Connections for Success



Co-Management Arrangements: Rewarding Quality and Efficiency Can Be a Win-Win

When arranged and implemented successfully, co-management arrangements facilitate cooperation among hospitals and physicians that improve the services provided to patients. As a result, the hospitals and the physicians are better positioned for success under the evolving healthcare payment regime, which focuses on paying for the value of services provided instead of volume alone. This model can provide your practice a boost that can help it survive an economic downturn and thrive going forward. While co-management arrangements can be advantageous, it is important to note that it is not for every practice.

Two common structures

Co-management typically comes in two forms, structure of service line co-management arrangements and service line co-management arrangements. In the first arrangement, a hospital contracts a physician group or several groups to take responsibility for the clinical and operational management of a hospital-related facility (such as a satellite primary care clinic) or service line (such as ophthalmology). Under this type of arrangement, a hospital enters into a formal agreement with a certain number of its medical staff physicians to manage a designated hospital service line. The primary purpose is to align physician and hospital objectives while recognizing and appropriately rewarding participating physicians for their efforts in managing and improving the overall quality and efficiency of the service line.

Any relationship with a hospital must achieve goals set by both the physicians and the hospital. If only one party benefits, the relationship will be short-lived. It is also important for the hospital to realize that every action in pursuit of market share and mission fulfillment has an economic impact on its physicians.

The second arrangement, service line co-management arrangements, can be arranged in three ways:

  • A new joint-venture entity is created consisting of both the hospital and participating physicians as investors. This may be in the form of an LLC.
  • A new joint-venture entity is created consisting solely of participating physicians as investors. This newly-created, physician-owned entity allows physicians from a number of professional practices to have a single contracting entity for purposes of the service line co-management arrangement.
  • No new entity is created. The service line co-management is entered between the hospital and a single physician group practice.

Typically, the parties create a compensation agreement that involves a base payment commensurate with the fair market value of the management services provided, plus an incentive fee tied to efficiency and quality objectives. Both parties should seek independent valuations by experienced appraisers to determine the fair market value of the two compensation components.

Establishing trust

Co-management may be attractive to physicians who want to integrate more closely with a hospital while maintaining their independent practices and not becoming employees of the hospital. With such a close-knit working relationship, the parties must trust each other completely.

The hospital must accept that it will surrender some control over its operations. In turn, the physicians must understand that they will take on substantial managerial and leadership responsibilities within the hospital.

In addition, governance of the separate organization or the operations management is critical to the success of the arrangement. If it is a true partnership of physicians and a hospital, granting substantial authority to the doctors, their participation should equal or exceed the authority of the hospital. This will likely present no problem with for-profit hospitals. However, tax-exempt hospitals may insist on 50-50 equity arrangements and reserve powers to protect their charitable missions.

Legal questions to answer

When a hospital and a group of independent physicians collaborate, a number of legal questions emerge. For example, the Anti-Kickback Law may be violated if the co-management agreement induces physicians to refer patients to the hospital. The Stark Law requires that compensation in agreements between a hospital and physicians not be tied to the value or volume of referrals for “designated services.”

Physicians who become involved in a co-management arrangement by taking an equity interest in a joint venture entity that will manage one or more service lines, or by entering an administrative services agreement, need to work with their own attorney to review the arrangement and ensure that they are legally protected from a corporate, contract and health law perspective. The attorney also needs to review the arrangement from a regulatory perspective.

Further, an attorney should review the governing documents and provide guidance to the physician about any usual provisions that the physician may not expect, such as non-competes or other restrictions that may survive after a physician leaves such arrangement. Also, consider the Civil Monetary Penalty Statute. It prohibits a hospital from making payments to physicians as inducement to reduce or limit services. So, co-management deals should avoid incentive fees based on achieving cost reductions. Lastly, 501(c)(3) hospitals cannot use a co-management arrangement to confer private inurement, private benefit or excess benefits to the physicians.

A possibility to explore

As you can see, there are some complexities involved in the co-management structure. But, if you iron out the details with the help of qualified professionals, you might discover a way forward for your medical practice that will lead to the best results.

For more information, contact Antwone Turner at 312.670.7444. Visit to learn more about our Health Care Group.

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