Professional services agreements (PSAs) between physicians and hospitals continue to be a strategic and successful alternative to traditional hospital employment models. These agreements offer a flexible framework that can align the interests of physicians and hospitals while addressing regulatory and operational challenges. By allowing a hospital to become the sole source of revenue and/or compensation for a physician practice, the practice can remain intact and maintain its independence while mitigating some risks it previously faced while in private practice.
Ultimately, PSAs have many benefits to physicians and hospitals, can vary in their structure, and should be carefully constructed to address key items described below.
Benefits of PSAs
For Physicians
Many physicians prefer PSAs over full hospital employment agreements for several reasons, including but not limited to:
- Addressing Private Practice Operating Pressures: Decreasing or uncertain reimbursement trends, increasing malpractice risk for physicians, and work-life balance issues are consistent operating concerns for many private practices. With a PSA, physicians can mitigate these concerns while maintaining control over their practice, including the distribution of compensation, retirement benefits, and the payment of other discretionary expenses.
- Providing Assistance with Alternative Payment Models: Accountable care organizations (ACOs) and shared savings programs aim to improve outcomes and reduce costs through collaborative community efforts. PSAs can act as a vehicle to provide the necessary resources for and allow physicians to participate in these alternative payment models.
- Serving as a Viable Alternative to the Employment Model: The PSA model offers a viable and flexible alternative to the employment model and a means for maintaining independence. PSAs may carry some of the benefits of employment, such as transferring the risk of collections to the hospital thereby moderating some of the effects of payer contracting, payer mix, and indigent or charity care.
For Hospitals
Hospitals also benefit from PSAs in several non-exhaustive ways:
- Strategically Aligning with Physicians: PSAs provide an opportunity to align with physicians when employment is not viable (i.e., states that have corporate practice of medicine statutes). This alignment can improve the quality and efficiency of care.
- Acting as a Transitional Model: Hospitals often view PSAs as a transitional model with the potential for future employment of physicians. In layman’s terms, a PSA allows a hospital to “date” a physician practice before they decide to get “married.”
- Creating Hospital Operational Efficiencies: By integrating physician services into a continuum of physician practices/specialties, hospitals can streamline operations and improve service delivery.
Structure of PSAs
The structure of a PSA can be customized to meet the needs of both the hospital and the physician practice. The basic components of a traditional PSA include
- A hospital contracts with the physician(s) for professional services.
- A hospital employs the physician practice’s staff and becomes responsible for certain overhead and management activities (i.e., a hospital/health system becomes responsible for the billing/collecting for the services provided by the physicians).
- A hospital pays physician compensation that is generally based upon physician work relative value units (wRVU) and a compensation-to-wRVU conversion factor. This rate can include only compensation for professional services or be built to include benefits such as payroll taxes, retirement benefits, and malpractice insurance. It may also include additional compensation for other non-clinical services (e.g., call coverage, administrative services, etc.).
In addition to a traditional PSA, a second type of PSA, commonly referred to as a global PSA, may be structured as follows:
- A hospital contracts with the physician(s) for professional services.
- The physician practice maintains responsibility for all costs (e.g., provider compensation, benefits, malpractice, and overhead expenses) yet allows the hospital to bill and collect for all services rendered by the physician practice.
- The hospital makes a “global” payment to the physician practice for all expenses, such as using a collections-to-wRVU conversion factor or a cost plus a fixed percentage/dollar amount. Often, these expenses are based on an annual budget that has been pre-approved by both the hospital and physician practice.
Additional Considerations in PSAs
When structuring a PSA, several key considerations must also be addressed:
- Scope of Services: Clearly defining the services to be provided and the compensation structure is crucial. Both parties must agree on the scope of services and ensure all services are compensated fairly.
- Exclusivity: Determining whether the physician group will be the exclusive provider for a department can impact the dynamics of the agreement and the surrounding environment (e.g., other physician practices within the same specialty). Exclusivity clauses should be carefully considered.
- Term and Termination: The duration of the agreement and the conditions under which it can be terminated should be clearly outlined. In PYA’s experience, the arrangements typically have initial terms from 3-5 years. Close attention should then be paid to the provisions for renewal and termination with and without cause. Furthermore, PSAs commonly have reconciliation processes that measure key assumptions made on the front end of an agreement versus actual results.
- Regulatory Compliance: Ensuring compliance with Stark Law, the Anti-Kickback Statute, and other regulations is essential. Notably, all transactions must be at fair market value, commercially reasonable, and in compliance with the volume or value standard. Involving legal counsel and a qualified valuation firm is strongly recommended.
- Compensation and Benefits: Structuring compensation based on wRVUs or another physician compensation methodology should ensure physicians are fairly compensated for their services. Benefits (such as retirement plans), malpractice insurance, and other overhead expenses should also be fairly considered when the agreed-upon structure incorporates these items.
PSAs offer a flexible, effective, and strategic alternative to traditional employment models for aligning the interests of and providing benefits to physicians and hospitals. While maintaining physician practice independence, PSAs can enhance hospital operations and the quality and efficiency of patient care. Careful structuring and compliance with regulatory requirements, however, are essential to ensure the success of these agreements.
If you would like additional guidance related to PSAs, provider compensation design, or any matter related to compensation valuation, commercial reasonableness, compliance, or strategy and integration, our executives are happy to assist.
