Reviews governmental direction for the development of clinical co-management agreements; Describes appropriate structure and development of fair market value compensation for services provided under a clinical co-management agreement.

1. Using Co-Management to Improve Quality and Keep
Physicians Financially Engaged
Curtis
Bernstein, CPA/ABV, ASA, CVA, MBA
Craig Anderson, DHG
Chris Masone, DHG
1

2. Agenda
 How does Healthcare Reform support Clinical Co-Management?
 What is the Federal Government advising us about pay for
quality, outcomes, and satisfaction?
– Value Based Purchasing Incentives
– Gainsharing Demonstration Projects and OIG Opinions
 What is a Clinical Co-Management Agreement?
– Structure
– Development
– Compensation Example
– Fair Market Value Compensation Calculation
2

3. Healthcare Reform Mandate
3

4. The Reform Mandate
More Care (32M uninsured, Baby Boomers, Chronic Disease)
Higher Quality (P4P, Shared Savings, Core Measures)
Less Money ($240B Cuts, $90B Penalties)
“Bottom line, if you attempt to use the same care delivery model moving
forward, faced with the magnitude of reductions in forecasted revenue, you will go
out of business.” Michael Sachs, Sg2
4

5. PPACA
Objectives of Healthcare Reform
Increase Healthcare “Value”
GOAL • Improve Quality
• Increase Access
• Reduce Costs
• Adopt New Models of Care Delivery
OBJECTIVES
• Shift Accountability and Risk to Providers
• Redirect and Shrink the Dollars
• Provide Coverage for the Uninsured
PREREQUISTES • Physician Alignment
• Provider Integration
• New Model Adoption
• Electronic Health Records
Source: HFMA | DHG 5

6. Payment Reform is Shifting Risk
6

7. Value-Based Purchasing
Incentives
7

8. Hospital Value Based Purchasing Program
 Hospitals are given points for Achievement and Improvement for
each measure or dimension, with the greater set of points used
 Points are added across all measures to reach the Clinical Process
of Care domain score
 70% of Total Performance Score based on Clinical Process of Care
measures
 30% of Total Performance Score based on Patient Experience of
Care dimensions
8

9. Medicare Measures
12 Clinical Process of Care Measures: 8 Patient Experience of
1.AMI-7a Fibrinolytic Received Within 30 Minutes of Care Dimensions:
Hospital Arrival
2.AMI-8 Primary PCI Received Within 90 Minutes of
Hospital Arrival 1.Nurse Communication
3.HF-1 Discharge Instructions
4.PN-3b Blood Cultures Performed in the ED Prior to 2.Doctor Communication
Initial Antibiotic Received in Hospital
5.PN-6 Initial Antibiotic Selection for CAP in
Immunocompetent Patient 3.Hospital Staff Responsiveness
6.SCIP-Inf-1 Prophylactic Antibiotic Received Within
One Hour Prior to Surgical Incision 4.Pain Management
7.SCIP-Inf-2 Prophylactic Antibiotic Selection for
Surgical Patients
8.SCIP-Inf-3 Prophylactic Antibiotics Discontinued 5.Medicine Communication
within 24 Hours After Surgery
9.SCIP-Inf-4 Cardiac Surgery Patients With Controlled 6.Hospital Cleanliness &
6AM Postoperative Serum Glucose Quietness
10.SCIP-Card-2 Surgery Patients on a Beta Blocker Prior
to Arrival That Received a Beta Blocker During the
Perioperative Period 7.Discharge Information
11.SCIP-VTE-1 Surgery Patients with Recommended
Venous Thromboembolism Prophylacxis Ordered 8.Overall Hospital Rating
12.SCIP-VTE-2 Surgery Patient Who Received
Appropriate Venous Thromboembolism Prophylaxis
Within 24 Hours
9

10. Point System
 How are Achievement Points awarded?
– Hospital rank at or above the Benchmark: 10 Achievable Points
– Hospital rank less than the Achievement Threshold: 0
Achievement Points
– If the rank is equal to or greater than the Achievement Threshold
and less than the Benchmark: 1-9 Achievement Points
 How are Improvement Points awarded?
– Hospital rank at or above the Benchmark: 10 Improvement
Points
– Hospital rank less that or equal to Baseline Period Rate: 0
Improvement Points
– If the hospital’s rank is between the Baseline Period Rate and
the Benchmark: 0-9 Improvement Points
10

11. Sample Calculation - Performance
55% 60% 65% 70% 75% 80% 85% 90% 95% 100%
Threshold Benchmark
0 1 2 3 4 5 6 7 8 9 10
Hospital’s Performance Period Score1 – Achievement Threshold
9 x
( Benchmark – Achievement Threshold ) + 0.5
1 As used in these formula, the “score” refers to the hospital’s performance rate.
11

12. Relationship of Score to Compensation
The exact slope of the linear
exchange function will be
determined after the performance
period and will depend on the
hospital’ Total Performance Scores
and the total DRG amount withheld
Value Based
Incentive
Payment
Percentage
0 Total Performance Score 100
12

13. Gainsharing Models and
Demonstrations
13

14. Demonstration Projects
 Initially performed by Medicare in the early 1990s under a Coronary
Artery Bypass Graft Demonstration project.
– Five year project
– Saved Medicare $42 million on patients treated in demonstration
hospitals
» 10% from expected spending
14

15. New Jersey Demonstration Project #1
 Application submitted in 2001
 Eight hospitals covering all of the All Patient Refined (APR) DRGs
– Maximum pools of Part A hospital savings for each APR-DRG
treated in the hospital to be shared with the medical staff
– Limited to 25% of total Part B payments received by the
physician
– Pools converted to a per-discharge cost for each APR-
DRG, based on average cost of the lowest 90% of cases.
– Responsible physicians identified for each hospitalization and
they became eligible for bonuses if the average cost of their
cases did not exceed the mean cost of the 90 percent baseline
group of cases
 Terminated in its early implementation period
15

16. New Jersey Demonstration #2
 CMS approved 12 New Jersey hospitals and their participating
physicians to test gainsharing
– Three year program
– Offers physicians financial incentive to work with hospitals to
lower costs
» Includes stringent quality controls to protect patient
– Designed around three cost areas: efficiency strategies, quality
standards, and financial incentives
 In second year of program
16

17. Medicare Demonstration Project
 Began October 1, 2008
 Two sites: Beth Israel Medical Center in New York City and
Charleston Area Medical Center in Charleston, West Virginia
– BIMC continued participation through September 30, 2011 and
CAMC elected to end participation as of December 31, 2009
 CAMC demonstration was limited to cardiac DRGs
17

18. March 28, 2011 Report to Congress
 Demonstration project is Secretary’s response to requirements
under Section 5007(e)(3) of the Deficit Reduction Act of 2005 as
amended by Section 3027 of the Affordable Care Act
– Began October 1, 2008
– Test and evaluate methods and arrangements between hospitals
and physicians designed to govern the utilization of inpatient
hospital resources and physician work to improve the quality and
efficiency of care provided to Medicare beneficiaries and to
develop improved operational and financial performance with
sharing of remuneration
18

19. Beth Israel Medical Center
 BIMC included most medical and surgical DRGs in their demonstration.
 Enrollment was voluntary for physicians.
 A pool of bonus funds was prospectively estimated from hospital savings on
the basis of the following factors:
– Total available incentive is a percentage of the best practice variance for
each APRDRG.
– Best practice variance = (actual spending - best practice cost)
– Best practice cost = spending of the lowest-cost 25th percentile
 If no hospital savings were realized, no bonuses are allocated to
participating physicians. The total available incentive was defined as:
– total available incentive = X% x (actual spending - 25th percentile
spending)
– where X% = the percentage of spending (X%) to allot to the incentive
pool
 An incentive pool calculation was made for every APR-DRG and then
summed across all APR-DRGs.
19

20. BIMC Demonstration Project
 Each patient is assigned to one practitioner who takes financial
responsibility for the care of the patient
– For medical patients, the responsible physician is the attending
physician
– For surgical patients, the responsible physician is the surgeon
 Bonus is calculated as a percentage of the maximum performance
incentive, based on performance
 Gainsharing payment is capped at 25% of the physician’s affiliated
Part B reimbursement
 Standards to be eligible for bonus:
– Overall admission rates within seven days must not increase
– Adverse events and malpractice experience must not increase
– Physicians must attain standards set for selected quality
measures and administrative requirements
– Increased post-acute care use by participating physicians will be
reviewed for appropriateness
20

21. BIMC Results Through Report
 Staff estimates savings as a result of reduction in length of stay
resulting from:
– Use of electronic health records
– More efficient use of consults
– Improved communication and management of imaging choices
– Streamlining evidence based care through implementation of
protocols
– Implementation of interdisciplinary rounds
– More efficient operating room management
– More appropriate use of intensive care unit beds
21

22. Quality Assurances
 BIMC proposed a range of physician quality standards, which, if not met by
individual physicians, would make them ineligible for the gainsharing bonus.
These overall standards are as follows:
– Overall readmission rate within 7 days must not increase.
– Adverse events and malpractice experience must not increase.
– Physicians must comply with available quality measures.
 Complete evaluation results will be available through a report to Congress
that is due in March 2013 and a final report to CMS that is due in December
2014.
22

23. Charleston Area Medical Center
 Focused on cardiac DRGs.
 CAMC anticipated that internal savings would be generated by the following initiatives:
– examination of practice differences,
– utilization of laboratory resources as needed,
– evaluation of product usage,
– increase in patient flow, and
– negotiation of lower prices for medical devices and supplies
 The CAMC proposal did not propose Medicare savings and expects costs savings to be internal
to the hospital.
 CAMC proposed to measure physician care provided on several factors to ensure that quality of
patient care remained the same. Worse performance on any of the following standards for an
individual physician would make him or her ineligible to receive the gainsharing bonus:
– Readmission rates
– Repeat procedures
– Patient outcomes
– Major events during procedures
– Antithrombotic usage
23

24. CAMC Results Through Report
 Estimated savings are:
– Surgical costs reductions made via negotiated rates on devices
and implants
– Reduced physician variation in practice patterns
– Reduction in infections, complications, and readmissions for
cardiac and orthopedic procedures
24

25. IHA Bundled Episode Payment and
Gainsharing Demonstration
 Test the feasibility of bundling payments to
hospitals, surgeons, consulting physicians and ancillary providers
for selected inpatient surgical procedures
– Limited to California
– Funded by the Agency for Healthcare Research and Quality
– Expands the current pilot that has focused on commercial PPO
patients receiving total hip and total knee replacement in Los
Angeles and Orange counties
 In 2011, Integrated Healthcare Association (IHA) added additional
procedures including diagnostic cardiac catheterization, cardiac
angioplasty with stents, and knee arthroscopy with meniscectomy
25

26. Clinical Co-Management Agreement
26

27. Co-Management Overview
Governance Committee
FMV Compensation Management
Fee Distributions
Physician
Hospital XYZ Physicians
LLC
Management Investment
Services
Fixed Performance
Duties Metrics
• Committee Involvement • Clinical Outcomes
• Day-to-Day Mgmt
• Patient Safety
• Strategic Plan Dev
• Clinical Care Mgmt • Satisfaction
• Quality Improvement
• Operational Processes
• Staff Oversight
• Budget Development • Financial Performance
Source: DHG 27

28. Co-Management Models
Component Management Quality
Share reduction of
Manage day-to-day
What is it? expenses resulting
operations of entity
from improved quality
Must delineate Compensating
duties performed appropriate amount
Challenges while maintaining associate with
provider based individual metrics
status
Improved quality of
Joint effort in cost
care should reduce
Benefits reduction through
cost of care through
management of
lower lengths of stay
staff and supplies
and readmissions
28

29. Co-Management Overview
Hospital
Physicians
Source: Sg2; Genesys Health System Case Study

30. Co-Management Agreement: Structure
 Shareholders:
– Hospital – Class A interest
– Physicians – Class B interest
– Purpose: apply limitations on ownership (e.g., only physicians licensed in
state in a certain specialty can own Class B interest)
 Committees
– Board of Directors – oversees all other committees
» Include both hospital and physician representatives
– Quality Committee
– Financial Committee
– Operations Committee
30

31. Co-Management Agreement: Structure
 Compensation
– Base compensation
» Fixed monthly amount; or
» Variable amount based on actual hours worked
– Incentive compensation
» Fixed amount
» Varies based on achievement of different levels of goals
– Compensation distributed based on hours worked and / or ownership
percentage
31

32. Co-Management Agreement: Development
 Rally the troops –physicians may already be involved in a
venture together (e.g., specialty hospital, ASC, or physician
practice)
 Require buy-in to co-management company
– Legal restrictions on offering of ownership interests
– Only those with an ownership interest can participate in profit
distributions
 Owners must actively participate in the management of hospital
or hospital department
32

33. Co-Management – Valuation Overview
Scope Departments
Inpatient  Neurology 
Outpatient  Neuro Surgery

Revenue of Selected Services (EXAMPLE): $1M
Base Market
Service Second Revenue FMV Range
Range Range Approac
Adjustment* Range Adjustment** (% of NR)
(% of NR) h
Low 5.00% 50.00% 2.50% 0.00% 2.50% $25,000
High 7.00% 50.00% 3.50% 0.00% 3.50% $35,000
*Service adjustment is associated with depth and breadth of fixed duties written into the
agreement (100% would be fully comprehensive list of duties)
**Revenue adjustment is associated with magnitude of net revenue of the service line. There
are economies of scale associated with management of larger service lines, therefore the % of
net revenue range is lowered for these larger service lines
33
All Compensation is paid at Fair Market Value

34. Co-Management Model – Flow of Funds
($1M Service Line)
Governance Committee
Physician #1
FMV Compensation Management
Fee Distributions
Physician Physician #2
Hospital XYZ LLC
Management Investment
Physician #3
Services $2.5K - $5K
Per MD
Performance
Fixed Duties
Metrics* 60%
40%
$15k Total,
$10k Total
$5k per MD
* All Compensation is paid at Fair Market
Value
Investor Leader
(2 Physicians) (1 Physician) **Maximum payment assuming full
Approx. $2k per MD Approx. $6k attainment of performance metrics
34
Source: DHG

35. Co-Management Example: Management
Component
Hours per Hourly Total
Task Year Rate Compensation
Staff Management 600 $ 250 $ 150,000
Peer and Hospital Education 100 250 25,000
Financial and Operational Oversight 250 250 62,500
Market and Strategy Development 100 250 25,000
Billing and Coding Review 175 250 43,750
Total Compensation $ 306,250
35

36. Co-Management Example:
Quality Component
Total Quality Pool $ 1,000,000
Percent of Total Percent Total
Measure Pool Achieved Compensation
AMI-8 Primary PCI Received Within 90 Minutes of
Hospital Arrival 10% 85.0% 85,000
PN-3b Blood Cultures Performed in the ED Prior to
Initial Antibiotic Received in Hospital 10% 90.0% 90,000
SCIP-Inf-1 Prophylactic Antibiotic Received Within
One Hour Prior to Surgical Incision 10% 95.0% 95,000
SCIP-Inf-2 Prophylactic Antibiotic Selection for
Surgical Patients 10% 85.0% 85,000
SCIP-Inf-3 Prophylactic Antibiotics Discontinued
within 24 Hours After Surgery 10% 90.0% 90,000
SCIP-Card-2 Surgery Patients on a Beta Blocker Prior
to Arrival That Received a Beta Blocker During the
Perioperative Period 10% 95.0% 95,000
Patient Satisfaction Levels 10% 85.0% 85,000
Coding Accuracy 10% 90.0% 90,000
Surgery On Time Starts 10% 95.0% 95,000
Electronic Medical Record Usage 10% 85.0% 85,000
Total Pool 100% $ 895,000
36

37. Management Services
Scope of Responsibilities
Level of Responsibilities
Duties within Hospital Based Management Agreements Full Partial N/A
Financial Management Services
Operational Management Services
Other Management Services
Staffing Management Services
37

38. Management Services
Calculations Under Market Approach
Market Value of Services
Low High
Overall Percentage of Typical Services Provided 75.0% 80.0%
Full Service Mgmt Fee 5.0% 6.0%
Adjusted Management Fee (Based on Level of Services) 3.8% 4.8%
Additional Discount for Service Line Size 20.0% 20.0%
Adjusted Management Fee (Based on Level of Services
and Size of Service Line) 3.0% 3.8%
Revenue of Service Line $6,320,000 $6,320,000
Results of Market Approach - Comparable Agreements $189,600 $242,688
Results of Market Approach - Physician Compensation $233,420 $258,502
Results of Market Approach (Equal Weighting) $211,510 $250,595
38

39. Benchmark Facilities
Comparable Hospitals
Gross Patient Revenues Case Mix Index
Hospital (in Millions) Total Beds
Regional Medical Center $1,283 265 1.6863
Medical Center $767 204 1.4803
Regional Medical Center $692 256 1.4537
East $614 302 1.6324
Regional Medical Center $685 243 1.5678
Medical Center $1,277 290 1.6695
Hospital $918 404 1.6919
Hospital $1,299 268 1.7777
Regional Medical Center $775 210 1.8117
39

40. Quality Incentive
Cost per Case Extended
APC n 25th Median 75th 25th Median
0006 5 $75 $97 $141 $375 $485
0007 9 489 489 489 633 764
0013 7 26 59 124 179 410
All Others XXXXXXX XXXXXXX
Subtotal $1,592,048 $2,038,759
Variance in Range $446,711
Shared Savings Percent 50%
Shared Savings Amount $223,355
40

41. Contact Information:
Curtis Bernstein ■ curtis.bernstein@sinaiko.com ■
720-240-4440
Craig Anderson, Jr. ■ craig.andersonjr@dhgllp.com ■
330-650-1752
Chris Mason ■ chris.masone@dhgllp.com ■
330-650-1752
41