Tuesday, May 13, 2014 10 11 a.m. Central time Professional Services Arrangements Randy Biernat, CPA, ABV Director BKD, LLP rbiernat@bkd.com To Receive CPE Credit Participate in entire webinar Answer polls when they are provided If you are viewing this webinar in a group o Complete group attendance form with Title & date of live webinar Your company name Your printed name, signature & email address o All group attendance sheets must be submitted to training@bkd.com within 24 hours of live webinar o Answer polls when they are provided If all eligibility requirements are met, each participant will be emailed their CPE certificates within 15 business days of live webinar 2 // experience access 1
OVERVIEW OF PROFESSIONAL SERVICES ARRANGEMENTS 3 // 3 experience // access ideas Professional Services Arrangement Disclaimer Professional services arrangements are not a one-size fits all contractual relationship. Legal representation in the process of establishing a professional services arrangement is essential to compliance related to Stark, AKS, IRS excess benefit rules, and anti-trust regulations. BKD, LLP is not qualified to provide legal advice and none should be considered rendered on this topic. All data & language in this presentation is illustrative in nature only and is only for discussion purposes. 4 // 4 experience // access ideas 2
Professional Services Arrangement Overview Hospital contracts to purchase clinical services from Physician Group at a fixed price per unit Physician Group assigns billing rights for services to Hospital Hospital bills clinical services under its payor contracts 5 // 5 experience // access ideas Professional Services Arrangement Key Terms Compensation Typically per wrvu, supported by a fair market value analysis for Stark compliance purposes Term of Contract Typically one to three years with annual or biannual negotiation of the wrvu rate Restrictive Covenants Noncompete language may or may not be included but should be considered. Nondisclosure & confidentiality terms are also fairly typical 6 // 6 experience // access ideas 3
Benefits to Hospital Potential for increased market share/market presence resulting in the potential for stronger payor contracting position Assist in the coordination of care in the community Allows for period of familiarization before a potential practice acquisition Potential to generate/maintain referral relationships Opportunity for noncompetition terms 7// 7 experience // access ideas Benefits to Physician Group Provides stability with respect to income Potentially allows for continued control over practice in terms of management, personnel, systems, etc. Allows for period of familiarization before a potential practice sale Opportunity for escape clause in agreement 8 // 8 experience // access ideas 4
Risks to Hospital Creating a clinical relationship will potentially tie the Hospital s quality data to the Physician Group s As the billing entity, Hospital will have oversight responsibility for correct coding & documentation Physician Group s actions may negatively affect the reputation of the lessor Fair market value compliance 9 // 9 experience // access ideas Risks to Physician Group The perception of a professional services arrangement to the community may be that the Physician Group is struggling or no longer independent The legal & operational requirements of a professional services arrangement may potentially increase overhead &, therefore, decrease compensation The contract terms may prohibit the lessee from pursuing other opportunities in the marketplace Physician Group may have difficulty making long-term business plans & other key business decisions 10 // 10 experience // access ideas 5
Comparison to Employment Model Factors Professional Services Arrangement Employment Migration to New EHR Not Required Strongly Encouraged Change in Control of Entity No Yes Ancillary Business Interests Unaffected May require buy-out Length of Commitment Short-term Long-term Economies of Scale Limited More significant Alignment Opportunity Partial More complete 11 // 11 experience // access ideas CASE STUDY 12 // experience ideas 6
Case Study Overview of Facts o Medical oncology group desires to partner with Hospital for strategic & financial purposes o Parties agree to utilize a wrvu rate for services provided o Parties agree that the Hospital will provide space & nursing support o Parties agree that medical oncology group provides physician services, nurse practitioner services, an administrator, a biller/coder & cover its own overhead (including malpractice). 13 // experience ideas Case Study Total Payment Calculation Service Fee Basis Unit of Measure Units FMV Rate FMV Amount Physician Compensation Performed wrvus 15,000 $ 90 $ 1,350,000 Physician Benefit FTE Physicians 3 50,000 150,000 Physician Malpractice FTE Physicians 3 25,000 75,000 NP Salary & Benefits FTE NP's 4 150,000 600,000 Biller / Coder FTE Biller / Coder 1 50,000 50,000 Administrator FTE Administator 0.5 150,000 75,000 Total $ 2,300,000 14// experience ideas 7
Case Study wrvu Payment Calculation Total Compensation: $ 2,300,000 Total Corporate wrvus: $ 20,000 * Compensation per wrvus: $ 115 * Total corporate wrvus include Nurse Practitioner productivity 15// experience ideas Case Study Medical Oncology Practice Financial Analysis Factor Old Revenue Old Expenses Before Physician Compensation (1) Old Physician Compensation New Physician Compensation Medical Oncology Increased Physician Compensation Increased Compensation per Physician Amount $ 2,500,000 $ (1,325,000) 1,175,000 1,350,000 175,000 58,333 (1) Amount of old expenses do not match due to differences in actual costs of Hospital & certain fair market value estimates being different than actual costs. 16 // experience ideas 8
Case Study Hospital Financial Analysis Factor Amount Billable wrvus 20,000 Weighted Average Reimbursement per wrvu $ 125 Total Oncology Professional Fee Revenue $ 2,500,000 Less: Fees to Medical Oncology Group (2,300,000) Less: Billing Fees (5%) (125,000) Less: Support Staff (250,000) Less: Rent (100,000) Subtotal $ (275,000) 17 // experience ideas Case Study Hospital Clinic Financial Analysis Factor Amount Net Loss (Direct) $ (275,000) Add: Profit from increased referrals to clinic owned ancillaries 900,000 Add: Profit from increased relationship benefits, such as quality 150,000 Net Impact of Lease Arrangement to Hospital $ 775,000 18 // experience ideas 9
DEVELOPMENT PROCESS 19 // experience ideas Typical Lease Arrangement Process 1. Kick-off meeting between Hospital & potential Physician Group that establishes a timeline, expected process, points of communication, etc. Present on lease alignment pros & cons in order to promote a common understanding 2. The second meeting goes into more detail on process, mutual commitments of resources, etc. A master information request list is distributed The parties sign exclusivity & confidentiality agreements Sign physician authorization of representation form to allow physician group to negotiate via one or two representatives 20 // experience ideas 10
Typical Lease Arrangement Process 3. The Hospital & Physician Group establish a transaction team & establish meeting schedules & timelines. The transaction team tackles issues ranging from governance to negotiating the terms 4. The Hospital engages in an internal, formal due diligence exercise, to include strategic, financial & other elements 5. A fair market value analysis is prepared according to the actual deal terms in support of the proposed compensation 21 // experience ideas Typical Lease Arrangement Process 7. Final contract terms are finalized & the arrangement commences 8. Follow-up meetings are scheduled to monitor performance & create an avenue for regular communication of issues 22 // experience ideas 11
CONCLUSION 23 // experience ideas Additional Points to Consider Hospital may have leveraging opportunities to provide management services, staffing services, etc. Opportunities may also exist for Physician Group to leverage Hospital s clinical technology A third party may be required to prepare analysis of rate differentials due to antitrust rules Issues may arise from the Physician Group s participation in ancillary businesses not affiliated (or competing with) Hospital s ancillary business interests 24 // experience ideas 12
Conclusion Utilization of arrangements is a less intense alignment strategy than a traditional employment relationship Both parties can realize strategic & financial benefits through an arrangement Risks & regulatory concerns will require a fair amount of due diligence 25 // experience ideas Questions? 13
Thank You! Randy Biernat rbiernat@bkd.com 317.383.4271 Continuing Professional Education (CPE) Credits BKD, LLP is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: www.learningmarket.org. The information in BKD webinars is presented by BKD professionals, but applying specific information to your situation requires careful consideration of facts & circumstances. Consult your BKD advisor before acting on any matters covered in these webinars. 28// experience access 14
CPE Credit Up to 1 CPE credit will be awarded upon verification of participant attendance For questions, concerns or comments regarding CPE credit, please email the BKD Learning & Development Department at training@bkd.com 29 // experience access 15