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Hospital/Physician Affiliation Models in an Age of Private Equity

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Glenn Prives, Partner, Epstein Becker & Green PC, and Elizabeth Kastner, Senior Transactional and Corporate Counsel, TriHealth, Inc., discuss the current climate around hospital/physician affiliation models in the age of private equity, and they cover six different models they are currently seeing in the health care industry. Glenn and Elizabeth spoke about this topic at AHLA’s 2024 Health Care Transactions conference in Nashville, TN. From AHLA’s Business Law and Governance Practice Group.

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Speaker 1:

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Speaker 2:

Welcome to an A HLA podcast, the latest chapter, which is Hospital Physician affiliation models in an age of private equity. This is based on a presentation that was done at the 2024 A HLA Healthcare Transactions in person program , uh, in Nashville. Um , this is also sponsored by the A HLA Business Law and Governance Practice Group. My name is Glenn Previs . I'm a partner with Epstein Becker and Green. I am a healthcare transactional and regulatory attorney , uh, representing providers of all different sizes, shapes, and everything in between, as well as investors in healthcare , uh, in transactions and regulatory matters. Uh, and here's my co-presenter, Beth Kasner. Beth,

Speaker 3:

Thanks, Glen . I am Beth Kasner. I am senior corporate and transactional counsel with TriHealth Health Systems in Cincinnati, Ohio. Um, I've been at TriHealth about a year, and prior to that I was actually a partner at , uh, Epstein Becker Green with, with Glen and in private practice for about 20 years. So, so new to the in-house position , um, but bring my , uh, regulatory and transactional experience with me. So, Glenn , you're gonna get us , uh, started here. What would you say is the current climate as we start to talk and think about hospital physician affiliation, models and the age of private equity? So

Speaker 2:

I look at this bet as being fun time , USA here, <laugh> . And what I mean by that is we, we have a lot of money flowing into healthcare. We have a very expensive healthcare system, we have a lot of regulations, and all of it's creating a nice mixing bowl with all the different stakeholders trying to figure out the best way to move forward and compete in this system. So right now we have unique economics in healthcare. Healthcare is seen as a relatively safe haven for putting money into this system, given that we just need healthcare. We, we always need healthcare, and we have an aging population of theoretically is going to have growing and greater healthcare needs. Um , there's also a big , um, aim to create a more efficient healthcare system, and everybody kind of has different ideas and approaches as to how that's going to happen. Um , but it's, it's leading towards consolidation to try to make things more efficient, to try to streamline the economics and cut costs while delivering higher quality care. Um, it's also developing a large market that historically has been fragmented. Historically, healthcare is a bunch of small mom and pop shops, and that's just ripe for consolidation. Now, at the same time as private equity has done a big entry into healthcare in the last several years, hospitals which are also growing larger, healthcare systems are consolidating all over the country. They can, however, feel under siege by trying to compete with dollars thrown around by private equity firms. And yet caught in all the middle of this are the physicians, the physicians who are in private practice and are trying to figure out, do I join the hospital? Do I join a private equity firm? What if I don't want to do either? Where do I go with this? Do you have some physicians who are really comfortable with private equity, understand that model and like that model, but yet they still need to establish this a a , some sort of relationship with their local health system. They may not want to be employed by that health system, but simply working with private equity is not a solution to having no relationship with a health system whatsoever. And at the same time, you have hospitals who have had the tried and true employment and PSA models and are looking for other ways to affiliate with practices short of direct employment. And it's also a way for hospitals to affiliate with practices who are also affiliated with private equity . So with that in mind, you know, Beth and I in our differing roles, but Beth, I'll always miss you as a partner. You know, you can always come back. <laugh> , Uh , <laugh> , um, we have seen hospitals use different alignment models, some of which are old in , are back and new again in ways to affiliate with private equity backed physician practices. Um, so on that end, we're gonna look at briefly six different models and we'll go over with you some elements of each of them , um, and kind of feed off each other for how much everything is gonna be full of fun here. So starting off with co-management. So clinical co-management, also simply known as co-management, also known as CCM, typically , um, a separate co-management company usually formed by physicians from one practice or different practices. And sometimes with the hospital as a partner in the co-management company, they'll, they'll contract with a hospital to provide medical director and medical administrative services. Um , essentially services that require the experience and expertise of being a physician but are not clinical in nature with the aim of hitting and achieving and exceeding different quality, efficiency and cost reduction metrics that are established annually. Um , while you can see legacy physician groups being the direct contracting vehicle for co-management, more often I see a, a new company being formed to do that. And compensation for this is basically a fixed fee plus , um, some sort of at risk money with the actual breakdown being variable based upon achieving the metrics that we talked about for a quick second there. Um , important points can't duplicate , um, previously provided services or other services already being provided. Um, and again, they have to be services that you would need to be a physician to provide, otherwise you wouldn't need to pay the appropriate , um, compensation head of physician commands in order to provide those services. Some examples, managing operating room scheduling, establishing protocols for admitted patients, developing inpatient and outpatient quality and efficiency objectives. The metrics need to be objective and not directly tied to revenue increases or cost reduction simply for cost reduction sake, and typically require the use of an, of an independent valuation firm to verify fair market value and market commercial reasonableness. So another model is actually gain sharing . I'm gonna turn it over to Beth for her thoughts on gain sharing .

Speaker 3:

Thanks, Glen . Uh, before I touch on gain sharing , I'll kind of give a couple preliminary thoughts as we get into the different models. I think as Glen kind of touched on, you know , from the hospital perspective, they really are looking for options to partner with physicians when they now have to compete in this private equity backed world and, and , and be competitive, right? And as we know, some of the PE backed practices are not subject to some of the same restrictions as , you know, some hospitals in particular, the 5 0 1 C3 , uh, or gain sharing CMP restrictions or , or requirements that hospitals have to comply with. And that could be perceived sometimes as giving private equity and advantage , um, in terms of the amount of money that they can offer to physicians. I I would also note that today the models we're gonna discuss are really the non-equity affiliations. Uh , but that said, some of the same considerations that a hospital has when they're looking at doing a PE-backed equity transaction can come into play in a non-equity transaction. And what do I mean by that? Um, things like if, you know, again, historically hospitals were used to partnering with physician practices in the community. They have a relationship with the physicians, they know the physicians, their local physicians. That certainly might still be the case even if the practice becomes partially , uh, PE batched , for example. But there could be a concern that they lose that connection with, with the local physicians. And so one thing that I've seen throughout the years to kind of solidify and continue that relationship , um, whatever affiliation model we're talking about, that local touch, that physician involvement is maybe an oversight or joint operating committee type structure , um, that really kind of solidifies that relationship. The other thing you might see , um, again, coming from the hospital perspective is, you know, what kind of protections or, or termination rights perhaps , um, the hospital might want, even in a non-equity type of transaction, maybe an affiliation agreement or clinical co-management, which we'll touch on, for example, what the hospital wants some kind of termination, right? If the , uh, if the group wants to sell the remaining portion of its, its ownership to private equity. The the other thing , uh, which we could talk about later is the, you know, you might even see a right of first refusal. The hospital may say, Hey, even though this is just a, you know, clinical management agreement or some kind of master affiliation agreement, if you're gonna sell out your entire practice or more of your practice, we wanna , uh, write a first refusal. Um, now as Glen will tell you, I, and and I concur on this, I think when it comes to non-equity type affiliations, a CM uh , a recruitment agreement, you're gonna have a lot , uh, more pushback then from the private equity backed , uh, entity. Then you might, if it's an equity type transaction.

Speaker 2:

I would agree with you on that. Beth <laugh> , she already know me so well,

Speaker 3:

Yes, but the hospital may still try it. And , and understandably, I think it comes from a , you know, a place of just not , uh, knowing who they're partnering with or, or trying to be protective in terms of change circumstances when, you know, sometimes the private equity , um, it , it can go pretty high up the chain in terms of , um, ownership and , and lack of , um, having a connection with, with the owner, so to speak. So, okay, so the first model I'm gonna touch on is, is gain sharing . So the entire idea behind gain sharing is to encourage physicians to reduce costs by allowing the physicians to share in the cost savings, of course, assuming that the cost savings are the result of the physician's efforts or outputs. Um, so typically efforts around product standardization is a typical technique. Um, you know, things like if we can see cost reduction from you , you know, using a certain type of instrument that could be the basis of a gain sharing , uh, arrangement. I would say one of the key guardrails you need to have in place in a gain sharing arrangement is , um, to make sure there's no reduction on medically necessary services. And the good news, and we , we talk , uh, more about this in our , uh, our presentation in Nashville is there , the OIG advisory opinions, there's quite a few. It's, it's an area that's rich in OIG advisory opinions. If you are looking to structure a gain sharing arrangement. Now, what I would say is gain sharing , you know, is not really a , a hot model, so to speak. I I wouldn't describe it as the newfangled thing , uh, been around quite a while , but

Speaker 2:

I , I like that Beth Newfangled thing.

Speaker 3:

<laugh> <laugh> , it is , it is not the newfangled thing. Um, so, so why even mention it? Well, I mention it because in the right circumstances it is an effective tool. And , and it's something that hospitals can offer to physicians that quite honestly, a private equity backed , uh, physician practice might not be able to , um, in terms of cost savings in the hospital environment. Um, it could be a true win-win, right? The hospital saves money , um, and the physician share in that cost savings. Now, in terms of cons, not dissimilar to , uh, clinical management where you might have QI metrics , um, gain sharing arrangements by their nature tend to be time limited and hard to come up with new cost reductions. So, for example, if a hospital had an issue with an expensive device, and that issue was the, the drive for the gain sharing arrangement after two years it was successful, the issue was fixed, but you know that then it's, it's kind of run its course. Um , so again, I , we mentioned it because it , it can be useful in the right circumstances, but um , you know, it does have its limitations. Okay, next is recruitment. And I'm gonna take that one as well. So the idea behind position recruitment high level , of course, is for the hospital to provide compensation to induce a physician to relocate his or her medical practice to the geographical area served by the hospital in order to become a member of the hospital's medical staff. And conceptually, again, big picture as part of the recruitment arrangement, remuneration provided by the hospital in whatever form that might be is passed directly through or remains with a recruited doc. The exception, of course, is that the actual cost incurred by the practice recruiting position can be maintained by the group. So, so what are the pros? Why, why would we, particularly in the private equity backed space, look to do recruitment? Well, recruitment really is a vehicle to allow cash strapped practices to recruit and retain physicians when they might not otherwise have the means to do so. Um, you know, particularly maybe a private equity backed practices in a rural community and the hospital might be in a position to provide that recruitment support and when the private equity isn't , um, and then certainly the hospital gets the benefit of having the provider in the community and establishing a relationship with that physician. Now, in terms of cons , um, when we as lawyers are looking at structured recruitment arrangements , um, it is pretty regulatorily , um, stringent and you have to be thoughtful about complying with the regulatory requirements of the exception. Um, and again, we get into this in more detail in our, in our presentation if you wanna know more. But I would say the two areas to be particularly mindful of, and there are CMS advisory opinions on point with respect to both issues. First issue is really make sure that you satisfy the requirement that the physician relocate his practice to the area served by the hospital. And what you have to watch is if the physician is doing a percentage of his , um, time or his medical practice outside the geographic area, again, there's a CMS opinion on point if you wanna refer to that from 2006 . Uh , the second issue I just note , uh, quickly is the timing of the inducement. I've had some situations where , um, unfortunately, you know, the key to the recruitment exception is you really do have to provide the remuneration to induce them to relocate. Um, so if, you know, the physician has already signed or even agreed to sign the employment agreement with the practice , um, or has agreed to move, or worse yet, I've seen this happen already moved, <laugh> , you're gonna be hard pressed to now argue that the recruitment assistance provided by the hospital induce them to relocate, which this is a tricky one. Sometimes I find because we do a good job with our, with our business owners telling them don't give things to induce physicians here, it is the exception, right? We really do wanna be able to show that that , uh, remuneration was given to induce , uh, relocation

Speaker 2:

And to hop on that point right there, Beth, I , I think we can all agree that recruitment is one of the more , uh, fleshed out detailed stark exceptions, which is a , it's a double edged sword in my mind. On , on the one hand, you get a lot of guidance of what you need to do to fit within that exception. On the other hand, it makes it kind of more impossible <laugh> to meet the exception 'cause it has so many prongs and you have to be so careful. 'cause again, as a reminder to folks, stark is a strict liability statute. This is not a, we aspire to try to meet most of the exception you have to meet the exception,

Speaker 3:

Right? No, absolutely. And , and sometimes, you know, some of the elements like the, you know, the, the prohibition on crosstown re recruitment, people kinda understand that if the physician's already in the medical staff, you know, if you have a , an in-house hospital recruiter, for example, in my experience, they , they understand that they know you can't recruit a doc who's already in the medical staff that that's understood. But some of the, the other requirements , um, as I touched on and Glen mentioned, are a little bit more nuanced and, you know, you just have to work through 'em with your, with your business owner. The last one I'm gonna take is , uh, medical directorships. So probably everyone listening is familiar with medical directorships. You know, what , what we typically see is a hospital will contract with a physician to provide some type of administrative services that requires a particular clinical background. Um , you know, for example, medical director of cardiovascular services , um, maybe for a specific service line, usually on a part-time hourly basis. Um, and medical directorships are often a component , um, of a larger clinical co management or, or master affiliation, which, which Glen will touch on. Um, obviously the pro of this is it enables health systems to obtain expertise of physicians. And particularly again, in the private equity backed space where hospitals have to remain competitive. It , it gives physicians a way to feel that they have a leadership position or they're invested in, or they're connected to the hospital in some way. Really creating that, that connection between traditional hospital work and physicians and a leadership perspective is, is critical. Um, now in terms of things we need to watch for, again, probably not a surprise to folks listening is really you have to watch out for , um, you know, unnecessary services or , or duplicative services. Um, unfortunately in my my years of practice, I , I've seen a few instances where, you know, the business owner will say, look, you know, we got, we're looking at paying the doc $3,000 a month or what , whatever it's , um, and then they, they come up with a number and then they back into, you know, the number of hours that get to that bigger number as opposed to doing the approach, which is the appropriate approach of saying how many hours do we need of administrative services and then paying appropriately. So things to watch for in , in that environment. Um , and now Glenn , I'm gonna turn it back over to you to finish this up with a couple more models.

Speaker 2:

Alright , thank you Beth. So one model is your time, old management services organization, MSO. And most of the time when you hear me talk about that, you're thinking about, okay, that's a private equity backed company providing nonclinical services, not in the realm we're talking about here. So there are several, many instances in fact of hospitals, hospital affiliated entities that are MSOs that essentially are designed to offer the same, if not better, suite of nonclinical services and back office operations to , uh, physician practices. This is gonna be a model that really is a better fit when you're a complete independent physician practice as opposed to one affiliated with , uh, private equity, but it's offering usually a full suite of services and an exchange. The practice pays fair market value , uh, for the services back to the hospital and they remain independent , um, of the SA So you get to utilize the health systems resources, which are a value, particularly to small practices who are struggling. Um, but sometimes one of the drawbacks here, despite this being somewhat prevalent, is , um, health systems can struggle to fit every type of practice for what they're offering. Um, and there might be a mismatch into the health system resources for what a hospital for what a practice needs or , or vice versa. Last one, as Beth mentioned actually, is the master affiliation agreement. Kind of a catchall type of thing. Usually see this coming into play when a health system and a physician practice want to establish some broader relationship that will probably have multiple components, but , uh, and , and they wanna rush to kind of outline what that's going to look like, but they're not ready to really go hard pen to paper on binding terms , uh, with sufficient detail. Uh , now you gotta be careful with this one because this can't be a situation where a health system says, okay , um, I got a bucket of money I wanna throw at the physician practice 'cause I want the referral. So let's do some sort of master affiliation agreement. We'll figure it out along the way. Can't do that. Beth and I have been down that road before. Not good. Um, but what this really is, is basically kind of what I'll call a, a high level , almost like memorandum of understanding that lays out , um, some potential different detailed affiliation. Uh, concepts may be joint venturing on a surgery center, maybe having a recruitment arrangement, maybe having a co-management arrangement. This can be kind of your overarching top line agreement to dive into the other models that we talked about in more detail later on. But sometimes it also can be research involved or , um, some sort of sports sponsorship. Um, really the sky is the limit on this and it's basically a roadmap at the end of the day. So it , it's very flexible document 'cause there wasn't really one right or wrong way to do it. Um, but it does tend to leave out the detail in some of the heavier negotiations that the parties are going to have to get to later, later on. So it can be looked at as a bit like kicking the can down the road. Um, one thing that it can be useful for , um, is if a health system is looking to establish some relationship for the practice down the line , but doesn't know what that is, but at the same time is fearful of, you know, losing that practice to another health system or a private equity firm. It can be used to establish , uh, a right of first opportunity or right of first refusal rights for certain endeavors. And sometimes I see it broad to even include , uh, a sale of the practice as well. So it can be a good vehicle on that end to preserve , um, the practice for some sort of further detail alignment later on down the line. But the , these come in all different shapes and sizes , um, kind of in my experience. So that basically kind of wraps up the models , um, on a very high level for what we covered in our conference program back in April. Um ,

Speaker 3:

I can I add a couple couple talks ?

Speaker 2:

Absolutely Best ,

Speaker 3:

Uh, just real quick back to the, the PSO model. The one thing I would say a and Glenn is right, you know, sometimes the hospitals really do have the expertise, like particularly information technology , um, you know, managing, running an EMR , um, and it makes sense to wanna partner with the physicians to provide those services to them. What I have a caution is, is is working with your, your client on setting up the concept of becoming a vendor, right? So effectively when the hospital does that, they become the service provider , um, which is, is not always intuitive , um, to be, you know , uh, particularly if a hospital, let's say, for example, has a wonderful IT department. They're great at providing IT services to the hospital, and it may be a different world to now be a, you know, vendor to someone else. And obviously ensuring the services are provided at fair market value, et cetera. So it , it , it's a , it's a opportunity area for sure, but it's also an opportunity to really, you know, work with your clients to make sure that vendor relationship is set up correctly. Um, the , the other thing I'd piggyback on with Glen on the master affiliation agreement, I , I really think those are the most fun to draft because this guy is the limit in terms of what , uh, you know, initiatives can be covered by an exhibit or, you know, a flow down agreement. And I do think that may be an area where hospitals in particular are more successful in negotiating some kind of right of first refusal. For example, maybe it could be a right of first refusal to say, Hey, physician group, if you're gonna partner with someone to do , uh, research, you know, you're gonna come with us , come to us first. So, so it's a little less scary perhaps than having a a right of first refusal requested , um, to, to, you know, in terms of investment in the practice entity itself as opposed to a right of first refusal to partner in a particular endeavor or type of service. So,

Speaker 2:

Oh, but they come in all different shapes and sizes. Beth, I must say that. So , uh, with that, that about wrap wraps up this podcast. I, I do wanna leave , uh, one note for folks. Um, we do have the 2025 A HLA healthcare transactions program in the planning stages right now. The dates next year will be May 5th, sixth and seventh in 2025. Um, and it will be in Nashville as it has historically been. And , uh, as someone who actually is on the planning committee and sorting through our proposals right now , I can absolutely assure you that we are going to have a robust program with , uh, cutting edge legal topics. So it's a, it's a great program to attend if this is your area, or even if it's not your area and it's something you wanna learn about. Um, Beth, do you have any final words before we wrap up ?

Speaker 3:

Wrap up ? No, I would just encourage folks to attend. It's a really, it's a really meaty conference. Um, so it's, it's worth attending in Nashville.

Speaker 2:

Uh, thank you for your time and for listening to us. Uh , again, this is Glenn Previs and Beth Kasner and take care.

Speaker 1:

Thank you for listening. If you enjoy this episode, be sure to subscribe to a HLA speaking of health law wherever you get your podcasts. To learn more about a HLA and the educational resources available to the health law community, visit American health law org .