Aligning Hospitals and Physicians with Clinical Co-Management Agreements

Many know that the healthcare industry is moving from a pure fee-for-service model to one that rewards hospitals and physicians based on quality. Primarily, however, reimbursement is still based on fee-for-service, with significant uncertainty about how the specifics of future reimbursement paradigms will look. However, such reimbursement clearly will be based on factors that will be affected by participants providing higher quality services at lower costs and with greater efficiencies. To facilitate such changes, one model that is currently in use is the Clinical Co-Management Agreement (CCMA). Under CCMAs, hospitals will focus on a particular service line, which may cover inpatient, outpatient, ancillary, and/or other services, and enter into an agreement with physicians (either individual physicians, medical groups, or a physician-owned management entity) to work with hospital leadership to develop, manage, and improve the quality and efficiency of the service line.

Typical services provided by participating physicians may include the following:

• Involvement in general management
• Acting as liaison with other physicians and departments of the hospital
• Providing outreach activities
• Assisting in relationships with third-party payers, governmental entities, and credentialing organizations
• Developing and improving processes and patient satisfaction
• Consulting with the hospital regarding strategic planning, budgeting, materials management, capital purchases, and other administrative-based activities

In exchange for these services, the participating physicians typically receive a base fee, which may be a fixed annual payment or on an hourly basis of work provided, and a performance bonus, which is based upon meeting certain mutually agreed upon predetermined metrics that relate to improving or maintaining quality and patient satisfaction.As with all hospital-physician arrangements, the compensation paid under the CCMAs need to be consistent with fair market value (FMV) and be commercially reasonable.To value CCMAs and ensure they meet FMV, valuators typically consider the three approaches to value: the Income Approach, the Market Approach, and the Cost Approach.

Income Approach

The Income Approach considers a present worth analysis of anticipated future. The appraiser converts estimated future cash flows to present value based on an appropriate discounted rate of return. Typically, this approach is not relied upon for valuing CCMAs due to the difficulty of establishing what economic benefits or measurable income that will result from the CCMA.

Market Approach

The market approach is a method of determining a value by applying a comparative analysis of prices paid for similar assets or services in the marketplace. Under this approach, the valuator reviews market data and comparable agreements to determine a range of FMV payments, with adjustments for the size and level of services provided under the CCMA.

Asset-Based (Cost) ApproacH

The cost approach uses estimates of the reproduction costs of the asset or services under consideration. This approach mainly considers the cost that other reasonable individuals would pay to acquire a similar asset or service with similar functionality. Under the Cost Approach, the valuator determines the cost that would be incurred to obtain similar services provided under the CCMA. While it can be difficult to determine the cost related to CCMAs, in many cases determining the FMV hourly rate for the time of participating physicians and the estimated time spent provided services under the CCMA may yield an indication of value under this method.It is important that the valuator considers the approaches above and the specifics of the CCMA under review to value the CCMA and ensure it is consistent with FMV. Coker has completed numerous clinical co-management valuations throughout the country to support the contemplated compensation to be paid to participating physicians and to ensure such compensation is FMV.Coker’s dedicated healthcare valuation experts have extensive experience valuing businesses, service and compensation arrangements, and tangible and intangible assets related to a broad range of healthcare entities and arrangements.

‍Download Coker’s white paper "Physician Empowerment in the Hospital: An Overview of Clinical Co-Management Agreements” to learn more about CCMAs. For more information about how Coker can assist you with clinical co-management valuation services, submit your information and request to speak with Justin Chamblee or Michael Weng.