Carving out space between employed and independent: Professional service agreements in today’s physician market

While the shift away from independent practice toward hospitals, systems or corporate entities remains a strong force, physicians have more options than a binary choice between independence and full employment.

Recruitment challenges and increasing expenses are key factors that often force the hands of private practice owners to align with or sell to larger entities, noted Justin Chamblee, CPA, executive vice president, Coker Group, during his session with Susan Nelson, MD, vice president of physician operations, Northwest Community Healthcare, Arlington Heights, Ill., at the 2022 Medical Practice Excellence: Leaders Conference in Boston.

Two of the major issues, as Chamblee noted, are:

1. The dynamic of offering market-based compensation to newly recruited physicians that sometimes exceeds what the long-time physicians at the group have been earning
2. The financial instability resulting from those economics, paired with rising expenses and lost revenue from reimbursement rate cuts from the government and other payers.

Cuts to the Medicare Physician Fee Schedule (MPFS) conversion factor are having major impacts on physician practices. While some decreases were offset by increased work RVU (wRVU) values, that wasn’t true across all specialties, Chamblee noted. 

“[Specialties] that are highly nonprocedural are the ones that are seeing the most benefit from some of the changes, meaning that the wRVUs are more than offsetting the decrease in the conversion factor,” Chamblee said. “Whereas other procedural specialties are being negatively impacted” on Medicare reimbursement from Medicare. “That decrease can just continue to tighten the financial performance of the practice that has been pushing them toward alignment.”

Those procedural-heavy specialties also expect to take a hit from updates to shared/split visit billing, as they historically have more advanced practice providers (APPs) doing clinical work, with the physician coming in enough to act as the rendering and billing provider to bill at 100% rather than the APP 85% rate. Once new rules that were delayed this past year take effect in 2024, Chamblee expects reimbursement rates to drop as more billings are done at the 85% APP level rather than the physician level.

Assessing options

Chamblee recently worked with a fiercely independent group that was bordering on discussions with a local hospital yet hesitant about shifting physicians into employment — but employment is not the only option for physicians seeking some autonomy and independence.

“They’re leaning toward a professional services agreement (PSA), because that allows the group to maintain some of the feel of independence that they’ve had in the past,” Chamblee said.

Beyond the physician recruiting challenges, the pressures of increasing costs also make the use of PSAs more attractive, as there typically is less risk associated with overhead costs under a PSA.

But as Nelson noted, the range of problems to be solved by updating the methods of employing physicians goes beyond human resources. “For my organization, we’re looking at how we optimize growth,” Nelson said. For independent groups, growth is a financial risk to the physicians, and hospitals typically will attempt to help manage that risk when alignment models are developed.

“If you’re only looking at employment as the solution for every issue,” Nelson cautioned, “you may miss other opportunities that are kind of outlined here on the spectrum.” (See Figure 1.)

Elements of PSAs

Nelson noted that the purpose of a PSA is to achieve clinical and financial integration and increased stability for physicians without employment or sacrificing independence. PSAs are structured to contract for physicians’ clinical and professional services, which might include administrative and quality work or call coverage.

In building out remuneration, the PSA is typically based on productivity/wRVUs rather than collections, though there are opportunities to work in additional compensation for other services (e.g., an hourly rate for administrative services).

Sizing up the models

The structure of a PSA can vary, as well, including independent contractor status, call pay arrangements, clinical oversight agreements, group contracts, or administrative or service line management contracts, to name a few. Each type is intended to help independent physicians test the waters of alignment.

“It’s a lot easier to move from independence toward integration than it is to move from integration back toward independence,” Chamblee said. “If a group is hesitant to align with a health system, it is better to take baby steps. … What is more challenging is if we jump from private practice into employment and then want to go back to a global PSA.”

The traditional PSA model only has physicians and providers within the PSA, with all else — the practice, staff, administration — residing in the hospital organization. The global PSA differs from this in that the hospital would contract with a practice for global payment and the practice retains all management responsibilities. The fee in a global PSA then covers compensation, benefits, malpractice and overhead, effectively replacing the typical collections-based financial structure.

Chamblee said some people refer to the traditional PSA as “the compensation PSA,” since that is what they are replacing, whereas the global PSA is viewed as “the collections PSA.” The difference is that traditional PSAs focus on the bottom-line net income or compensation of a practice, whereas the global PSA is focused on top-line revenue. “The funds flowing from the hospital to the medical group are replacing the overhead, as well as the compensation and benefits which, in essence, comprises the collections in the practice.”

The traditional PSA can feel a lot more like employment than private practice, Chamblee added, in that the assets of the practice oftentimes are sold to the hospital, resulting in the hospital assuming day-to-day management of the practice.

“What is occurring, from an economic standpoint, is the practice is being engaged by the hospital for the professional services, and the payment that is occurring — from the hospital to the practice — is focused on just the compensation, the benefits, and perhaps the malpractice costs associated with the physicians and the APPs left in the practice,” Chamblee said.

A global PSA is more attractive to medical groups “that feel like they are well managed and want to continue functioning as they have been,” Chamblee said, while getting the benefits of partnering with a health system. “They still are maintaining the day-to-day management of the practice, but it doesn’t mean that they can do anything that they want: There is governance defined in the PSA that really speaks to how the practice and the health system or the medical group are going to work together.”

Going hybrid

Chamblee noted growing interest in the hybrid model for taking into consideration the private-equity style structures that have grown in recent years in which the clinical and back-office services are separated, “in essence creating a joint venture between the health system and the medical group,” and then monetizing it by taking that venture to a broader market and generating additional revenue by bringing in other practices to use it. This can work well in certain markets where, for example, one large orthopedic group can capitalize on their infrastructure to serve smaller orthopedic groups in the market.

The economics of traditional versus global PSA

Table 1 illustrates the typical economic terms of a traditional PSA, structured around a productivity element (e.g., RVUs), with the potential to add on quality incentives. As Chamblee described, there’s typically a benefits pass-through or allowance to cover those costs at a market base level, and then malpractice is typically retained by the physician group and reimbursed at cost by the hospital.

For APPs, compensation and benefits can be handled in a variety of ways, depending on their utilization:

• If APPs function as a support system, they can either be employed by the hospital, or they can remain as providers in the legacy practice and be reimbursed by the hospital at market-based rates or at cost.
• If APPs function more in a productive capacity, there typically is a separate APP RVU rate from the physician RVU rate.

For global PSAs, the structure involves an overhead pass-through, often at a fixed budget — with the PSA governance committee adjudicating gaps between budget and actual results, when necessary, Chamblee said. “The goal is not for the practice to make money on the overhead element,” he added. “It is more so to be reimbursed for the costs of managing the practice on an ongoing basis,” with a compensation and benefits element similar to the traditional PSA wherein the physicians are paid for their respective services.

As Table 2 illustrates, there are many economic similarities between traditional and global PSAs, particularly around the key economic drivers of clinical services (e.g., productivity, quality incentives and benefits). What differs in a global PSA “is where practice expenses are being reimbursed,” Chamblee said, in that it defines practice expense reimbursement levels for staffing, occupancy and other costs. “The idea is to push these through at cost, … for the practice to have the resources that they need to sustain themselves,” he added.

The carve-out PSA

Carve-out PSAs are very similar to traditional and global PSAs, but focused on one element of a practice. Chamblee offered the example of a multispecialty medical group in an area where orthopedics makes sense to align with a health system, even though the broader group does not want to align. The orthopedic group could negotiate a PSA with the hospital just for that small subset of the larger group.

PSA considerations

While a main feature of PSAs is to reach outcomes without going to full employment, Chamblee highlighted several scenarios in which they might be especially attractive to groups and hospitals:

• Accounting for and maintaining nuanced compensation structures in practices with junior/senior partners or employed/partner providers. “That economic dynamic cannot be replicated in direct hospital employment, because each individual physician has an employment agreement,” he said.
• The ability for physicians to profit from APP activity/performance. Groups with heavy APP utilization likely will not be able to replicate that profit-sharing dynamic in an employment arrangement. “The beauty of a PSA is the payments are going in lump sum to the group, and then they get to decide how they spend those within the group,” Chamblee said.
• Groups seeking to maintain unique benefits arrangements. Groups with very lucrative benefit packages can maintain those offerings by avoiding full employment. Similarly, PSAs are beneficial if there is a strong desire for groups to maintain their own malpractice coverage.
• Governance and physician autonomy. PSAs are useful for bridging the gap between alignment and the physician concerns of losing clinical control of their practice. “It creates an opportunity to align, but it doesn’t push it so far,” Chamblee said.

Stories from the field

At Nelson’s Northwest Community Hospital (NCH) as part of the NCH Medical Group, employed physicians make up about 25% of the medical staff, and building collaborative relationships with independent providers is important.

“We look at multiple alignment models to accomplish system strategies that fit well with the physician’s own professional trajectory as well as their practice goals,” Nelson said. “We look to PSA structures as one of the physician alignment models because employing an entire medical staff is not an option.”

From a hospital system perspective, Nelson said NCH generally sees greater success in quality outcomes and expense management “when we can align and collaborate with physicians, but they have to really be kind of buying into the process and being accountable for that.” To do that, NCH has to “meet in the middle” to build a structure that preserves physician autonomy for the elements they want to manage.

For groups that ultimately opt for employment, the PSA arrangements — particularly in general surgery and cardiology, Nelson notes — have been a “bridging mechanism.”

“We used the PSA structure as an opportunity to work together and build that relationship, build that trust, working together as an organization to the point where it was then a much easier step into employment because of the relationship and the already very close integration that we had built through the PSA models,” Nelson said.

Nelson noted that PSA arrangements can be very close to employment models sometimes, and that it is important to not overlook the work of a governance committee to ensure mutual accountability and responsibility and review operations, strategic and financial decisions that go into the relationship.

“The idea of the expense pass-through is not a blank check,” Nelson said. “You really want to work together, because oftentimes, there are opportunities for expense reduction by working together and taking advantage of purchasing agreements and [other] things that are available to the practice as part of that PSA relationship.”

Notes:

1. Physicians Advocacy Institute. COVID-19’s Impact on Acquisitions of Physician Practices and Physician Employment 2019-2021. April 2022. Available from: bit.ly/3eOiP9J.
2. Post, B, Norton, EC, Hollenbeck, B, Buchmueller, T, Ryan, AM. “Hospital-physician integration and Medicare’s site-based outpatient payments.” Health Serv Res. 2021; 56: 7-15. doi.org/10.1111/1475-6773.13613.
3. American Association of Medical Colleges. “Medical Student Education: Debt, Costs, and Loan Repayment Fact Card for the Class of 2022.” October 2022.