10 Key Steps to Ensure a Smooth Affiliation Among Providers, Health Systems, Hospitals

The first day of the National Association of Managed Care Physicians (NAMCP) Virtual Spring Managed Care Forum focused on the business of health care, and one session concentrated on 10 priorities for physicians and health systems to keep in sight if they are looking to strike a deal with each other.

The session was led by Max Reiboldt, CPA, president and CEO of health care advisory firm Coker Group, and Thomas Anthony, a partner at Frost Brown Todd.

How well, and how in-depth, all parties execute each step can determine how long it will take to reach a finalized agreement, what the relationship will be like after the transaction, and whether the parties will be in legal compliance, speakers noted.

"We are in an extremely dynamic era. I guess you could say it was always that way," said Rieboldt. The difference now, he added, is that there is more flexibility in terms of the type of affiliation agreements that hospitals, health systems, and physicians can create.

Reiboldt and Anthony explained the 10 considerations:

Defining and understanding the affiliate structure. These may range from limited, moderate, or full affiliation levels and could involve physicians only, some combination of physicians and hospitals, or physicians and health care systems. Increasingly, private investors are part of the arrangement.

The success of the transaction will depend on choosing the most appropriate model for the parties involved.

“This is always the first question—how far are we going to go?” Reiboldt said, and it has to be decided early in the process.

From the start, Anthony said, participants “need to understand the possibilities, from simple to complex, and have a singular goal to work toward.”

Employment arrangements are decided in this step; hospitals like the control that comes with fully employed physicians, while providers may want to retain some freedom.

“Finding a good match is not always possible,” said Anthony, although there are different ways to combine, such as hybrid and carve-out arrangements and professional services agreements.

Clinically integrated networks are more flexible than accountable care organizations, Anthony noted. “It is a great tool for 2 organizations that want to come together but remain independent,” he said.

Completing the financial analysis. This is the step where the purchaser or investor examines financial data and information to identify opportunities and/or concerns related to financial performance, provider productivity, provider compensation, and payer contracts. A coding audit is highly recommended.

Payer rates are on a “need-to-know basis” during this phase, Reiboldt said. And parties should know that "the financial analysis will form the basis of the ‘ask’ of the physicians to the health system,” he said.

Conducting operational due diligence. This encompasses everything from reviewing the revenue cycle to accounts receivable, operational processes, use of technology, and more. “I never heard anyone say, ‘Gee, I wish we’d done less due diligence,’” said Anthony.

“No one likes surprises, because usually they manifest themselves as additional cost,” said Rieboldt.

Considering posttransaction physician compensation. This is one of the most scrutinized areas and can’t be overlooked, they said. A provider wants to know what they will receive after the transaction.

Normalization agreements to prevent overstating or understating expenses and/or physician compensation should be used, and adjustments should reflect posttransaction compensation within fair market value (FMV).

Specific expertise of physicians is included in calculating the FMV, Anthony said.

Structuring a deal that is compliant with regulations. The 3 main fraud and abuse laws are the Stark Law, the Anti-Kickback Statute, and the Civil Monetary Penalties Law. Other antitrust laws come into play; so do the corporate practice of medicine, state insurance laws, commercial reasonableness, and more.

“There’s no way to skirt these—you can’t come close—they must be met,” said Anthony. With Stark, a deal is either compliant or not, he said.

Creating a letter of intent (LOI) or term sheet. The LOI is nonbinding and defines key terms; while both speakers said they have seen LOIs of varying lengths, the scope of it will uncover any possible challenges to the deal sooner rather than later.

“It is a preface to the definitive agreement and can identify early warning signals or aspects that may not have been fully vetted,” said Rieboldt.

In other words, Anthony said, the more effort that is put into the LOI up front, the faster the deal can proceed.

Developing a strategic financial plan with adequate resources and performance targets. Both physicians and health systems must come together to identify their specific strategies moving forward. It should evaluate alternative affiliation models; consider future services and growth opportunities; quantify direct and indirect revenue, cost, and performance targets; and more. This will determine “if the level of commitment is appropriate when compared to the level of operating improvement forecasted by the buyer.”

Monitor key performance indicators (KPIs) consistently. KPIs can motivate physicians, but metrics should be clear and simple and focused on actionable items. In order to win buy-in and consensus, the data must be validated.

Understand posttransaction reimbursement. This primarily focuses on third-party reimbursement, as affiliation can create opportunities in negotiating managed care contracts. And increasing third-party reimbursement is the main reason for affiliation or other types of agreements in the first place.

Completing the definitive agreements. The core pieces of an agreement, which should have already been outlined in the LOI, include documentation about employment agreements, professional service agreements, asset purchase agreements, real estate leases, and medical directorship contracts.