Hospitals across the country have been actively seeking to align physician interests with the interests of the hospital, in order to provide high quality patient care in a more coordinated and efficient manner. Many hospitals have acquired physician practices and employ physicians directly. Other hospitals, acting in response to the Accountable Care Act, have formed accountable care organizations, in an effort to generate and share savings in connection with the care of Medicare patients.

Another option for aligning the interests of physicians with the interests of the hospital is for the hospital to enter into a co-management arrangement with physician members of the hospital's medical staff. Under a co-management arrangement, the hospital engages a group of physicians to manage one or more service lines offered by the hospital. Alternatively, the hospital can form a management company and invite physician staff members to become part-owners of the management company and participate in the management of hospital services.

In either case, the payment of management fees to physicians who refer patients to the hospital raises potential regulatory concerns under the Civil Monetary Penalties Statute ("CMP Statute"), which prohibits hospitals from making payments to physicians as an inducement to reduce or limit services provided to Medicare or Medicaid beneficiaries. Co-management arrangements also raise concerns under the Anti-Kickback Statute, which prohibits the payment of remuneration to induce the referral of items or services reimbursable by any federal health care program. These statutes do not, however, present an insurmountable obstacle to the implementation of a co-management arrangement. If structured properly, a co-management arrangement enables a hospital to compensate physician staff members, without violating applicable healthcare statutes, for assisting the hospital in improving the quality and efficiency of hospital services.

In its final Advisory Opinion of 2012 (OIG Advisory Opinion 12-22, issued: Dec. 31, 2012, posted: January 7, 2012), the Office of Inspector General ("OIG") provides a useful road map for structuring a co-management arrangement to comply with applicable law. In that Opinion, the OIG approved a co-management arrangement in which a hospital paid a cardiology group to manage the hospital's cardiac catheterization laboratories (the "Arrangement"). The compensation paid by the hospital included a fixed management fee and a performance bonus, based upon achieving certain quality and costs savings benchmarks in connection with operation of the cath labs.

Pursuant to the Management Agreement between the hospital and the physician group, the group assumed responsibility for overseeing cath lab operations, providing strategic planning medical direction services, and various other management services. In consideration for providing such services, the hospital agreed to pay the group a guaranteed fixed payment, plus a potential performance-based fee, based upon achieving certain benchmarks relating to employee satisfaction, patient satisfaction, improved quality of care, and implementation of certain measures to reduce costs attributable to cath lab procedures. The largest component of the performance fee was related to achieving costs savings.

The OIG determined that, although the Arrangement (i) could potentially constitute an improper payment to induce the reduction or limitation of healthcare services, in violation of the CMP Statute, and (ii) could potentially generate prohibited remuneration in exchange for referrals under the Anti-Kickback Statute, the presence of certain "safeguards" minimized the possibility of violation of the applicable statutes. Because the likelihood of violation of these statutes was minimal, the OIG stated it would not seek to impose sanctions against the parties. The OIG identified the following features of the Arrangement as safeguards which minimized the potential for violation of the CMP Statute: (i) the hospital's certification that the Arrangement did not adversely affect patient care; (ii) low risk that the Arrangement would cause physicians to use medically inappropriate items to achieve cost savings; (iii) the financial incentives to achieve cost savings were reasonably limited in duration and amount; and (iv) the presence of certain other limitation on physician actions, including restrictions against a) stinting on patient care, b) increasing referrals to the hospital, c) cherry-picking healthy patients or patients with desirable insurance coverage, or d) accelerating patient discharges.

Safeguards which minimized the potential for violation after the Anti-Kickback Statute included: (i) the hospital's certification that both the fixed fee and the performance bonus represented fair market value compensation for the services performed; (ii) the compensation paid to the physicians did not vary with the number of patients treated; (iii) the Arrangement would not serve as an incentive for the physicians to refer patients to the hospital's cath labs instead of to a competing facility; (iv) the Arrangement was designed to improve quality rather than to reward referrals, and (v) the Arrangement had a limited duration.

Hospitals and physician groups which are considering entering into co-management arrangements pursuant to which the hospital would pay physicians to manage one or more hospital services should review Advisory Opinion 12-22 carefully and utilize it as a road map for structuring the arrangement. The parties should seek to incorporate as many of the "safeguards" identified in the Opinion as possible.