Growing economic pressures and the prospect of sweeping changes in healthcare are driving new interest in integration between physicians, physician groups and hospitals. In the past, integration was often seen as an “all-or-nothing” proposition that required the full employment of physicians by the hospital. But today’s integration models provide a continuum of cooperative opportunities that can be tailored to meet the unique requirements of both parties. Determining the most appropriate level of integration, or the best “entry point” along the integration continuum, requires assistance from a qualified third party capable of providing strategic and tactical guidance regarding the costs, benefits and implementation demands of each approach. By working to identify shared values and objectives, an integration initiative can be developed that will largely preserve the culture of both the hospital and the physician group while achieving the critical objectives of cost reduction, improved care and marketshare gains. For additional information: http://sites.mckesson.com/practiceconsulting/kc_expansion.htm

1. The Integration Continuum:
Multiple Options Evaluating the Best Entry Point
Growing economic pressures and the prospect of sweeping changes in
Exist to Maximize healthcare are driving new interest in integration between physicians,
Integration Benefits physician groups and hospitals.
In the past, integration was often seen as an “all-or-nothing” proposition
for Physicians that required the full employment of physicians by the hospital. But today’s
and Hospitals integration models provide a continuum of cooperative opportunities that
can be tailored to meet the unique requirements of both parties.
Determining the most appropriate level of integration, or the best “entry
point” along the integration continuum, requires assistance from a qualified
third party capable of providing strategic and tactical guidance regarding the
costs, benefits and implementation demands of each approach.
By working to identify shared values and objectives, an integration initiative
can be developed that will largely preserve the culture of both the hospital
and the physician group while achieving the critical objectives of cost
reduction, improved care and marketshare gains.
Drivers of Integration
Due to decreasing reimbursements, falling ancillary revenues, shrinking
access to capital and increasing practice operating costs, there is resurgent
interest among physicians in closer hospital-physician ties. At the same
time, both hospitals and physician groups understand that as healthcare
reform advances, care delivery will become ever more reliant on pay-for-
performance and other mechanisms aimed at inducing or rewarding greater
When it comes to continuity of care and improved outcomes. These objectives cannot be
pay-for-performance accomplished without coordination of care, a major goal of integration.
and other mechanisms
aimed at rewarding
greater continuity of care, Health Spending Decisions Controlled by Physicians
hospitals cannot move
into this “new realm”
without physicians. 13%
Hospital, Rx Income Controlled By Patients
21% Physician Income
Controlled by Other Health Professionals
66%
Sager, A., et. al., “Health Costs Absorb One Quarter of Economic Growth 2000 – 2005,”
Boston University

2. 2 3
Medicare already has launched pilot projects in which hospitals are Low-Intensity Integration
financially at-risk for readmissions or continuing care. The Centers
Stipends
for Medicare & Medicaid Services is also experimenting with bundled
reimbursements that consolidate all provider payments associated When viewed as a continuum rather than an “either-or” proposition,
with a single incident of care. integration presents a range of options from “low-intensity” to “high-
intensity” models. Low-intensity integration can involve a stipend paid
The current structural and market changes make integration increasingly by the hospital to the group in exchange for a specific service or duty.
attractive, if not essential, for both parties. Yet many physicians remain The quid pro quo could be a chairmanship, directorship, an exclusive
wary of the concept. A loss of control and independence, combined with contract agreement or a call arrangement. A dedicated exclusivity Integration presents a range
perceived cultural differences, frequently are seen as roadblocks by doctors agreement helps the hospital maintain and extend continuity of care. of options from low-intensity
to closer alignment with hospitals. However, these beliefs are based on For the group, stipends can ensure at least break-even operations in to high-intensity models.
the erroneous assumption that integration must entail capitulation to the support of extended coverage hours or remote location staffing.
hospital, or full employment and a commensurate loss of control.
Gain-Sharing
The Integration Continuum Along with stipends, another type of low- to mid-intensity integration
involves gain-sharing models built around jointly managed service lines.
In reality, a range of incremental integration opportunities exist that
Essentially, the group agrees to manage the hospital’s specialty-specific
do not necessarily involve loss of operational or financial control.
service line. Any savings generated under the group’s management (when
Understanding the various On the contrary, a number of approaches – such as the subsidiary
benchmarked against prior financial performance) is shared between both
levels of integration is the physician company model and the management services organization
the hospital and the group. It is important to note that federal guidelines
first step in identifying – preserve physician independence while enhancing cooperation and
mandate the nature of the partnership and stipulate specific gain-sharing
the type of integration model risk-sharing between hospitals and practices.
requirements.
that best suits the needs
of those involved. Understanding the various levels of integration is the first step in
By giving physicians responsibility for cost controls, incentives and
identifying the type of integration model that best suits the needs of
opportunities exist to reduce supply chain expense by standardizing
those involved. This knowledge, combined with clarity about respective
expensive medical devices and other goods and services.
organizational philosophies, cultures and objectives, can result in unions
that are productive for both parties. Furthermore, establishing a relatively
simple integration initiative can serve as a starting point in a progression Mid-Intensity Integration
toward closer, more complex alignment models once trust and a working Mid-intensity integration solutions typically involve real estate ventures,
relationship are established. such as medical office buildings or ambulatory clinics. By working together
to purchase, develop or lease a physical property, hospitals and physician
Integration Continuum and Levels of Intensity groups can maximize their investment while spreading the risk. For example,
the combined credit of both the hospital and physician group might enable
a debt-financed project that otherwise would be beyond the reach of either
party individually.
• Direct Physician
• Professional Employment Another example of mid-intensity integration is the establishment of
Service a center for excellence within a specific specialty line. Not unlike a gain-
Agreements • Subsidiary sharing arrangement, the group and hospital divide responsibilities in
Physician a center of excellence, with the physicians providing the expertise and
• Real Estate Company management, and the hospital providing equipment, physical assets and
Ventures marketing support. By joining forces, the partners should be able to improve
• Gain Sharing • Management care quality, grow marketshare for the particular service line and share in
• Centers for Services the resulting profits.
• Stipends Excellence Organization
At the upper end of mid-intensity model (or possibly the lower end of
the high-intensity model), integration possibilities are structured based
Low Mid High on professional services agreements (PSAs). Traditionally, hospital-based
physician practices have maintained relatively simple, PSAs to document

3. 4 5
their exclusive contract with the hospital for the provision of their Since hospitals and health systems generally have the financial wherewithal
specialty services. to capitalize the development of a communitywide EHR, many successful
MSOs are anchored by a hospital. However, physician groups also are
However, PSAs are continuing to evolve and today are used by hospitals establishing MSOs. Regardless of whether the entity is organized by
not only for traditional service lines but also to contract with other provider physicians or a hospital, MSO participation can include other community
organizations that are not necessarily hospital-based. With a properly organizations, such as imaging centers, physical therapy centers,
developing PSA, it is possible for a hospital to contract directly with an rehabilitation facilities, ambulatory surgery centers and more. Ownership
external physician practice to ensure that all of the hospital’s needs within typically will reflect the capital contributions of the members.
a particular arena of care are met according to specific standards. These
standards are established either by the hospital or through collaboration In the past, some hospital-driven MSOs have fallen short of their potential
with the practice. by mandating the services that participating providers were required to use.
Increasingly, however, MSOs are being structured to provide member groups
The primary characteristic of a PSA is that the hospital can create with full flexibility in selecting only those services they need or desire. This
performance standards without having to directly employ the physicians. a la carte approach allows independent provider groups to choose from
At the same time, the physicians are not compelled to relinquish control a range of offerings, including:
A primary characteristic of of their practice to the hospital. Using a PSA controls risk and allows for
a Professional Services Agreement improvement in the continuum and quality of care offered at the facility.
It also enables the strategic development of quality improvement tactics Management Offerings Multiple Selection Choices
(PSA) is that the hospital can
create performance standards within the physicians’ practice as well. This seldom-considered but extremely
Billing and Account
without having to directly powerful tool should be examined as part of any integration plan if the
Receivable Management 
employ the physicians. parties are moving past low-level intensity integration in their discussions.
Human Resources/
High-Intensity Integration Personnel Management 
High-intensity integration can involve a range of models, from the joint- Equipment Leasing
venture development of ambulatory surgery centers or specialty hospitals and Maintenance 
to the creation of a management services organization (MSO) or subsidiary Some Management Service
physician company (SPC). A distinguishing aspect of a high-intensity
integration solution is the complexity of the legal structure and the
Purchasing
 Organizations (MSOs) have
mandated services. Increasingly,
regulatory control applied by government entities, such as the Centers
for Medicare & Medicaid Services and the Federal Trade Commission.
Regulatory Compliance
 however, MSOs are being
structured to provide member
Management Services Organization
Financial Management
 groups with full flexibility in
selecting only those services
Management Services Organizations (MSOs) are partnerships that offer
a range of support services to independent physician and ancillary service
Managed Care Contracting
 they need or desire.
provider groups. MSOs frequently include a hospital ownership interest and
are designed to assist providers with basic business functions like purchasing,
Services Contracting

equipment leasing, contracting and human resources. MSOs can also deliver
mission-critical services, such as billing and regulatory compliance.
Information Technology

Because the MSO provides an ideal conduit for implementing an electronic Accounting and Payroll

health record (EHR), hospitals benefit from the creation of this partnership
by more effectively aligning with the local provider community and Strategic Planning

improving continuity and quality of care.The emergence of the EHR has been
a primary catalyst behind the current interest in MSOs. Unlike stand-alone Management

hospital-based EHRs developed in isolation, EHRs implemented within the
framework of the MSO are more likely to generate the critical mass of
participation necessary to succeed. The prospects for success are stronger By bringing the weight of multiple practices to vendor negotiations, MSOs
because providers stand to benefit not only from the EHR’s electronic are positioned to save groups money on everything from medical supplies
connectivity but also from the support services the MSO provides. to equipment leasing. Some MSOs also are authorized to negotiate and

4. 6 7
contract with managed care companies on behalf of their participating Groups likewise stand to benefit in the area of support staff recruitment
provider groups. The collective marketshare can provide MSOs with the and retention. By aligning with the hospital, the practice can gain access to
muscle to negotiate higher reimbursements for their member provider a larger personnel pool, including office staff, nurses and technicians. And
groups through demonstrated quality improvements. information technology support is likely to be greater and data sharing more
seamless if the physician practice is owned by the hospital. Finally, the SPC
Subsidiary Physician Company should have greater access to capital for expansion and equipment needs,
assuming the hospital’s credit is solid.
Another business model, the subsidiary physician company (SPC), maximizes
the benefits of integration for both parties while preventing the loss of The advantages of the SPC structure for hospitals are perhaps less direct but
operational control for the physicians. While sometimes more complex and no less important. By owning the physician practice, hospitals can ameliorate
time-consuming to establish than other alternatives, the “best-of-both- physician shortages and guarantee coverage and availability. They also can
worlds” benefits offered by a well-designed SPC can make expending the work with physicians to present a united front during contract negotiations.
effort worthwhile. Physician employment contracts
Direct Physician Employment have evolved dramatically in
SPCs generally are created as limited liability companies or C or S recent years. Today’s agreements
corporations. Typically, 100% of the equity ownership is controlled by At the far end of the integration spectrum is the direct employment of maximize gains and minimize
the hospital or the hospital’s for-profit subsidiary. As owner, the hospital physicians by the hospital. While this option remains an anathema for many pain for both parties.
establishes the strategic direction for the group and is represented on physicians, the fact is that physician employment contracts have evolved
the board. However, the hospital does not directly control distribution dramatically in recent years. Today’s agreements reflect lessons learned in
of revenue and does not receive revenue beyond incidental and ancillary earlier physician employment forays and consequently contain a number of
payments agreed upon in the company’s bylaws. Nor does the hospital provisions and incentives designed to maximize gains and minimize pain for
have direct control over operational issues or income distribution. Those both parties.
prerogatives remain in the hands of the physicians.
Establishing a Positive Organizational Culture
With this kind of structure, physicians essentially are free to operate as they
traditionally have. Productivity-based compensation plans may be used and Regardless of the type and degree of integration pursued by hospitals and
With Subsidiary Physician benefits structured according to physician needs and desires. Scheduling and physician groups, it is important to remember that a central goal in all cases
Companies (SPCs), the structure call duties likewise can be developed without interference from the hospital. is the reduction or elimination of the contentiousness that frequently has
can be established so that marked hospital-physician relations in the past. By replacing mistrust with
physicians are essentially The physician group retains responsibility for the cost side of the ledger, cooperation and mutual respect, both parties are in a position to work
free to operate as they including insurance, supplies and other expenses. However, aligning with the together to expand services, boost marketshare and meet payor integration
traditionally have. hospital should create savings opportunities in the supply arena due to the and quality demands. The latter points will become increasingly important
hospital’s purchasing power and economies of scale. In addition, employee as payors shift to bundled, consolidated payment and pay-for-performance
benefits, such as retirement plan management and health or life insurance, for a growing number of incidents of care. Integration can not only
may be less costly when acquired through the hospital. reduce costs and make the providers more competitive but also improve
the quality of care.
Physician Hospital
A Wealth of Options
• Retains responsibility for • 100% of equity ownership
The healthcare industry has changed dramatically in recent years, and
the cost side of ledger owned by hospital
that rate of change will only accelerate going forward. Today, integration
• Free to operate as • Represented on the board between physicians and hospitals is no longer an “all-or-nothing”
traditionally have proposition. Instead, a wide range of models have emerged to accommodate
• Does not receive revenue
the specific cultural, operational, economic and strategic needs of both
• Scheduling and call duty beyond incidental and
parties. Although this abundance of options is a plus, it nonetheless requires
developed by practice ancillary payments
that organizations understand the models fully in relation to their own
• Responsible for income • Does not control requirements and capabilities.
distribution operational issues or
income distribution

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