Executing a Carve Out Professional Services Agreement (PSA)
Physician alignment and affiliation strategies include many options, but selecting and executing the right one can be challenging.
Challenge
A urologic private practice aimed to expand by opening a new clinic in a nearby outreach area but wanted to avoid financial risks. To achieve this, they partnered with a hospital, which covered all start-up costs. Under the agreement, the practice would break even, with reimbursements covering direct provider costs and a small margin for overhead. While the hospital managed most staffing, billing, and revenue cycle management, the partnership allowed the practice to serve the outreach area—something they couldn’t have done alone.
Solution
Coker guided the practice in structuring the partnership through a carve-out Professional Services Agreement (PSA). We defined compensation metrics, established terms, and submitted a letter of intent to the hospital, assisting with negotiations. The practice was reimbursed for provider and staff costs, with some indirect expenses included in the guaranteed payment. This arrangement ensured coverage of overhead costs, allowing the practice to earn a small margin while staying within fair market value.
Approach
- Step 1Situational Review
Evaluated the clinic's physical layout, logistics, and other essential structural and functional aspects. - Step 2Financial Analysis
Conducted a financial analysis of the practice’s market-based costs for providers and staff, ensuring fair market value. This informed the terms in the letter of intent (LOI), with the hospital agreeing to cover all start-up and operating expenses. - Step 3LOI & Terms Development
Used insights from the previous phases to draft the carve-out PSA terms in the LOI, outlining key conditions for the agreement. - Step 4Negotiations
Finalized the economic and non-economic terms through negotiations, leading to an executed LOI. - Step 5Ongoing Assistance in PSA Start-Up
Supported the legal team in completing the legally binding PSA and assisted with implementation and follow-up consultation.
Conclusion
Coker developed a comprehensive plan for the urology practice, performing necessary analyses, preparing documentation, and negotiating agreement terms. The carve-out PSA met the goals of both the practice and the hospital, enabling the practice to stay independent while benefiting from the partnership. The agreement delivered long-term value, creating a "win-win-win" outcome for the hospital, the practice, and the community by balancing innovation with compliance.
Practice secures compensation to remain independent and serve a remote community.
Results At a Glance
- $600KAmount the practice secured for an annual market wage, including direct and indirect costs
- 1.0 FTEFull-time equivalent providers the practice provided to staff the outreach clinic and serve a remove community
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