As 2015 draws to a close, hospitals are facing a significant number of changes, including new developments in value-based payment and a changing regulatory environment. Three broad categories of transaction trends emerged in 2015. These trends were likely influenced by the changes in the market and may inform what is ahead for 2016 and beyond. The three categories of trends were consolidation, clinical integration and alignment, and new compensation models.
Increase in consolidation
"[Calendar year] 2014 brought a large volume of transactional activity" said Adria Warren, partner at Foley & Lardner. Ms. Warren participated in the Dec. 9 webinar sponsored by HealthCare Appraisers and led by Andrea Ferrari, director with HealthCare Appraisers. "The final 2015 statistics are not yet available, but preliminary data indicate there was again a great deal of acquisition transaction volume and physician employment, but also a lot of movement toward joint ventures and partnerships."
Although consolidation models vary, three key types stand out: an asset purchase/employer model, a stock purchase/merger model, and a professional service/professional service+ arrangement. A variety of factors play a role in the success or failure of these models, including timing and whether the organizations are an adequate cultural fit. Not all succeed. As 2016 dawns, hospitals are exploring alternatives to mergers and physician practice acquisitions, including clinically integrated networks and various joint ventures.
A shift toward clinical integration
Various legal, regulatory and business considerations may drive the trend toward clinical integration. "The clinically integrated network is a model that is attractive to an increasing number of hospitals as a means to foster coordination of care and achievement of quality and value goals among independent providers, including primary care providers," said Ms. Ferrari of HealthCare Appraisers. "Attention to quality and value are hallmarks of the next evolution of healthcare."
The various factors that encourage hospitals to pay attention to quality and value are sustaining the interest in co-management arrangements and similar hospital-physician alignment arrangements. In 2015, several new trends emerged in the concept of co-management. For example, hospitals have begun to experiment with new types of incentives and the layering or incorporation of co-management with gainsharing, particularly after MACRA — the Medicare Access and CHIP Reauthorization Act of 2015.
Other types of joint ventures and aligning services agreements — such as affiliation agreements — are also of great interest, according to Ms. Ferrari. "Community hospitals are looking at collaborations for pre-hospital and post-hospital care and affiliations with larger institutions in order to meet the full continuum of care for their patients," said Vivian M. Gallo, senior vice president and general counsel at Daytona Beach, Fla.-based Halifax Health. "We're seeing community hospitals reaching out to academic research centers to ensure they have access to the latest quality benchmarks and clinical research so they can be ready for bundled payments and payments for value."
In 2016, hospitals must consider how their arrangements will yield value. "The details of how physicians are compensated, and for what efforts, are important. In order to accommodate a dynamic regulatory landscape, existing compensation structures are evolving," said Jamie McIntyre, manager at HealthCare Appraisers.
"Incentive metrics vary and the changing nature of the regulatory environment means that they should be reviewed carefully to ensure that they make sense from a practical as well as regulatory compliance standpoint," said Ms. Ferrari. "Unusual or overlapping metrics may be reasonable and desirable for a variety of reasons, but if not carefully considered they can also be pitfalls for ensuring fair market value, commercially reasonable compensation."
Compensation changes
The changing market emphasis in favor of quality and value is affecting even "bread and butter" hospital services arrangements, including physician employment arrangements, medical director agreements, departmental staffing arrangements for hospital-based service lines and on-call coverage agreements. Hospitals are increasingly incorporating quality and value measures into their agreements and sometimes putting a certain amount of compensation at risk.
"I'm seeing a lot more emphasis on quality, and a shift in putting clinical compensation more at risk in order to pay our physicians for those quality and goal-aligned metrics," said Kelly R. Anderson, associate general counsel at Baptist Health in Louisville, Ky.
Robyn Revelson, in-house counsel at Kettering (Ohio) Health Network, agrees. "Quality achievement is becoming a higher percentage of what [physicians'] total compensation is," she said. "We've focused on bringing in some clinical people to really develop a strong set of metrics. One of the big focuses is making sure there is meaningful achievement in quality in order for physicians to achieve incentive compensation."
The enforcement environment
The transactional trends of 2015 and the ongoing shift of more emphasis on quality and value in healthcare are occurring in conjunction with changes in the healthcare regulatory environment. Some of the changes of 2015 were very significant, including passage of MACRA with its changes to physician reimbursement models and the gainsharing civil monetary penalties law; changes to the Stark Law regulations through the rulemaking process for the Medicare Physician Fee Schedule; legislation changing reimbursement for services in hospital outpatient departments; and the proposal of new rules related to the 340B drug pricing program.
There was also a lot of attention-getting regulatory enforcement activity in 2015, including a "Fraud Alert" reporting and warning of adverse action by the Office of Inspector General of the United States Department of Health and Human Services when physician compensation arrangements are not legally compliant, and a substantial number of lawsuits filed against and/or settled with hospitals and their physicians and employees under the Federal False Claims Act.
"Both the volume and settlement amounts of False Claims Act cases against hospitals seem to be increasing overall," said Ms. Ferrari. The amounts that hospitals agreed to pay to settle False Claims Act cases in 2015 are staggering. "Just a few years ago, Bradford Regional Medical Center made news with a settlement of $2.75 million. We are a far cry from that now, with settlements near or topping $100 million," Ms. Ferrari added. As an additional development of 2015, there was the "Yates Memo," which suggests that the Department of Justice may seek individual accountability and culpability before settling with a corporation. This may affect how investigations play out if and when there are qui tam lawsuits.
There are several notable trends in the allegations and resolution of False Claims Act cases against hospitals. These include:
- Focus on physician compensation, including stacking of compensation that leads to high aggregate compensation amounts
- Focus on fair market value benchmarks and quality of fair market value opinions, with non-fair market value compensation or transfers being an allegation in many qui tam lawsuits
- "Unlikely" whistleblower relators, including physicians and hospital employees
- Questioning of commercial reasonableness of compensation arrangements
- Losses construed as evidence of non-fair market value and non-commercially reasonable compensation
- Tracking of hospital referrals and contribution margins construed as evidence of illegal behavior
- Settlements and liabilities for hospitals in staggering amounts
With these trends as the backdrop, good knowledge and understanding of the marketplace and regulatory environment may be more important than ever.
7 tips for hospitals
Based on trends of 2015, the webinar panelists shared several tips for hospitals for 2016, and perhaps beyond.
1. Remember the Triple Aim. The Triple Aim encompasses three tenets: improve the patient experience, improve the health of populations and reduce the per capita cost of care. These factors are the new drivers of value and transaction trends in healthcare. In 2016, they could and should continue to influence the type and nature of transactions for hospitals.
2. Productivity is important, but so are quality and value. Survey data from the Medical Group Management Association indicate that 100 percent productivity-based compensation models are on the decline for physicians. Although productivity will always be important in healthcare, with the healthcare marketplace shifting focus to quality and value, hospitals may benefit from active planning to ensure they are able to meet or exceed benchmark standards of quality and value. This may require re-evaluation of processes and compensation arrangements in the context of trends and regulatory realities.
3. Don't go it alone. There are two points underlying this tip. First, hospitals can't operate in a silo in an environment when comprehensive, coordinated care for populations is so important. Collaborative approaches to care delivery — for example, through clinical integration with other providers and/or affiliations and partnerships — can be important for thriving in the current environment.
Second, given the changing market and pitfalls, it may be valuable for hospitals to reach out to and work with knowledgeable and informed advisors, including appropriately experienced valuation analysts and counsel.
4. Assume sunshine everywhere, and be prepared for when the clouds come. Healthcare is a highly regulated and heavily scrutinized industry today. With qui tam lawsuits and related government investigations increasing, healthcare leaders will need to be mindful of how their activities may be presented or interpreted if they end up in the limelight. Planning for this possibility by having appropriate documentation for transactions and compensation arrangements is important. The appropriate documentation may include fair market value analyses, and explanations of the "whys" of a transaction, including community needs and other reasonable business justifications.
5. Remember that when someone loses, someone else wins, or we are all losers. Hospital losses are expected for a variety of reasons. For hospitals employing or otherwise entering into professional services arrangements with physicians, the ongoing shift from volume-based to value-based payment means value arises from more than just the traditional measures of "productivity," and metrics such as the "compensation to collections ratio" should be considered carefully. Some data indicate that some types of practices, even if legitimately needed by a hospital, tend to routinely experience losses by nature, regardless of ownership or management. There are many reasons losses may be both reasonable and expected.
On the other hand, recent developments suggest losses that are perpetual and result from physician compensation that exceeds physician services may attract regulatory scrutiny. This being the case, good documentation to support the hows and whys of a transaction may be very important when losses are expected.
6. Be reasonable. Acrimonious relationships or negotiations may breed qui tam relators. With this in mind, it is important to take a reasonable approach to transaction structuring and compensation issues. Since "commercial reasonableness" may be advisable if not required for regulatory compliance, be mindful of the criteria for commercial reasonableness and whether you have facts and documentation to establish that a transaction is commercially reasonable. The price tag for being "unreasonable" — both corporate and individual — could be very high.
7. Remember that the devil is in the details. As healthcare evolves, there are various reasons for hospitals to reevaluate and/or change the way they do business and the type or focus of relationships and transactions that they enter. This makes for novel and interesting challenges, particularly given the complexity and intensity of the legal and regulatory scrutiny that we have seen over the last few years. Hospitals should be mindful of the old adage that garbage in equals garbage out. Incomplete or inaccurate information may result in faulty assessments of arrangements, including their fair market value and commercial reasonableness. Context is important to interpretation of facts, so an incorrect or incomplete understanding, communication or evaluation of details can lead to pitfalls, particularly in the event of scrutiny or an investigation later.
Although we don't know for certain what 2016 will bring, we hope these seven tips, taken in the context of the trends, events and developments of 2015, will assist hospital leaders to prepare for the next evolution of healthcare.
Click here to view the webinar recording.