March 2013 Volume 9 Number 7

Five Common Sense Strategies For Structuring Co-Management Agreements After Advisory Opinion 12-22

By Catherine Greaves, Cox Smith, Austin, TX

AuthorAs healthcare reform and other factors have increased the pressure to provide quality patient care in a cost effective manner, hospital-physician integration has been seen as one way to accomplish this goal.  Co-management agreements are an increasingly popular method to achieve this desired hospital-physician integration.  As the name implies, these are generally arrangements through which a physician group assists in the management of a single service line or department of a hospital.  However, co-management arrangements are subject to a myriad of regulatory considerations including the Anti-kickback Statute (“AKS”),1 Civil Money Penalties Law (“CMP”),2 IRS private inurement/private benefits considerations,3 Stark Law4 and potentially, specific state laws.  However, thanks to a generally favorable response from the Office of Inspector General (“OIG”), knowing what is required to structure such an arrangement to comply with the AKS and CMP has become just a little more clear.

I. Overview of Advisory Opinion 12-22

On December 31, 2012, the OIG issued Advisory Opinion 12-22,5 which reviewed and analyzed a co-management arrangement between a rural hospital located in a medically underserved area and an 18 physician member cardiology group.  Under the reviewed arrangement, the physicians provided specified management and medical direction services to the hospital’s cardiac catheterizations laboratories (“Labs”) in exchange for an annual fee. This fee was comprised of two parts, a fixed fee and a potential bonus, based on performance, that was capped at the amount of the fixed fee.  Earning the performance bonus was based upon four factors: (1) favorable employee satisfaction survey (five percent), (2) favorable patient satisfaction survey with the Labs (five percent), (3) improved quality of care of Lab services (30 percent), and (4) cost reduction in Lab operations (60 percent).  The bonus arrangement also provided for three levels of achievement that would trigger a partial to full payment.

In reviewing the arrangement, the OIG determined that the fixed fee, the employee satisfaction survey, the patient satisfaction survey, and the quality improvement component of the arrangement did not trigger the CMP relating to a hospital knowingly paying a physician to directly or indirectly limit or reduce services to a patient.6 However, the cost savings component could potentially implicate the CMP.  Despite this concern, the OIG found that the hospital had imposed sufficient safeguards to avoid the imposition of sanctions under the CMP.

Among the safeguards cited by the OIG were that the hospital certified that it utilized cost savings measures based on evidence and clinical outcomes. Physicians had access to clinically appropriate devices and supplies, no physician was prevented from requesting a particular device or supply required to address a patient’s unique need and performance fees were based on aggregate, not individual measures. Further, the hospital used several methods to monitor the physicians’ performance under the co-management agreement. These methods included the use of internal auditing staff, hospital staff committees, and independent third party auditors and reviewers. The hospital also limited its performance fee both in amount and duration and ensured the physicians did not alter their referral or treatment patterns or “cherry-picked” patients.7

The OIG also found that the arrangement would not fit within the AKS personal services and management contracts safe harbor as the aggregate compensation to be paid was not set in advance. Again, because of the safeguards implemented by the hospital, the OIG determined the arrangement posed a low risk of fraud and abuse. The provision of substantial services by the physicians, compensation that did not vary with the value of or the number of patients treated, and the specificity of performance measures were all cited as factors in the OIG’s decision not to impose sanctions.8 However, a fourth factor was one over which neither the hospital nor the physicians had much control. Maintaining the only cardiac catheterization laboratory within a fifty mile radius, and thus limiting the ability of the physicians to refer patients elsewhere, made it unlikely the hospital was paying the physicians for their referrals and this too, was a factor in the favorable review.9

II. Five Strategies For Structuring Co-Management Arrangements from Advisory Opinion 12-22

The OIG Advisory Opinion alone will not provide all of the guidance a hospital or physician practice requires to establish and maintain a compliant co-management arrangement. As with all advisory opinions, it is limited by the OIG to be binding only as to the actual requestor and the specific arrangement described in the Opinion. Further, the Stark Law limitations must be considered10 as well as any requirements imposed under state law and, for non-profit entities, IRS laws, regulations and rulings. However, compliance with the AKS and the CMP are major factors in structuring any shared savings or similar arrangement between physicians and hospitals. Despite the limiting language, the Advisory Opinion provides instructive guidance into the factors and oversight the OIG considers appropriate in integrated service arrangements, and these strategies should be incorporated into any physician-hospital co-management arrangement.

1. Outline Prohibited Conduct in the Contract and Maintain Compliance Through Audits by Independent Reviewers.

Contracts typically specify the actions the parties want accomplished or the goals each seeks to achieve.  However, with co-management agreements, the parties should also specify conduct that is considered inappropriate. Examples of actions the parties should prohibit include: (1) stinting on care to patients, (2) increasing referrals to the hospital, (3) cherry-picking healthy patients or those with favorable insurance, and (4) accelerating patient discharges. All of these were specifically identified as of concern to the OIG.11

It is also important to conduct periodic reviews to ensure that prohibited conduct does not occur. In its Advisory Opinion, the OIG identified the oversight by multiple internal hospital committees as well as external third party utilization review firms as factors in its decision not to impose sanctions.12 Thus, internal auditing staff, hospital quality committees, and even the hospital’s board can all play a role in performance oversight.  Reviews from outside auditors are also important.  Although more expensive, these may be viewed as more objective to both regulators and the physicians involved, particularly if there is a finding that inappropriate conduct has occurred or less money is due under the performance measures.

2. Base Compensation on Fair Market Value for a Specifically Defined Set of Services.

It is important that the physicians involved contribute substantial services to the operations and management of a hospital department or service line. Physician responsibilities should be described with sufficient detail so that both parties fully understand the requirements and the performance of services can be verified. Further, all assigned services should require the expertise of a physician. “Make work” or tasks that can be performed by staff with less training or skills may not support the compensation to be received. An independent, external third party valuation firm should prospectively and periodically review the compensation formulas and the amounts actually paid to the physicians.

3. Utilize Specific and Objective Performance Based Measures Supported by Nationally Recognized Standards but Do Not Limit Patient Care and Choice.

The use of specific performance measures related to actions or changes for which the physicians are responsible will help ensure that the purpose of the arrangement is to improve quality rather than simply reward referrals. Additionally, the use of national standards allows for objective determinations that such measures are truly geared to improvement in care and not just rewarding the status quo.

Even with specific standards in place, physicians should still have the flexibility to make independent clinical decisions based on the medical needs of their patients. This is an essential element to any co-management arrangement. Benchmarks, particularly those related to cost savings, should not be based on individual physicians meeting a specific standard. Instead, incentive payments should be based on aggregated performances to allow physicians to continue to be eligible for performance bonuses even if the needs of a particular patient are costly or outside of the generally agreed upon parameters.13

4. Avoid Compensation Measures That Vary Based Upon The Number or Value of Referrals and Prohibit Physicians From Distributing Compensation Based on Individual Performance.

While it should go without saying, the compensation structure of any co-management arrangement, including performance based compensation, should not vary with the volume or value of referrals to the hospital by the physicians.14 Such arrangements will automatically be suspect. Further, avoid basing distributions of payments within the physician group on individual physician performance. Physicians should not be directly rewarded or incentivized to take actions, or more importantly, not take actions (i.e., not utilizing medically appropriate but expensive equipment) because the physician has an identified financial stake in clinical decisions. Distributions based on a per capita, pro rata ownership or other, similar basis will be viewed more favorably by the OIG. In fact, the OIG specifically stated that it may not have considered the arrangement at issue in the Advisory Opinion to be low risk had the physicians allocated compensation based on individual physician participation or results.15

5. Limit Both the Total Compensation to Be Paid and the Duration of the Co-Management Arrangement.

Performance measures, by their nature, are subject to adjustment. The achievement of specific quality improvement goals may be valuable and worthy of compensation the year they are implemented but may be significantly less valuable three, five or ten years down the road. Likewise, cost saving measures typically become more difficult to accomplish as the easily identified efficiencies are achieved. Thus, without review and revision, quality measures and cost savings bonuses may not provide sufficient incentive for additional improvements or represent fair market value for the services provided. In its Advisory Opinion, the OIG commented favorably on the caps for both the performance bonus and the three year term of the arrangement.16 For these reasons, co-management arrangements should be limited in both their scope and duration. They should be periodically re-evaluated to ensure that the goals of quality improvement and cost efficiency continue to be achieved.

The OIG’s favorable Advisory Opinion is a recognition of the legitimate benefits of aligning cost savings incentives for both the hospital and physicians and through the Opinion, the OIG has provided other hospitals and physicians with a helpful tool for developing structures that allow for the integration of clinical operations in a manner that provides for more efficient and effective delivery of patient care.

142 U.S.C. §1320a-7b(b).

42 U.S.C. §1320a-7a.


26 C.F.R. 1.501(c)(3)-1.


42 U.S.C. §1395nn (also known as the Ethics in Patient Referrals Act).


Office of Inspector Gen. Advisory Op. No. 12-22, Dep’t Health and Human Servs. (Dec. 31, 2012).


42 U.S.C. §1320a-7a(b)(1).


Office of Inspector Gen. Advisory Op. No. 12-22, at 11.


Office of Inspector Gen. Advisory Op. No. 12-22, at 13-14.


There is an advisory opinion process for determining compliance with the Stark Law. See, 42 U.S.C. §1395nn(g)(6).

11Office of Inspector Gen. Advisory Op. No. 12-22, at 11.
13Office of Inspector Gen. Advisory Op. No. 12-22, at 11.

While not specifically illegal, the OIG clearly disfavors payment arrangements that vary based upon the value or volume of business between the parties. This disfavor is reflected throughout the safe harbor regulations, OIG advisory opinions and other authority. See, 42 C.F.R. §§1001.952(b)(5),(c)(5),(d)(5)(f)(2); See also, “"Per click", "per patient", "per order", and similar payment arrangements are highly disfavored under the anti-kickback statute.” Office of Inspector Gen. Advisory Op. No. 99-12, at 5 fn. 4.


Office of Inspector Gen. Advisory Op. No. 12-22, at 13, fn. 24.


Id, at 11, 14, fn 25.

The ABA Health eSource is distributed automatically to members of the ABA Health Law Section . Please feel free to forward it! Non-members may also sign up to receive the ABA Health eSource.