Why Physician Employment Is Not A Strategy By

Why Physician Employment Is Not A Strategy By Itself John Kirsner Partner, Squire Sanders Michael Strilesky Manager, Charis Healthcare 1

Today’s Objectives 1. Market Conditions Impacting Physician Employment and Integration 2. Key Revisions of Healthcare Reform Considerations that Impact Alignment 3. Clinical Integration, Co-Management as Alternative to Physician Employment 4. Strategic Considerations for the Future 2

Keys to the Future: Reduced Fragmentation and Comprehensive Integration Present State: Fragmented Care Future State: Patient Centric Care 3

The Next Step: Moving to More Integrated and Performance Based Models Low Independent Medical Staff Integration Medical Directorships, Subsidies, Management Contracts Under. Arrangements, Joint-Ventures High Clinical Institute, Co. Management Employment Income Guarantee Fixed Salary Productivity (FFS) Foundation Care Coordination / Bundling

Why The Push To Employment: Physician Income Declining PCP Production vs. Compensation 1991 -2009 Specialist Production vs. Compensation 2007 -2008 Work RVU % Change Comp per w. RVU % Change Neurosurgery 13. 0% Gastroenterolo 26. 0% gy General Surgery -2. 4% 2. 8% 12. 1% 7. 5% 6. 9% 1. 9% 0. 9% Otolaryngology 8. 6% 12. 4% 0. 1% OB/GYN 5. 5% 4. 2% -0. 7% Urology 4. 6% 12. 8% -0. 8% Neurology 5. 2% 14. 4% -1. 5% Cardiology 15. 3% Orthopedic 4. 4% Surgery Family Medicine 5. 8% Internal -1. 0% Medicine 9. 3% -2. 1% 8. 6% -3. 8% 19. 7% -5. 0% 20. 4% -7. 7% Comp% Change $565 k $250 k $185 k $125 k 1991 PCP Production Source MGMA 2009 PCP Compensation 5

7 Steps: Developing a Successful Employed Medical Group Vision Structure Leadership (Physicians and Administration) Culture Compensation and Incentives Measure and Monitor Demonstrate Value Source: Sg 2, Building a Successful Employed Medical Group 6

It’s Now the Law: ACO and Bundling Demonstration Projects § § § Group of providers with the organization to contract as a unit, monitor performance (“ACO”) ACO will share aggregate savings with Medicare that result from the integrated structure Sufficient primary care physicians to serve 5, 000 Medicare Part B beneficiaries Three year agreement Existing leadership and management structure that includes clinical and administrative systems Must meet certain quality measures and demonstrate patient-centered care § § § Group of providers including a hospital, a physician group, a skilled nursing facility, and a home health agency One bundled payment to the group for an “episode of care” for participating Medicare beneficiaries Episodes of care defined as § § § One of ten applicable conditions selected by the Secretary Care beginning three days prior to admission to a hospital and ending thirty days following discharge from the hospital Must meet certain quality measures

Payment Flow in a Bundled World I: Bundled Facility Fees 1. Results in “supergroups” and clinically integrated PHOs 2. Hospital owns/ controls/contracts with all facilities Payor Professional Fees 3. Physician-hospital collaboration more important than ever Bundled Facility Fees Inpatient Procedure Downstream Risk Primary Care Specialist Surgeon Post-Acute Care 8

Payment Flow in a Bundled World II: Bundled Professional and Facility Fees 1. Hospital owns/controls/ contracts with all facilities 2. Hospital owns/controls/ contracts with physician practices Payor All Payments (Professional and Technical) Bundled 3. Can an independent Group be strong or large enough to survive? Inpatient Procedure 4. Foundation Model/ ACO as End Game? 5. Is there capacity for Foundation/ACO everywhere? Post-Acute Care Primary Care Group Practice I Specialist Group Practice I Surgeon Group Practice II Downstream Risk 9

Repeal of Hanlester § Healthcare Reform amended the Anti-Kickback Statute’s intent standard, such that, in violating the Anti-Kickback Statute, a person need not have actual knowledge of the Statute or a specific intent to violate the Statute § This effectively overturns Hanlester § Historically, other courts and the OIG have reviewed the facts, circumstances and safeguards surrounding an arrangement in evaluating Anti-Kickback Statute compliance § While this will likely continue, there will be a “sorting-out” period with respect to risk analysis, and parties should take a thoughtful, cautious and comprehensive approach when evaluating Anti-Kickback Statute compliance

Clinical Integration § FTC allows joint contracting where clinical integration exists § Defined as a “network implementing an active and ongoing program to evaluate and modify practice patterns by the network’s physician participants and create a high degree of interdependence and cooperation among the physicians to control costs and ensure quality. ” Statements of Antitrust Enforcement Policy in Health Care (August 1996) at Statement 8, § B. 1.

Clinical Integration – Key Characteristics § § § Selective, scalable membership Delivery of evidence-based care Infrastructure for coordination and collaboration Performance transparency system Meaningful performance-based incentives

Clinical Integration – Necessary Components § § § § Clinical protocols and benchmarks Governance and staffing infrastructure Data monitoring and reporting Contractual model and accountabilities Technology infrastructure Payer contracting vehicle Performance-improvement tools and processes Performance-based pay structures

Treatment in a Clinically Integrated Network Patient Flow Implications Specialist 1. Access to health records by individual physician and group • EMR • Performance Improvement 2. Access by all physicians in CIN • Clinical Pathways Surgeon Primary Care 3. Access between groups 4. Access by Hospital 5. Physician-driven Post-Acute Care 14

What Facilities Want: Structural Physician Collaboration § Hospitals and Health Systems are seeking greater collaboration § Survey of Facilities - Either already implementing/are considering within 2 years: § § § Co-Management Relationship: 22%/27% Office Leasing: 40%/22%* Equipment Lease: 15%/14%* Joint Venture: 21%/37% Under-Arrangement: 18%/10%* *Discouraged after most recent Stark regulatory changes Source: Advisory Board, Toward True Shared Governance: Emerging Oncology Service Line and Physician Alignment Models (2009). To Edit Footer Text: Select View/Header and Footer/Check Mark Footer Box/Edit Text 15

Co-Management Intended to Drive Comprehensive Integration Hospitals Engages Physicians to on Quality Metrics (not currently reimbursed) Maintains Open Lines of Communication Provides Attractive Workshop to Practice WIN-WIN Physicians Desire Improved Efficiency and Operations Impacts Work-life balance & Income Establish Market / Competitive Advantage 16

Co-Management Leadership Structure LLC Management Company • General Surgery • Orthopedics Executive Director • Urology • Budgeting • Human Resources • Managed Care Contracting © 2010 Squire, Sanders & Dempsey L. L. P. 17

Co-Management Legal Structure Specialists Service Contract to Manage Cancer Center Equity Cancer Center Pays the LLC for: Management Contract $ Management Company LLC • Base management fees • Expense reimbursement • Incentive compensation meeting service line management benchmarks Equity Return (Incentive Payout) Specialists © 2010 Squire, Sanders & Dempsey L. L. P. 18

Healthcare Reform…The Goal 1. The Goal Accountable Care Organizations Bundled Payments Reduce Hospital Acquired Conditions 3. Prerequisite Reduce Preventable Readmissions Tactics Reduce Costs Improve Quality Value-Based Purchasing 2. Increase Healthcare “Value” Electronic Health Records Source: HFMA Regulatory Sound Bites I September 2009 To Edit Footer Text: Select View/Header and Footer/Check Mark Footer Box/Edit Text 19

Economic Comparison of Integrated Strategies ACO PCMH INSTITUTE EMPLOYMENT Requires Significant Market Risk Spread Across Multiple Providers Patient Centered Medical Home (Population or Disease Focused) Bundled Payments for Technical and Professional Component Fixed or Incentive Compensation (Fee for Service Model) 20

Getting Here from There… 2010 2015 Accountable Care Organization COST Integrated Physician Network QUALITY Co-Management GROWTH Optimizing EMG & MSO Strategy EMG: Employed Medical Group, MSO: Management Services Organization 22

Contact Information John M. Kirsner, Esq. Squire, Sanders & Dempsey L. L. P. Partner, Health Care Practice Group (614) 365 -2722 jkirsner@ssd. com Michael Strilesky Charis Healthcare Manager (330) 650 -1752 michael. strilesky@charishealthcare. com