Stark Implications: Trends in Imaging JVs and Arrangements
A convergence of factors shaping the current health care environment—including some key regulatory changes—has caused many health systems to reevaluate their broad array of physician relationships in an effort to determine the optimal hospital–physician alignment strategy. This is particularly true of medical imaging arrangements, as hospitals struggle to recapture a profit center that continues to shift away from the hospital setting. 
Jerry J. Sokol, JD These strategies include hospital–physician comanagement arrangements, the group-practice imaging-division model, the ancillary-only management model, and hospital–physician employment arrangements. At first glance, these strategies might seem like the usual suspects, which have been tried and tried again—perhaps with some success, or maybe without it. It is from those prior experiences, however, that these strategies have evolved, in the current marketplace, to take into account the best approaches from the past and the optimal tactics for success, now and into the future. Today’s Health Care Environment Hospitals are increasingly attempting to collaborate with their affiliated physicians in medical imaging arrangements, for a number of reasons. First, a new imaging venture typically requires the participants to choose from a broad array of imaging and testing modalities, many of which are coupled with high capital costs, yet in today’s economic environment, health systems and other health care providers typically have limited access to capital.
Joshua M. Kaye, JD Second, many hospitals are experiencing a decline in imaging revenue due to falling reimbursement, a decline in elective procedures, and increased competition from physician practices and other imaging suppliers. Third, commercial payors (and patients) are demanding better clinical performance at a lower cost. In fact, a number of commercial payors are considering, or have otherwise implemented, strategies that are intended to pay for performance (or to avoid paying for underperformance). Moreover, patients are becoming increasingly knowledgeable about their health care, in terms of both the types of services being offered and the associated costs. A properly structured imaging hospital–physician arrangement can incorporate appropriate safeguards to address these payor concerns. Medical imaging suppliers are under increasing regulatory scrutiny from CMS and the OIG in an industry that is perceived as being fraught with overutilization (and perhaps fraud and abuse). Recent changes to the Stark law, as well as to regulations governing imaging suppliers, have forced many health systems and other imaging suppliers to restructure existing arrangements and otherwise address new compliance issues. Comanagement Arrangements While medical imaging comanagement arrangements can vary in form, each generally has three common characteristics. First, the participating physicians and hospital invest in and capitalize a newly formed company that provides certain limited inputs to the hospital in connection with the hospital’s provision of an imaging service. Second, the hospital purchases these items and/or services from the new company. Third, the hospital bills and collects for the services under the hospital’s Medicare number and payor contracts. A number of these arrangements were historically structured as under-arrangement transactions, with the new company often providing turnkey services in exchange for a per-click or per-scan fee at fair market value. As of October 1, 2009, however, the Stark law has imposed two substantial limitations that have required the restructuring or unwinding of such arrangements. The first limitation is that the Stark law has been broadened to apply not only to the entity billing for the imaging services (the hospital), but also to the entity that is performing the service. As a result, it is critical to scrutinize the scope of items and/or services that the new company provides to the hospital closely in order to determine whether the new company is the imaging service provider. Note that CMS has recognized that an entity that solely leases personnel, solely provides the imaging equipment, or otherwise provides a single input would not be considered to be performing the service. The second limitation is that the Stark law will no longer permit a referring physician-owned entity to provide space or equipment in exchange for a per-click or other variable fee. Accordingly, the hospital must pay a fixed fee at fair market value to the new company in connection with the use of any space or equipment provided by the new company. Some providers might still want to consider using a percentage-based fee or other variable fee at fair market value in exchange for the new company’s provision of nonclinical administrative services. Such an arrangement, however, should only be structured after carefully considering the federal anti-kickback law, as well as the state-law implications of such an arrangement. Due to recent regulatory guidance, along with a health system’s desire to align the physicians’ goals better, a key change in these arrangements is to move the physicians from simple investment into meaningful participation. This integration could include formally establishing physician participation in key areas, including supervising clinical activities, conducting education, choosing technologies, monitoring the new company’s finances, and participating in payor-contracting matters. The Group-practice Imaging-division Model The group-practice imaging-division model allows health systems and physicians to collaborate in the provision of medical imaging services through the physicians’ existing medical practice. This model is typically best suited to a large existing physician practice or to the formation of a megagroup, pursuant to which multiple solo practitioners or small physician practices will combine to form a single practice. Under this model, the health system and the physicians form and invest in the medical imaging division of a physician practice. While similar structures have been around for some time, the increasing use by physicians of an LLC to operate their medical practices (coupled with an LLC’s flexibility in establishing divisions and profit interests) has allowed these arrangements to become a more attractive option. In some states, it is impermissible for a hospital to own an equity interest in a physician practice. Note that the underlying economics and business aspects of these arrangements have changed dramatically. In particular, recent regulatory guidance has caused this model to evolve so that physician practices incur direct financial risk and frontline responsibility by providing the space in which the imaging equipment is housed, employing the imaging technologists, and being responsible for the patient-scheduling and billing/collections services. The Ancillary-only Management Model Under this model, a health system with existing imaging expertise offers a physician practice a laundry list of imaging-management services, including the equipment, supplies, and assistance with billing. In exchange, the medical practice pays the imaging company a fee. While this arrangement has been around for some time, the underlying economics and business aspects have changed dramatically. Historically, the ancillary-only management model provided for the health system to incur substantially all the expenses associated with the physician practice’s imaging division. Recent regulatory guidance, however, has raised concerns over suspect contractual arrangements under which physician practices might profit from passive referrals without any financial or operational risk. As a result, these arrangements have changed; as in the group-practice imaging-division model, physician practices now incur direct financial risk and frontline responsibility by providing the space in which the imaging equipment is housed, employing the imaging technologists, and being responsible for the patient-scheduling and billing/collections services. The health system remains responsible for the equipment and certain nonclinical services. Depending on the parties’ tolerance for risk, the medical practice could pay the health system a fixed fee or a fixed fee plus a percentage of the physician practice’s imaging-division revenue or profits, or it could use some other payment method. From a regulatory perspective, this model is better suited for pure imaging-management companies (as opposed to health systems that are in a position to compete for a medical practice’s imaging business, and that might be perceived by physicians as not contributing enough to the venture to make it worth the effort). The Direct-employment Model There has been a recent resurgence in hospital–physician employment arrangements. While this model might have fallen out of favor for a number of years, it arguably maximizes the alignment between the hospital and the physicians, as they share a common set of goals. Unlike the other models, one major regulatory limitation of this model is the hospital’s inability to share medical imaging profits among the participating physicians. Due to the potential for declining reimbursement for professional fees, however, this model might enable a physician’s compensation to exceed what he or she would otherwise earn through private practice, in certain markets. In today’s health care environment, health care systems and providers are under increasing pressure to improve clinical performance and decrease costs. Each of these four models has the potential to allow a health system and its physicians to collaborate in the provision of imaging services in a manner that can address these issues and further solidify hospital–physician relationships. In light of the realities of the current marketplace, implementing one of these models might be just the right strategy for these uncertain times in the imaging industry.Jerry J. Sokol, JD, is a partner in the health law department of McDermott Will & Emery; jsokol@mwe.com. Joshua M. Kaye, JD, is a partner in the department; jkaye@mwe.com. Sokol and Kaye are board-certified health care lawyers who cochair the firm’s Imaging Practice Group.
Jerry J. Sokol, JD These strategies include hospital–physician comanagement arrangements, the group-practice imaging-division model, the ancillary-only management model, and hospital–physician employment arrangements. At first glance, these strategies might seem like the usual suspects, which have been tried and tried again—perhaps with some success, or maybe without it. It is from those prior experiences, however, that these strategies have evolved, in the current marketplace, to take into account the best approaches from the past and the optimal tactics for success, now and into the future. Today’s Health Care Environment Hospitals are increasingly attempting to collaborate with their affiliated physicians in medical imaging arrangements, for a number of reasons. First, a new imaging venture typically requires the participants to choose from a broad array of imaging and testing modalities, many of which are coupled with high capital costs, yet in today’s economic environment, health systems and other health care providers typically have limited access to capital.
Joshua M. Kaye, JD Second, many hospitals are experiencing a decline in imaging revenue due to falling reimbursement, a decline in elective procedures, and increased competition from physician practices and other imaging suppliers. Third, commercial payors (and patients) are demanding better clinical performance at a lower cost. In fact, a number of commercial payors are considering, or have otherwise implemented, strategies that are intended to pay for performance (or to avoid paying for underperformance). Moreover, patients are becoming increasingly knowledgeable about their health care, in terms of both the types of services being offered and the associated costs. A properly structured imaging hospital–physician arrangement can incorporate appropriate safeguards to address these payor concerns. Medical imaging suppliers are under increasing regulatory scrutiny from CMS and the OIG in an industry that is perceived as being fraught with overutilization (and perhaps fraud and abuse). Recent changes to the Stark law, as well as to regulations governing imaging suppliers, have forced many health systems and other imaging suppliers to restructure existing arrangements and otherwise address new compliance issues. Comanagement Arrangements While medical imaging comanagement arrangements can vary in form, each generally has three common characteristics. First, the participating physicians and hospital invest in and capitalize a newly formed company that provides certain limited inputs to the hospital in connection with the hospital’s provision of an imaging service. Second, the hospital purchases these items and/or services from the new company. Third, the hospital bills and collects for the services under the hospital’s Medicare number and payor contracts. A number of these arrangements were historically structured as under-arrangement transactions, with the new company often providing turnkey services in exchange for a per-click or per-scan fee at fair market value. As of October 1, 2009, however, the Stark law has imposed two substantial limitations that have required the restructuring or unwinding of such arrangements. The first limitation is that the Stark law has been broadened to apply not only to the entity billing for the imaging services (the hospital), but also to the entity that is performing the service. As a result, it is critical to scrutinize the scope of items and/or services that the new company provides to the hospital closely in order to determine whether the new company is the imaging service provider. Note that CMS has recognized that an entity that solely leases personnel, solely provides the imaging equipment, or otherwise provides a single input would not be considered to be performing the service. The second limitation is that the Stark law will no longer permit a referring physician-owned entity to provide space or equipment in exchange for a per-click or other variable fee. Accordingly, the hospital must pay a fixed fee at fair market value to the new company in connection with the use of any space or equipment provided by the new company. Some providers might still want to consider using a percentage-based fee or other variable fee at fair market value in exchange for the new company’s provision of nonclinical administrative services. Such an arrangement, however, should only be structured after carefully considering the federal anti-kickback law, as well as the state-law implications of such an arrangement. Due to recent regulatory guidance, along with a health system’s desire to align the physicians’ goals better, a key change in these arrangements is to move the physicians from simple investment into meaningful participation. This integration could include formally establishing physician participation in key areas, including supervising clinical activities, conducting education, choosing technologies, monitoring the new company’s finances, and participating in payor-contracting matters. The Group-practice Imaging-division Model The group-practice imaging-division model allows health systems and physicians to collaborate in the provision of medical imaging services through the physicians’ existing medical practice. This model is typically best suited to a large existing physician practice or to the formation of a megagroup, pursuant to which multiple solo practitioners or small physician practices will combine to form a single practice. Under this model, the health system and the physicians form and invest in the medical imaging division of a physician practice. While similar structures have been around for some time, the increasing use by physicians of an LLC to operate their medical practices (coupled with an LLC’s flexibility in establishing divisions and profit interests) has allowed these arrangements to become a more attractive option. In some states, it is impermissible for a hospital to own an equity interest in a physician practice. Note that the underlying economics and business aspects of these arrangements have changed dramatically. In particular, recent regulatory guidance has caused this model to evolve so that physician practices incur direct financial risk and frontline responsibility by providing the space in which the imaging equipment is housed, employing the imaging technologists, and being responsible for the patient-scheduling and billing/collections services. The Ancillary-only Management Model Under this model, a health system with existing imaging expertise offers a physician practice a laundry list of imaging-management services, including the equipment, supplies, and assistance with billing. In exchange, the medical practice pays the imaging company a fee. While this arrangement has been around for some time, the underlying economics and business aspects have changed dramatically. Historically, the ancillary-only management model provided for the health system to incur substantially all the expenses associated with the physician practice’s imaging division. Recent regulatory guidance, however, has raised concerns over suspect contractual arrangements under which physician practices might profit from passive referrals without any financial or operational risk. As a result, these arrangements have changed; as in the group-practice imaging-division model, physician practices now incur direct financial risk and frontline responsibility by providing the space in which the imaging equipment is housed, employing the imaging technologists, and being responsible for the patient-scheduling and billing/collections services. The health system remains responsible for the equipment and certain nonclinical services. Depending on the parties’ tolerance for risk, the medical practice could pay the health system a fixed fee or a fixed fee plus a percentage of the physician practice’s imaging-division revenue or profits, or it could use some other payment method. From a regulatory perspective, this model is better suited for pure imaging-management companies (as opposed to health systems that are in a position to compete for a medical practice’s imaging business, and that might be perceived by physicians as not contributing enough to the venture to make it worth the effort). The Direct-employment Model There has been a recent resurgence in hospital–physician employment arrangements. While this model might have fallen out of favor for a number of years, it arguably maximizes the alignment between the hospital and the physicians, as they share a common set of goals. Unlike the other models, one major regulatory limitation of this model is the hospital’s inability to share medical imaging profits among the participating physicians. Due to the potential for declining reimbursement for professional fees, however, this model might enable a physician’s compensation to exceed what he or she would otherwise earn through private practice, in certain markets. In today’s health care environment, health care systems and providers are under increasing pressure to improve clinical performance and decrease costs. Each of these four models has the potential to allow a health system and its physicians to collaborate in the provision of imaging services in a manner that can address these issues and further solidify hospital–physician relationships. In light of the realities of the current marketplace, implementing one of these models might be just the right strategy for these uncertain times in the imaging industry.Jerry J. Sokol, JD, is a partner in the health law department of McDermott Will & Emery; jsokol@mwe.com. Joshua M. Kaye, JD, is a partner in the department; jkaye@mwe.com. Sokol and Kaye are board-certified health care lawyers who cochair the firm’s Imaging Practice Group.