Co-Management Arrangements: A Realistic Strategy for Efficiency, Quality, and Alignment

By Dr. Grant Bagley & Wes Chapman

Summary and Conclusions

The delivery of complex healthcare services in a hospital environment has typically involved significant misalignment between hospitals and independent physicians, in both financial and operational incentives and accountability. This inequality of the parties has hampered programs aimed at improving efficiency and lowering health care cost. The fear of third party payors that any joint arrangement between hospitals and physicians might distort utilization and increase cost has led to onerous regulation. The Co-Management Arrangement, created by HHS Opinion 08-16, created a legal and operational framework to address these problems, to the benefit of both groups. Specifically, it allows the payment of significant facility fees to physician groups for participation and achievement of specified quality and operational goals.

Alignment –What Is It, and Why Does It Matter?

Much has been made of the need for physician/hospital alignment models as we move into the post-PPACA world of payment and care delivery reform. In its solicitation for quality/efficiency oriented demonstration operating models in 2007, CMS stated, “The defects and failures in the current health care system, as documented by the Institute of Medicine (IOM) in its report To Err Is Human (2000), are pervasive …the lack of alignment of incentives across different providers in the health care delivery system is often cited as a continuing obstacle to achieving optimal results in terms of quality and outcomes.” At its core, the interface of alignment must first take place in hospitals – the site of the most complicated, expensive, difficult and dangerous care delivery. If alignment doesn’t work in the hospital setting, between physicians and hospitals, it will not work anywhere else. From a practical perspective, in order to have a meaningful impact, an alignment strategy must:

  1. Align financial incentives in a meaningful way to all parties,
  2. Align clearly defined quality goals and objectives in a clear and measureable fashion.
  3. Align patient interests with providers and payors,
  4. Align patterns and practice of care to maximize efficiency without degrading care.
  5. Address physician fears that outcomes will not be realistically risk adjusted.

Practical Legal and Operational Considerations

Co-Management Arrangements as a Tool for Alignment

The health care industry’s increasing emphasis on quality of care and improving outcomes has created a need for innovative business models that align the interests of physicians and hospitals without conflicting with fraud and abuse laws. In Advisory Opinion 08-16 (promulgated in October of 2008), the Office of Inspector General of the U.S. Department of Health and Human Services (OIG) approved, for the first time, a hospital program to pay physicians for achieving quality of care by sharing the financial benefits received by the hospital through pay-for-performance (P4P) programs offered by third-party payors. Based on this Opinion, hospitals are able to align financially with their medical staffs to drive quality of care improvements at the hospital. The approved arrangement consisted of a Quality Enhancement Professional Services Agreement (Co-Management Agreement or CMA) between a hospital and a limited liability corporation (LLC), which is open to all active staff members at the hospital in the relevant departments. Under the Agreement, physicians who joined the LLC provided specific quality-related services to the hospital in order to improve the quality of care provided to the hospital’s patients. These services included: 1) developing policies and procedures, reviewing and monitoring quality of care in the hospital, 2) providing care in accordance with hospital quality targets, 3) ensuring adequate peer review if quality targets are not achieved, and 4) auditing medical records to track compliance with quality activities. In exchange for these services, the hospital agree to pay the LLC (which then distributed the payment(s) to the member physicians on a per capita basis) for achieving specific quality targets established by payors. This arrangement called a Co-management Arrangement permits physicians to participate in the proceeds received by the hospital for providing high-quality care, which benefits the hospital, physicians, and patients.

Structuring the CMA

The CMA is based around a contractual agreement with an LLC (or a simple contract between the groups), owned by Physicians, and potentially the Hospital and third parties. Payments to the Physician Group must be based on fair market value, but generally provide 2-3% of Hospital revenues in the relevant clinical specialty for the time and effort involved in the design and operation of the quality system “system revenue”, and up to 2-3% “at risk revenue” for the attainment of specified quality, efficiency and satisfaction goals. Governance is typically delegated to a Management Board. System revenue is typically paid monthly, based on a previously agreed upon budget. At risk revenue is paid either quarterly or annually, after careful data review. Partial payments are allowed of the at risk payments. Incentive payments are typically targeted at:

  1. Operational process improvements (which cannot induce reductions in quality of care) based on targets from historical operations or other benchmarks,
  2. Quality indicators which are typically process based and are similar to those utilized in PQRI and related P4P programs (HHS approved metrics),
  3. Satisfaction measures including patient reported outcomes, and
  4. Program development
Third Party Operational Requirements

CMA’s fundamentally differ from existing hospital-physician relationships, in that they require, and are benefitted by third party involvement. The CMA provides a “level playing field” between physicians and hospitals, based on contractually agreed upon roles, duties obligations and objective data to determine performance by all parties. PCD is an independent expert with decades of experience in designing the systems and fairly and objectively collecting data to assess performance. PCD can therefore alleviate the concerns of both parties about the fairness of system design, expectations of performance, and data based documented outcomes. There are extensive requirements for third party intervention in CMA’s. First, an independent outside expert is required to initially report on the overall quality effort, and make clear recommendations regarding the specific design of the quality system and metrics. Second, the payments proposed under the contract must be reviewed and deemed as within FMV (fair market value) by an outside valuation firm, and finally, an annual review of the system and metrics is recommended by an independent expert.

Operational Requirements

First, only physicians who have been members of the hospital’s active medical staff for at least one year are eligible to become owners of the CMA, a requirement intended to reduce the risk of physicians joining the medical staff of the hospital (and moving their patients there) in order to join the CMA and participate in the potential quality-bonus payments. Second, the physician-owners of the CMA receive distributions on a per capita basis; there are no payments made to induce patient referrals to the hospital. Third, the payments by the hospital to the CMA/LLC are capped based upon historical activity levels of the payor(s) at the hospital to ensure that physicians are not provided a financial incentive to refer additional patients to the hospital. Fourth, the hospital will provide written disclosure of its arrangement with the CMA to its patients. Fifth, the hospital will monitor both the quality of care provided and the volume and case mix of its patients to ensure that the financial rewards of the program do not reduce quality or inappropriately change referral patterns of the physician participants. Finally, the quality targets that can be incentivized under the program are limited to those listed by the Centers for Medicare & Medicaid Services and Joint Commission in the Specifications Manual for National Hospital Quality Measures, which represent the consensus of the medical community as to the appropriate standard of care. The OIG deemed these safeguards sufficient to approve the Agreement, and they can serve as a guide for future arrangements. The OIG’s approval of the Agreement demonstrates a willingness to allow hospitals to pursue this promising method of aligning hospitals and physicians so that they can better work together to drive quality of care improvements. Although the OIG approved the Agreement in Advisory Opinion 08-16, this approval extends only to those parties who submitted the OIG Advisory Opinion request and, technically, only they may rely on it. Other manifestations of this model must be structured carefully with the advice of legal counsel to survive regulatory scrutiny.

Alignment through CMA’s

The primary benefit of the arrangement is that it will likely improve quality of patient care by sharing the rewards for higher quality care with the medical staff that are primarily responsible for delivering it, and who are better suited to initiate, innovate, or carry out required actions. Performing well on quality metrics requires the participation and performance of the entire medical staff in relevant departments. Sharing the financial rewards for achieving those metrics with physicians is a positive way to incentivize broad compliance with specific quality standards. While physicians are under no obligation to join the CMA, the physicians who do have strong incentives for assisting non-participating physicians to achieve the quality metrics, since the benefits of the arrangement are tied to the quality performance outcomes of the hospital, not to individual physicians. Participating physicians thus have a vested interest in encouraging the recommended medical practices among all physicians on the medical staff and in engaging in meaningful peer review. The arrangement also should benefit both hospitals and physicians financially. Physicians are able to replace declining incomes through an arrangement that does not compete with the hospital. For hospitals, the participation of physicians to help improve the quality of care should allow hospitals to receive the highest quality outcomes, thus improving reimbursement from the payors under P4P arrangements. This arrangement also provides assistance in minimizing compliance risks now associated with quality of care, thus reducing the risk of enforcement actions for quality failures. Government regulators have identified quality of care violations as an enforcement priority under the False Claims Act, resulting in many multimillion dollar settlements with the government because of alleged substandard quality of care and unnecessary procedures. The 2009 OIG Work Plan has identified two specific enforcement initiatives focused on quality of care: a review of the reliability of hospital-reported quality measurement data and a review of the incidence of, and payments for, serious medical errors or “never events.” This new structure provides hospitals with a way to engage physicians proactively to improve quality, which assists the hospitals in avoiding costly public enforcement actions based upon quality failures.

Legal Considerations

Broadly speaking, there are two principle areas of legal concern. The first is Anti-Kickback Statutes (Stark Laws). These are the requirements for FMV and appraisals of all contracts. In particular, there can be no incentives: 1) for disproportionate distributions to reward volumes or referrals, and 2) to cherry pick the lowest risk patients. The second are the so-called civil monetary provisions under Medicare (the CMP Statute) which are designed to prevent denial of care for financial incentives. In particular, there can be no incentives to shorten LOS without overwhelming evidence that it did not negatively impact patient care. Care must be taken in the design and implementation of the CMA program not to contravene these laws. All CMA’s consist of two fundamental parts, 1) System Assets & Infrastructure, and 2) Quality Systems Operations. System assets and Infrastructure consist of management structure and related assets to actually make the CMA work. These includes quality control systems, data gathering and management systems, financial control and reporting systems, training and performance evaluation systems, medical and clinical staff to design operate and oversee the systems, legal and compliance expertise specifically related to CMA’s, and access to quality data for benchmarking and related purposes. Quality Systems operations involve the utilization of a process oriented system to provide real-time feedback to participating medical personnel and hospital employees. The system needs to involve people day-to-day and assist in constant quality review and improvement. At its core, alignment must be a real time reality, or it doesn’t exist. Finally, both static and dynamic portions require money to get them up and running. The reality is that these systems have historically been entirely dependent on physician and hospital financing to fund all start-up expenses. This has led to sub-optimal choices in system design and operation in many cases.

Wes Chapman
Written by Wes Chapman