Association of Washington Public Hospital DistrictsCEOs and Administrators Retreat

PRIMARY CARE DEVELOPMENT INNON-URBAN MARKETS

May 23, 2007

Kevin M. Kennedy, Principal Lori K. Nomura

1111 THIRD AVENUE, SUITE 3400SEATTLE, WASHINGTON 98101-3299

Telephone 206.447.4400Fax 206.447.9700

www.foster.com

2

Agenda

Background

Organizational Models

Other Support Structures

Financial Analysis

Which Model is Best for You?

3

Background

4

0

50

100

150

200

250

Cardiology Radiology OrthopedicSurgery

InternalMedicine

FamilyPractice

Background Physician Shortages

Top Five Searches by Volume in 2004–20051

Changes in physician supply and demand patterns in recent years are driving nationwide shortages in many specialties.

Changes in physician supply and demand patterns in recent years are driving nationwide shortages in many specialties.

Nu

mb

er o

f P

hys

icia

n S

earc

hes

Co

nd

uct

ed

Physician Supply

Stagnant medical school admissions.

Decreasing physician work effort.

Increasing number of part-time physicians.

Physician Demand

Growing aging population.

Technological advances.

Prevalence of chronic diseases.1 Merritt, Hawkins & Associates (MHA), 2005 Review of Physician Recruitment

Incentives. NOTE: Based on 1,743 physician search and consulting assignments that MHA represented from April 1, 2004, to March 31, 2005.

Physician recruitment will become more competitive as physician shortages increase.

ImplicationImplication

5

Background Subspecialization

With PCP reimbursement rates flat and compensation nearly half that of many medical subspecialties, medical students are increasingly choosing to specialize.

With PCP reimbursement rates flat and compensation nearly half that of many medical subspecialties, medical students are increasingly choosing to specialize.

Median Physician Compensation1

$0$50,000

$100,000$150,000$200,000$250,000$300,000$350,000$400,000$450,000

$0$50,000

$100,000$150,000$200,000$250,000$300,000$350,000$400,000$450,000

Physician specialization will increase the shortage of PCPs.ImplicationImplication

1 MGMA Physician Compensation and Production Survey: 2006 Report Based on 2005 Data, national data.

Specialty Certification Plans of Graduating Medical Students2

2 Source: Association of American Medical Colleges, AAMC Data Book, January 2005.

6

Due to rising practice costs and declining reimbursement, physicians have had to dramatically increase their productivity to maintain the

same level of compensation. Moreover, PCP compensation has barely kept up with inflation, averaging only a 2.6% increase per year.

Due to rising practice costs and declining reimbursement, physicians have had to dramatically increase their productivity to maintain the

same level of compensation. Moreover, PCP compensation has barely kept up with inflation, averaging only a 2.6% increase per year.

Median PCP Production and Income Median Specialist Production and Income

Source: MGMA Physician Compensation and Production Survey for the years 1995–2005.

NOTE: Primary physician compensation has been growing at the same rate as the Consumer Price Index, which rose 27% from 1994–2004.

1995–2005 Percentage Increase: 66%

1995–2005 Percentage Increase: 26%

1995–2005 Percentage Increase: 72%

1995–2005 Percentage Increase: 47%

Background Mounting Financial Pressures

Compound Annual Growth Rate: 2.6%

Compound Annual Growth Rate: 4.7%

Physicians are likely to be drawn to regions with higher reimbursement rates.

ImplicationImplication

7

Background Critical Questions

Is your medical staff willing and able to recruit:

» To replenish itself from turnover and retirement?

» To meet community needs?

» To support your programmatic and service goals?

Do the economics of your area (payor mix, patient demand, overhead factors) support market levels of physician compensation?

If the answers to the above are uncertain, what can the hospital do to ensure an adequate supply of physician manpower?

8

Organizational Models

9

Organizational ModelsIndependent Practice

Characteristics

Physicians are independent and typically apply for hospital privileges.

Hospital may provide limited financial or operational support subject to significant regulatory constraints.

Physicians are responsible for managing their own practices.

HospitalHospital PhysicianPracticesPhysicianPractices

Medical Staff Credentialing

Contracting Group Governance Physician Compensation Clinical Coordination Facilities Billing Staffing and Management

Hospital Privileges

PayorsPayors

10

Organizational ModelsIndependent Practice – Model Arrangements

Clinic ModelLicensing

RequirementsFinancial

ImplicationsOrganizational

StructureManagement

Requirements

Independent Practice

None.

Physicians are credentialed by hospital for practice privileges.

Revenue is highly dependent upon physician productivity and payor mix.

No supplemental payment arrangements.

Solo or group practice.

Smaller practices (one to three providers) are usually managed by physicians with “lead” staff members.

Larger practices typically have dedicated office or business managers.

Practices are responsible for managing all aspects of business, including contracting, group governance, physician compensation, clinical coordination, facilities, billing, and staffing and management.

11

Characteristics

Similar to the clinic-without-walls model, except:

The group incorporates common policies and procedures across all sites of practice.

The group centralizes most administrative functions.

Group expenses are typically shared among group physicians.

Compensation plan is based on factors that stress group success.

Organizational Models Integrated Medical Group

Medical Group

Medical Group

Common Practice Policies and Procedures

Group Governance Physician Compensation (Group-Based) Common Practice Clinical/Administrative Oversight

12

Organizational Models Integrated Medical Group – Model Arrangements

Clinic Model

Licensing Requirements Financial Implications

Organizational Structure

Management Requirements

Integrated Medical Group

Creation of a single medical group with one tax ID number.

No supplemental payment arrangements.

Physician compensation is group-based.

Practice expenses are shared across all physicians.

Common fee schedule across all practices.

Some economies of scale achieved through centralization of various administrative functions, including billing, purchasing, and shared staffing.

Common operating and practice policies and procedures are established.

Normally has a main practice facility, but satellite offices are common.

Centralized governance structure.

Medical group employs all staff.

Most administrative functions are centralized, including contracting, billing, accounting, facilities management, recruitment, practice management, and planning.

Dedicated management team, possibly with graduate training and professional certification.

13

Organizational Models Rural Health Clinics

Characteristics

Rural Health Clinics (RHCs) can be independent or hospital-based.

RHCs were established to stabilize access to outpatient primary care in underserved rural areas and encourage the use of physicians, physician assistants (PAs), nurse practitioners (NPs), and certified nurse-midwives.

Under the program, the U.S. Centers for Medicare & Medicaid Services (CMS) designates private and nonprofit clinics meeting certain conditions for certification as RHCs.

RHCs are eligible for enhanced Medicare and Medicaid reimbursement (cost-based payment per visit).

CMS contracts with the Washington State Department of Health Facility Services Licensing to survey clinics to determine whether they meet federal requirements.

Requirements include location, organizational affiliation and governance, staffing requirements, medical direction, and provision of required services (including some emergency care).

HospitalHospital PhysicianPracticesPhysicianPractices

Contracting Group Governance Physician Compensation Clinical Coordination Facilities Billing Staffing and Management

Payors(cost-based

payment per visit)

Payors(cost-based

payment per visit)

Hospital-BasedHospital-Based IndependentIndependent

Contracting Billing Staffing and Management Facilities

- OR -- OR -

14

Organizational Models Rural Health Clinics – Model Arrangements

Clinic Model

Licensing Requirements Financial Implications

Organizational Structure Management Requirements

RHC Eligibility established through the Washington State Department of Health Facility Services Licensing.

Clinic must be located in rural or nonurban area as defined by U.S. Census Bureau and be within a Federal Health Provider Shortage Area (HPSA) or Medically Underserved Area (MUA).

Freestanding and provider-based RHCs’ cost-based Medicare reimbursement capped at $74.29 per encounter for 2007; Medicaid reimbursement is not capped and is based on clinic’s cost-based rate per visit (2006 average for WA state is $82.06).

Private office reimbursement based on Medicare RBRVS fee schedule and Medicaid fee schedule.

May be for-profit, non-profit, public, or private.

Provider-based RHCs are certified as part of a hospital, SNF, or home health agency.

All other RHCs are classified as free-standing.

At least one NP, PA or certified nurse-midwife must be on site to see patients 50% of the time the clinic is open (waiver is possible).

A physician medical director must be on site at least once every 2 weeks.

Productivity standards of 4,200 visits per FTE employed physician and 2,100 visits per FTE employed midlevel.

On-site service requirements include common outpatient diagnostic and therapeutic services (X-ray, laboratory).

Basic ED services must be provided, including treatment for common life-threatening injuries/illnesses.

Development of an RHC from start to finish typically takes about 1 year.

Source: Washington State Department of Health, Office of Community and Rural Health, 2006. Source: Washington State Department of Health, Office of Community and Rural Health, 2006.

15

Organizational Models Provider-Based Clinic

Characteristics

Changing from an office-based practice to a provider-based practice may yield financial advantages.

It is important that hospital and physician organizations jointly consider the impact of all factors, including the effect on patients, organizational requirements, and operational requirements.

CMS has defined strict requirements for qualification as a provider-based practice. These requirements outline:

» Licensure.

» Ownership and control.

» Administration and supervision.

» Financial integration.

» Facility location.

Additional licensure/accreditation requirements of provider-based sites.

» Joint Commission on the Accreditation of Healthcare Organizations (JCAHO).

» State licensure requirements.

Medical Group

Medical Group - OR -- OR -

Independent Provider-Based Clinic Hospital-Employed Provider-Based Clinic

PayorsPayors

ProfessionalFees

TechnicalFees

HospitalHospital

PayorsPayors

Professional and Technical

Fees

HospitalHospital

ClinicClinic

ClinicClinic

16

Organizational Models Provider-Based Clinic – Model Arrangements

Clinic Model Licensing Requirements Financial Implications

Organizational Structure

Management Requirements

Provider-Based Clinic

Clinic must be operated as a department of the main provider (i.e., hospital or other provider).

Clinic must be operated under same licensure as main provider.

CMS must approve clinic application for provider-based status.

Clinic must meet all the same regulatory and inspection requirements as the main provider (e.g., JCAHO, CMS, College of American Pathologists).

Clinic must be located either “on campus” and within 250 yards of main buildings, or within 35 miles of the main campus of the provider.

Clinics within 35 miles must meet the 75/75 test, requiring that at least 75% of patients served by the main campus and by the remote location reside in the same ZIP codes.

Provider-based reimbursement provided in two components: APC payment (Part A) and physician professional fee payment (Part B), instead of global fee for freestanding clinics.

Increased payments of 50% or more can be realized in certain instances.

Medical practices with high Medicare populations benefit most from converting to provider-based status (internal medicine, family practice vs. OB and pediatrics).

Must have the same organizational structure and integration as other hospital departments.

Clinical services must be integrated with main provider: management, QA, UR, medical records.

Financial systems are integrated with main provider; income and expenses are shared; accounting and reporting of financial data are combined.

Reporting relationships for the clinic and hospital must be the same in terms of intensity, frequency, and accountability.

Administrative services such as HR, finance, payroll, and purchasing must be handled by the same personnel.

17

Organizational Models FQHC

Characteristics

FQHCs are similar to RHCs but have additional requirements:

» Must provide dental services.

» Certain proportion of care must be administered by midlevel providers.

» Must have a community board.

FQHCs are “safety net” providers, such as community health centers, public housing centers, and outpatient health programs.

The main purpose of the FQHC is to enhance the provision of primary care services in underserved urban and rural communities.

Medicare pays FQHCs an all-inclusive, per-visit amount based on reasonable costs with some exceptions. Rates vary depending on actual costs, but have been observed to range from $60 to $150 per visit.

CommunityBoard

CommunityBoard

PayorsPayorsFQHCFQHC

18

Organizational Models FQHC – Model Arrangements

Clinic Model Licensing Requirements

Financial Implications

Organizational Structure

Management Requirements

FQHC Clinic must be in a medically underserved area or medically underserved population

Designated Community Health Centers, Migrant Health Centers, Health Care for the Homeless Programs, Public Housing Primary Care Programs, and Urban Indian and Tribal Health Centers currently receiving section 330 grants are automatically certified as FQHCs.

Existing clinics meeting FQHC requirements can request certification as FQHC Look-Alikes.

Patient fees must be discounted based on federal poverty guidelines.

New clinics can qualify for up to $650,000 in start-up funding.

Enhanced Medicare and Medicaid reimbursement.

Malpractice coverage assistance.

Discounted prescription drug purchases.

Clinic must be public or nonprofit.

Board of directors must be established, composed of greater than 50% of active, registered patients.

Clinics may be rural or urban.

No specific staffing requirements.

Clinics must provide primary care to all age groups.

Other service requirements include dental, mental health, substance abuse, and transport services.

Clinic must be open a minimum of 32 hours per week.

Productivity standards of 4,200 visits per FTE employed physician and 2,100 visits per FTE employed midlevel.

19

Other Support Structures

20

Characteristics

Physicians would be independent but contract for office management services.

Physicians would pay the MSO a fee for selected services.

Existing hard assets may be repurchased by physicians.

Physicians would own accounts receivable (A/R) and patient charts.

Hospital creates an MSO, which could be a function of the hospital, a subsidiary, or a separate legal entity.

The MSO provides administrative and practice management services to area physicians, such as billing and staffing support (current clinic staff might be transitioned to MSO employment under this arrangement).

Physicians pay the MSO an overhead fee for services provided at fair market rates.

The MSO model can create economies of scale for multiple physician groups and allows physicians to focus on the clinical aspects of their practices.

Other Support Structures MSO

MSOMSOHospitalHospital PhysicianPracticesPhysicianPractices

Management Services

Billing Staffing and Management Practice Consulting

Contracting Group Governance Physician Compensation Clinical Coordination FacilitiesPayorsPayors

21

Other Support Structures MSO – Model Arrangements

Clinic Model

Licensing Requirements Financial Implications

Organizational Structure Management Requirements

MSO None. No supplemental payment arrangements.

Physicians pay fee to hospital for selected management support services.

Fee paid to hospital must be at fair market rate.

Ability to generate economies of scale from aggregating the needs of smaller practices; sometimes offset by higher hospital cost structure.

MSO could be a function within the hospital, a subsidiary, or a separate legal entity.

Physicians retain independence, but contract for management services.

Physicians continue to own and manage their group.

Physicians own A/R and patient charts.

Billing, staffing, management, and practice consulting services provided by the hospital.

Internal support functions (group governance, physician compensation) continue to be provided by group.

Allows physicians to focus on delivery of clinical services.

22

Characteristics

Physicians remain independent from the hospital but contract for information services.

Contracted services typically include:

» Hardware.

» Software.

» EMR.

» Patient accounting.

» Information services training and support.

Physicians pay the hospital a fee for information services.

Physicians own and operate their group(s).

Other Support Structures ISO

ISOISOHospitalHospital PhysicianPracticesPhysicianPractices

ISO Support

Information Services Platform/Staff Electronic Medical Record (EMR) Implementation Physician System Support

Contracting Group Governance Physician Compensation Clinical Coordination FacilitiesPayorsPayors

23

Other Support StructuresISO – Model Arrangements

Clinic Model

Licensing Requirements

Financial Implications

Organizational Structure

Management Requirements

ISO None. Physicians pay fee to hospital for selected IT support services.

Recent regulations allow for below-cost subsidies and reduced physician investment.

Minimizes investment required for physician EMRs.

Probable operating subsidy required from hospital.

ISO could be a function within the hospital, a subsidiary, or a separate legal entity.

Physicians retain independence, but contact for IT services.

Physicians own and manage their group.

All IT functions, which typically include the information services platform, EMR support/ implementation, and physician system support, are provided by the hospital or other IT agency.

Medical group performs all administrative support functions (billing, contracting, staffing, facility management).

24

Other Support Structures PSA

Characteristics

Under the PSA model, a group of physicians is linked to the hospital through a PSA.

Physicians are relieved of all nonclinical responsibilities.

The PSA model offers many of the benefits of employment with more physician control over compensation and governance.

The hospital employs all staff, owns payor contracts and hard assets, and provides all support services.

The hospital makes periodic payments to the group, based on the terms negotiated in the PSA.

Physicians maintain their group structure and internal compensation distribution plan.

Administrative Services and Aggregate

Compensation

Clinical Services

Contracting Billing Staffing and Management Facilities

Group Governance Physician Compensation Clinical Coordination

PSAPSAHospitalHospital

Medical Group

Medical Group

PayorsPayors

25

Other Support Structures PSA – Model Arrangements

Clinic Model

Licensing Requirements Financial Implications

Organizational Structure

Management Requirements

PSA None. Hospital contracts with medical group to provide clinical services in return for compensation and administrative support.

Payors contract directly with hospital.

Hospital makes aggregate payments to medical group (normally on a per-RVU basis) based on terms of PSA.

Operations and financing are integrated with hospital, yet physicians retain independent group structure.

Physicians control the distribution of compensation and medical group governance.

The hospital employs all staff, owns hard assets, and provides all support services.

Physicians perform clinical work only; all administrative support functions are performed by hospital (billing, contracting, staffing, facility management).

26

Other Support Structures Physician Employment

Characteristics

Hospital purchases existing practices at fair market value and employs the physicians. Office staff are also typically employed by Hospital.

A compensation plan is developed for the physicians that is productivity-based, but may also involve a base salary component.

Physicians collaborate with Hospital administrators to set strategic and operational goals and to provide input regarding day-to-day operations.

HospitalHospital ExistingPhysicianPractices

ExistingPhysicianPractices

Practice Purchase Price

PhysicianCompensation and

Management Services

Clinical Servicesand Input

27

Other Support Structures Physician Employment – Model Arrangements

Clinic ModelLicensing

RequirementsFinancial

ImplicationsOrganizational

StructureManagement

Requirements

Physician Employment

None.

Physicians must be credentialed by hospital.

Medical practice assets are purchased by the hospital at fair market value.

Compensation plans are developed based on characteristics of each specialty but are typically weighted toward productivity.

Virtually ensures market levels of compensation and benefits to physicians.

Best-performing hospital-employed groups can break even when ancillary revenues are considered.

Physicians become employees of hospital.

Physician-led quasi-governance mechanisms can be developed to secure physician input into operational and strategic goals of organization.

Physicians report to hospital administration.

Dedicated management.

28

Financial Analysis

29

Financial Analysis

The organizational models vary significantly in their revenue and expense characteristics.

Each model has unique reimbursement features for Medicare and Medicaid. For FQHC and RHCs, the reimbursement rate is based on detailed cost information submitted as part of your application.

Although the reimbursement is often considerably higher than a freestanding, independent clinic, it is important to note that expenses are often also higher due to operating restrictions, including:

» Mandated services (such as dental) or staffing patterns (midlevel providers).

» Integration with hospital and hospital cost structure (provider-based).

YMMV – do the math!

30

Financial AnalysisReimbursement Characteristics

The table below illustrates the flow of revenues and practice expenses for the various clinic models.

The table below illustrates the flow of revenues and practice expenses for the various clinic models.

Clinic Model Medicare MedicaidCommercial/

Other

Independent Practice RVU × Federal Rate (Professional Fee)

RVU × State Rate (Professional Fee)

RVU × Contracted Rate

Provider-Based Clinic RVU × Federal Rate (Professional Fee)

APC Weight × Federal Rate (Facility Fee)

RVU × State Rate (Professional Fee)

APC Weight × State Rate (Facility Fee)

RHC – Freestanding Federal Cost-Based Encounter Rate (Capped at $72.76)

Cost-Based Encounter Rate (Washington State Average = $82.06)

RHC – Provider-Based Federal Cost-Based Encounter Rate (Capped at $72.76)

Cost-Based Encounter Rate (Washington State Average = $106.49)

FQHC Federal Cost-Based Encounter Rate (Capped at $97.13)

Cost-Based Encounter Rate (Washington State Average = $144.50)

Total Revenue

− Practice Expense

= Funds Available for Physician Compensation and Benefits

Total Revenue

− Practice Expense

= Funds Available for Physician Compensation and Benefits

40 – 50% higher than freestanding

40 – 50% higher than freestanding

31

Financial AnalysisProfitability

Clinic ModelClinic

RevenuePractice

Expenses

Profit Before Physician

Compensation and Benefits

Percentage Variance to Base Case

Independent Practice $318,249 $151,806 $166,444 --

Provider-Based Clinic $464,839 $182,167 $282,672 70%

RHC – Freestanding $385,336 $166,806 $218,531 31%

RHC – Provider-Based $405,706 $197,167 $208,540 25%

FQHC $490,291 $233,656 $256,636 54%

In this analysis, the projected profitability was greatest for the provider-based and the FQHC models.

In this analysis, the projected profitability was greatest for the provider-based and the FQHC models.

NOTE: Totals may not be exact due to rounding.NOTE: Totals may not be exact due to rounding.

32

Which Model is Best for You?

33

Things to Consider

Hospital or Physician ownership?

Strongest financial return?

Location?

» Rural

» HPSA

» MUA/MUP

Productivity standards?

Hospital licensure requirements?

Service requirements/limitations?

34

Summary of Clinic Organization Models

LocationOwnership/Governance

StaffingProductivity Standards

Payment Medicare

PaymentMedicaid

Physician Office

No limitation Hospital or physician

No limitations No standards Physician fee schedule Medicaid fee schedule

Provider-Based

Urban or rural

Within 35 miles of hospital or other criteria

Hospital ownedAccountable to hospital governing body

No limitations No standards Tech =CAH = cost + 1%PPS = APCProf = fee scale + 12% if global bill by CAH

Tech = costProf = Medicaid fee scale

RHC Provider-Based

Rural and HPSA/ MUA (updated every 3 years)

Hospital owned; accountable to hospital governing body

NP, PA or CNM 50% of open hours

4,200/employed physician FTE2,100/employed midlevel FTE

Cost of up $74.29No limit if < 50 beds

FFS rate based on 1999/2000 data

RHC Freestanding

Rural and HPSA/ MUA (must be updated every 3 years)

Hospital or physician

NP, PA or CNM 50% of open hours

4,200/employed physician FTE2,100/employed midlevel FTE

Cost up to $74.29 FFS rate based on 1999/2000 data

FQHC Urban or ruralMUA or MUP

No for-profit entity> 50% of board are FQHC patients< half of remaining members work in healthcareNo FQHC employees

MD, NP, PA, CNM, social worker for psychologist available all open hours32 hours/week minimum

4,200/employed physician FTE2,100/employed midlevel FTE

Rural up to $99.17Urban up to $115.33

Medicaid PPS