How to negotiate Professional Services Agreements with hospitals

Understanding a Professional Services Agreement with a hospital is vital: ©Have a Nice Day - stock.adobe.com

As physician groups face growing challenges — such as higher operating costs, lower reimbursement, and increasing competition — many physician groups find themselves considering various strategic options, including:

• Entering into Professional Services Agreements (PSAs) with hospitals,
• Selling to hospitals (and becoming hospital employees),
• Selling to (and partnering with) private equity platform companies,
• Selling to large national health care companies, and
• Merging into (or forming) large single specialty or multi-specialty groups.

PSAs allow physician groups to benefit from hospital resources, managed care contracts, referral networks, and other economies of scale, without physicians becoming hospital employees.

This article outlines eight key provisions in PSAs that should be top priorities during negotiations between physicians and hospitals.

Scope of Services and Exclusivity

• It is crucial that PSAs describe in detail the scope of services to be provided by the group versus the hospital, as well as any exclusivity requirements. For instance, the PSA should set forth:
• The services the physician group is required to provide,
• The location where services will be delivered (e.g., specific hospital facilities and/or clinics),
• Required staffing levels and hours of services,
• The scope of exclusivity clauses that prohibits physicians from providing similar services to other hospitals,
• Reciprocal exclusivity clauses that prevent the hospital from contracting with other physicians and groups for similar services, and
• On-call responsibilities, and any administrative, medical director, and “co-management” services that the physicians will be providing.

Facilities, Equipment, and Non-Clinical Staff

The hospital typically is responsible for providing clinical space, medical equipment, and support staff at its expense, either directly or through reimbursing the group.If the hospital is taking over the group’s prior space, equipment and non-clinical staff, then this can be reflected in a “Premises, Equipment and Non-clinical Staff Leasing Agreement,” which passes through the costs to the hospital. Either way, the PSA should:

• Require the hospital to provide all such resources consistent with the group’s prior practice, including customary upgrades and enhancements,
• Describe how physicians can report deficiencies in, and request new/updated staff, equipment and offices (which the hospital must timely address), and
• Require the physicians’ advance written consent for decisions regarding clinical equipment and staffing, such as the selection of new equipment, the selection of medical devices and drugs, and the qualifications of non-clinical staff who support clinical services.

Autonomy Over Clinical Personnel

Physician groups should retain responsibility for hiring, firing, compensating, and providing benefits to their physician and other clinical providers (e.g., mid-level practitioners, such as PAs, NPs, etc.), as they will remain employees of the group. In this regard, the PSA should indicate that the hospital can request the removal of a clinical provider only for clearly defined, objective reasons.

Compensation

Under a traditional PSA, the hospital pays the physician group according to a predetermined formula, often based on:

• Personal productivity, measured by “work relative value units” (wRVUs) generated by the physicians (and mid-levels, if any), regardless of the patient’s payor source (e.g., Medicare, Medicaid, charity care, commercial insurance, self-pay, etc.),
• Multiplied by a “conversion factor” (e.g., $75.00 per wRVU) – which will vary depending on whether health insurance, benefits and malpractice costs are included in the rate, or if such items are separately being reimbursed.

Alternatively, the hospital may request that physician groups be paid based on the hospital’s collections for the physicians’ services, but the downsides of such a compensation methodology are that:

• Collections-based fees do not adequately compensate physicians for services they provide to charity care patients, or those with unfavorable rates, and
• Billing and collections almost always are the hospital’s responsibility in PSAs, and therefore the physicians would be penalized if the hospital’s efforts are subpar.

Regardless of the compensation formula, physician groups should consider requesting both:

• “Guaranteed” compensation for an initial period of time (e.g., one to two years), as long as their productivity is consistent with historic levels (unless there will be a ramp-up period for productivity under the circumstances, such as a new location or new providers); and
• Payment of a regular “base” amount to the group (in line with reasonable projections, sometimes discounted by 80-90%), preferably paid in advance at the beginning of each month, which is reconciled to actual performance on a monthly or quarterly basis.

Compensation for any on-call, medical director, administrative and/or service line co-management services is separately set forth in the PSA (or other contemporaneous agreements), and usually is based on the number of shifts or hours involved, and also could include bonuses for achieving various quality metrics and other improvements.

All components of compensation under a PSA must be fair market value and commercially reasonable for purposes of regulatory compliance. The parties typically engage an independent, reputable health care valuation firm to verify that the compensation (each component and overall) is fair market value based on multiple relevant factors (e.g., specialty, experience, geography, etc.), which valuation is updated every two to three years.

Finally, it is highly recommended that the PSA set forth:

• The required timing of payments and any reconciliations,
• That market interest be paid for late payments,
• The process and procedure for payment disputes (including the group’s right to audit the hospital’s calculation and review all relevant data), and
• That the hospital reimburse the group for its costs of enforcement (e.g., attorney fees and costs) if successful.

Restrictive Covenants

PSAs may include non-compete clauses or other restrictive covenants limiting the physician group’s ability to compete within specified geographic areas and time periods after termination.

Any noncompetes should be narrow and reasonable in duration and geographic scope, and there should be express “carveouts” so that the noncompete provision does not apply if the hospital terminates the PSA without cause or elects non-renewal, or the group terminates the PSA due to the hospital’s breach.

In addition, it is common to include provisions restricting both parties from soliciting each other’s staff for a period of one to two years following termination or expiration of the PSA. Finally, any confidentiality and non-disparagement clauses should be mutual.

Term and Termination Rights

PSAs should specify the initial term (usually between three to 10 years), automatic renewals, and the process for a party to terminate “for cause” (due to breach by the other party) or “without cause” (with certain advance written notice). Termination rights should be reciprocal.

Most PSAs require a substantial advance written notice (e.g., one to two years) to be terminated without cause, or to trigger a non-renewal, as both parties need sufficient time to plan for operations thereafter.For example, the group will need time to make arrangements to practice independently, including obtaining its own payor agreements, EHR, and sufficient staff and offices, while the hospital will need to arrange for another entity to provide the services that the group provides under the PSA.

Terminations “for cause” should be limited to clearly defined, objective events with a right for the alleged breaching party to cure within a specified time period.

Indemnification

Indemnification provisions — which typically require each party to be responsible for damages and losses caused by their breaches of the PSA, negligence, misconduct, etc. — should be mutual. Further, physician groups should not be responsible for indemnifying the hospital if the physicians’ actions are taken at the hospital’s direction or pursuant to its policies.

Insurance

The PSA sets forth required insurance coverage for both parties, typically including professional liability, general liability, and workers compensation insurance with specified minimum coverage amounts.

If prior to entering into the PSA the physicians have “claims-made” (vs. “occurrence”) malpractice insurance policies, then the physicians should insist on continuing the same policy during the PSA to avoid the cost of expensive “tail coverage” (or require the hospital to pay for any tail policy).

The PSA should also specify which party is responsible for obtaining and paying for tail coverage for claims-made policies following termination or expiration of the PSA for any reason.

Conclusion

The complexity of a PSA requires careful attention to detail and strategic negotiations. By securing favorable PSA terms, physician groups can position themselves to reap the many short-term and long-term benefits of a PSA, while at the same time protecting some degree of independence.

Timothy McHale, Nivedita Patel, and Gary Herschman are all health care transactions attorneys at Baker Donelson, a national health care firm, and collectively have advised dozens of physician groups on PSAs with hospitals across the country.