The earliest iterations of the service line co-management arrangement (“CMA”) structure focused largely on the contractual alignment of physicians and hospitals in the absence of broad-scale employment models. In those first years, it would have been impossible to have foreseen some of the market influences and sustaining innovations that would drive the evolution of the CMA structure. Be it the continued introduction and growth of new payor initiatives, a shifting regulatory landscape, or wide-sweeping disruptions to the healthcare system brought about by the COVID-19 pandemic, no period in history has had a potentially more profound effect on the structure and administration of service line CMAs than the past 18-months.
By way of background, it has been almost ten years since the Office of Inspector General (“OIG”) first formally reviewed a service line CMA and issued Advisory Opinion 12-22. Contrary to what one may have surmised (the authors included), amid a dynamic landscape of innovation in healthcare delivery models and against the backdrop of a shift toward value-based care, we have not seen any decrease in the popularity of these alignment vehicles. What we have witnessed, however, is the continued evolution of the CMA as part of hospitals’ overall responses to (i) the volatility of service line revenues; (ii) the ongoing need to re-assess and delegate day-to-day managerial activities, influenced in part by changing regulatory and accreditation requirements; and (iii) increased pressure from payors to more accurately track and establish accountability for optimized patient outcomes, all while maintaining a keen eye on the shifting landscape of where hospital services may be delivered.
As most readers of this article are likely aware, one of the main variables relied upon in the valuation analysis of a service line CMA is the relative size of the service line (e.g., a comprehensive cardiology program), as generally measured by the Part A net collections of the services subject to oversight under the CMA. During the COVID-19 pandemic, Hospital ICUs and inpatient censuses were overwhelmed with patients afflicted with the virus, and much of the healthier patient population was either unable to be scheduled for elective surgeries and/or canceled or delayed them out of fear of contracting the virus. Furthermore, many parts of the traditional hospital infrastructure were shuttered due to lack of supplies, stretched resources, and/or ill, furloughed, or re-deployed hospital staff. Now that the healthcare world is starting to safely open back up, and organizations are endeavoring to recommence stalled contracting activities, hospitals and health systems are struggling with how to accurately and defensibly provide a depiction of size with respect to their service lines.
While we place emphasis on issues caused by the COVID-19 pandemic, disruption or delay in hospital operations could certainly happen again in the future for a wide variety of reasons, and this unintended “volatility” may make it difficult to provide an accurate depiction of the annual size of a relevant hospital service line. In our experience, this issue can be addressed in a variety of ways. A decision regarding what best reflects an accurate annual period of operations for a service line will primarily depend upon whether the hospital organization believes that relevant operations have been temporarily disrupted or are reasonably anticipated to be permanently altered. On this point, no one has a crystal ball about the future state of affairs, but in those instances where a hospital client believes that its future operations are likely to expand (or contract) considerably in comparison to historical operations, our analyses have generally been “truncated” to a single year shelf-life. In these instances, and assuming that the anticipated expansions or contractions materialize, the hospital can always have its arrangement re-valued after an initial 12-month period. The more significant challenge has been faced by clients who realized a period of temporary volatility (e.g., opening a new or closing an existing wing of the hospital or co-located surgery center). In these instances, and in our experience with our clients, the two most common approaches seem to be (i) forecasting a reasonable estimate based on an increased revenue size (in the event of anticipated growth or the ‘go-live’ of new service offerings), perhaps based on historical revenue Part A collections per case for the applicable case type(s), or (ii) looking back at prior year historical revenues for the same months as “impacted” by the volatility (in the event of a temporary disruption or closure), and then substituting in these ‘typical’ monthly net collection amounts in place of the artificially depressed periods to derive a blended and reasonably ’knowable’ period of annual operations. While there are likely other ways in which this issue has been addressed, the most important aspect is that the hospital takes a reasoned and disciplined approach to creating a supportable net collections number that can be “re-created” should the need arise. Further, it goes without saying that accommodations should be made for other operational factors such as active shifts in the location of service for applicable case types, retirements or onboarding of new active medical staff within the department, known reimbursement changes and other issues which would have a material impact on revenue, case mix, acuity or volume.
With regard to the underlying day-to-day managerial activities and responsibilities of the CMA, and much in the same way that any local or market volatility can impact a hospital’s service line net revenue, such disruptions can also have an impact on previously agreed managerial responsibilities included in a CMA. In these instances, it is critical that hospitals have the ability to monitor and assess (i) what services the physician managers performed during the period of disruption and (ii) how to fairly handle an appropriate annual financial reconciliation with the physician managers in light of these disruptions. With regard to the first point, whether the result of a pandemic or due to an unforeseen disruption in normal hospital operations (e.g., natural disasters giving rise to evacuation, difficult EHR rollouts, etc.), it is important that a hospital take a critical look at what services the physician managers were providing during these periods, or how that delegation of responsibility may change going forward. While the services provided may have deviated from the specific tasks that were originally agreed upon and included in the agreement, we do not think it would be unreasonable for a hospital to indicate to its valuation firm (and document) that a series of “substitute” services deemed to be of equal importance were rendered. For example, perhaps in lieu of developing, implementing, and monitoring plans to reduce adverse events, the physician managers were charged with developing and implementing plans to address and treat increased spikes in infection rates. As another observation, community and/or staff education likely played less of a role in some arrangements in 2020, given that these activities are sometimes traditionally handled in-person and may not have translated well into a “virtual” setting. Alternatively, it is likely the case that other tasks required much more attention as compared to what was originally contemplated at the inception of a given agreement. For example, physician managers were likely required to ensure an increased focus on the rapid development of revised and additional/supplementary clinical protocols, pathways, and throughput guidelines in light of the effects of the pandemic and in response to required operational adaptations and rapidly changing circumstances. Whatever the case, and regardless of the cause, if there is a change to the task grid under an agreement, it is advised that such changes be discussed with your applicable valuation firm to ensure that your arrangement still comports with the underlying opinion of fair market value.
Lastly, as if dealing with potentially volatile service line net revenues and fluctuating physician management tasks is not enough to keep hospital operations folks busy, they also must contend with an ongoing (perhaps increasing) need to monitor patient outcomes amidst a sea change shift of surgical services to an outpatient setting. Contractually and operationally, service line CMAs are typically (a) heavily focused on the improvement of outcomes in areas such as patient satisfaction, safety, quality, and efficiency and (b) reviewed on an annual basis to ensure that the outcomes-based portion of the arrangement is kept fresh and consistent with both the broader marketplace and current hospital priorities. The Outpatient Prospective Payment System and Ambulatory Surgical Center final rule for 2021, released in December 2020, further solidifies a shift of surgical services to the outpatient setting. With roughly 300 services slated for removal from the inpatient-only list in 2021 – and full-scale removal anticipated by 2024 – hospital service lines are likely to experience a continued downtrend in overall revenue size.
Concurrently, hospitals will face even greater pressure to avoid unanticipated overnight stays, optimize care, expedite patient recovery and post-surgical ambulation and shift their delivery model to accommodate same-day discharge. Looking to the example of patient satisfaction helps make clear the magnitude of impact that the lifting of the inpatient-only rules will have on CMAs. Historically, well over fifty percent of CMAs have been involved in some way – on a ‘report only’, gatekeeper or paid incentive basis – the tracking of patient satisfaction scores via HCAHPS. Once the shift to primarily outpatient-based services has occurred, not only will the ‘n’ change significantly, but the population still subject to HCAHPS reporting will differ significantly in terms of acuity, complexity, and risk. Should HCAHPS be abandoned in favor of another benchmark as a material indicator of patient satisfaction, the hospital will bear the onus of vetting an alternative tracking mechanism, educating CMA participants on its use, and regularly and accurately reporting these results. A few other examples might involve in-hospital complication rates, readmissions, and inpatient ambulation rate on Post-Operative Day 0.
In summary, while “evolution” generally implies a positive, forward-looking series of changes, we all know that the very nature of healthcare oftentimes makes the simple appear complex. In the context of the CMA, this observation is even more poignant, given the inherent complexity of the CMA structure itself. So many critical factors are at play within these arrangements (e.g., generally a $30M plus service line being managed, multiple sub-service lines to be accounted for, the inclusion of service line-specific performance incentive metrics, the need for daily / weekly and monthly tracking, etc.), that if any one of them is thrown off-kilter, there are tremendous downstream ripple effects. These impacts range from (i) the challenges of keeping your physician managers engaged amidst a fluctuating service line, to (ii) effectively measuring the performance of the selected incentive metrics to (iii) the challenge of obtaining an accurate (and defensible) FMV opinion. As a result, hospitals are being forced to review and challenging (in a positive manner from our perspective) the old ways of doing things. In fact, as we prepared this article over the summer, we experienced the largest uptick in new service line management analysis requests than we can recall in recent memory. It would seem that the recent events of the past eighteen months have reinforced a hospital’s need for effective partnership, communication, and coordination with its medical staff physicians. As such, the service line management arrangement continues to be a very durable vehicle for accomplishing this objective.
Scott M. Safriet, CVA, MBA, Partner and Jamie McIntyre, JD, Director – HealthCare Appraisers
