Understanding the Regulatory Risks of Co-Management Arrangements

December 13, 2013 By Jack Seal
Vol. XI Issue 48
American Health Lawyers Association

The clear trend in health care is to reward providers who provide high quality services in a cost effective manner. With increasing regularity, hospitals are utilizing co-management arrangements with physicians as a vehicle for providing high quality, cost effective care.

Any time that a hospital pays a non-employee physician for services, this raises a number of regulatory issues that must be handled deftly. Co-management arrangements are no exception. 

Typical Co-Management Structures
The most common co-management agreement structures are the pure contract form and the joint venture arrangement. Under either structure,a hospital and physician or group of physicians enter into an agreement where the physicians are paid and provided incentives for managing and improving the quality and efficiency of a particular hospital service line(e.g. cardiology, orthopedic care, etc.). 

The pure contract arrangement is structured just as it sounds—via a contract between the physicians and the hospital, specifying the scope of services to be provided. The joint venture structure goes one step further, with a hospital and one or more physicians forming a co-ownedjoint venture entity, such as a corporation or limited liability company,which enters into a management contract with the hospital for the co-management services. The joint venture structure is often used when less than all of the physicians in the group will provide co-management services.

Co-management arrangements typically include two types of payments: base compensation and incentive compensation. Base compensation is a fixed fee representing the fair market value of each physician’s time and efforts in developing, managing, and overseeing the service line. Incentive compensation is based upon the achievement of specific targets related to the provision of high quality, cost effective care.

Regulatory Issues 
Most of the major health care regulatory schemes can be implicated by co-management arrangements.  Co-management agreements need to be carefully constructed for compliance with, among other things, the Anti-Kickback Statute (AKS), the Stark Law, and the laws on Civil Money Penalties (CMP).  When it comes to co-management agreements, it is important to consider how each of these laws may come into play.

Consider the hypothetical situation of a hospital that wants a cardiology group to oversee its cardiac catheterization lab and develop a cardiology program at the hospital. The hospital will contract with a local (in this case, because of the remote location, the only local) cardiology group (Group) for those services under a co-management agreement.

Per the agreement, the physicians in the Group agree to provide strategic planning and medical direction services, serve on medical staff committees, and provide staff training and development. In addition, they agree to provide credentialing for lab personnel and to recommend lab equipment, medical devices, and supplies. Further, they agree to consult with the hospital regarding information systems, provide assistance with financial and payor issues, and provide public relations services. In return, the hospital agrees that the Group will be paid a base fee of $500,000, with a maximum performance bonus payment of $500,000 each year for a term of three years. Fifty percent of the bonus will be based on specific quality measures (Quality Component) and 50% based on reducing costs attributable to lab services (Cost Effective Component).

AKS Analysis
Is AKS implicated by this agreement? The relevant part of AKS makes it a crime to knowingly and willfully offer or receive remuneration to induce or reward referrals of items or services that are reimbursable by Medicare, Medicaid, or any other federally funded health care program. An improperly structured co-management arrangement could violate the AKS if any one purpose of the arrangement is deemed to be the provision of compensation to physicians in exchange for referrals. The Department of Health and Human Services Office of Inspector General (OIG) has promulgated “Safe Harbors” to the AKS identifying certain payment and business practices that will not be subject to criminal and civil prosecution under the AKS. However, if an arrangement does not qualify for a Safe Harbor (and many co-management arrangements do not), it is not automatically in violation of the AKS. The OIG has recognized that arrangements that do not qualify for a Safe Harbor are not in violation of the AKS where there is a low risk that the agreement will incentivize fraud and abuse. 

Under our hypothetical, the AKS is implicated because the arrangement could be used to disguise remuneration from the hospital to reward or induce referrals by the Group. In this case, as long as the parties obtain an appropriate valuation, the agreement is likely to be AKS-appropriate and low risk because:

Stark Analysis
The Stark Law prohibits physicians from making referrals to an entity for designated health services payable by Medicare if the physician or an immediate family member has a financial relationship with the entity to which the physician refers, unless an exception to this prohibition applies. Payments to physicians under a co-management agreement constitute a financial relationship. Therefore, the parties must fit their co-management agreements into an exception to Stark under our hypothetical.  

Stark has a number of exceptions available to protect payments under a commercially reasonable co-management arrangement. In general, the exceptions require that the compensation paid by the hospital to the Group, and ultimately to the physicians, (1) is set in advance, (2) does not vary with, or otherwise reflect, the volume or value of referrals by the physicians to the hospital, and (3) reflects the fair-market value of the services provided.

The Personal Services Exception could apply to the arrangement if, among other requirements, (1) the agreement was for one year and (2) the compensation is fair-market value, set in advance, covers all services, is unrelated to the volume or value of referrals between the parties, and is negotiated at arm’s length.

Analysis for CMP
The CMP laws prohibit a hospital from knowingly making a payment, directly or indirectly, to a physician as an inducement to reduce or limit services to a Medicare or Medicaid beneficiary. An arrangement that incentivizes cost-effective care may inadvertently violate the CMP. In this case, the Cost Effective Component implicates the CMP because it may induce physicians to alter their current medical practice to reduce or limit services. 

The arrangement can be structured to pass CMP scrutiny if it has certain safeguards, such as:

Structuring the Co-Management Agreement[3]
While co-management agreements can vary widely, there are a number of elements that should be included in any well-drafted co-management agreement to comply with the various regulatory schemes that may be implicated by the arrangement. These include: 

If properly structured and operated, co-management arrangements can increase patient outcomes and operational efficiency, resulting in higher employee and patient satisfaction and increased cash flow for both the hospital and to the physicians. However, in comparison to other health care compensation arrangements, co-management arrangements have a relatively higher degree of regulatory risk, especially if FMV cannot be demonstrated or proven. This is due in part to the numerous regulatory schemes that may be implicated by the arrangement, and the fact that incentive payments are made to physicians who refer patients to the hospital. 

Nevertheless, the health care world is changing under the Affordable Care Act, and high quality, cost effective care is now a major driver for health care providers. "Pay for performance" (as opposed to illegal payment for referrals) is likely to become common, and co-management arrangements are likely to flourish.

[2]The hypothetical used in this article is based on one put forth by CMS itself, in Advisory Opinion 12-22. 

[3] The concepts in this article are not intended as legal advice, and the reader is encouraged to consult counsel regarding the specific facts of any proposed co-management arrangement.