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Best practices for compliant, aligned professional services agreements

Stan Stephen (stanstephen@sullivancotter.com) is a Principal in the Indianapolis office, Dina Unrath (dinaunrath@sullivancotter.com) is a Principal in the Pittsburgh office, and Thomas Johnston (tomjohnston@sullivancotter.com) is a Principal in the Minneapolis office of SullivanCotter.

Over the past decade, merger and acquisition (M&A) activity in healthcare has been particularly strong as health systems adapt to the changing healthcare environment. Among the potential unintended consequences of this M&A activity are inefficient, fragmented, and poorly aligned physician services contractual relationships.

When a health system merges with or acquires a hospital or physician group, it can also obtain hundreds, if not thousands, of contracts for both employed and independent providers. Employment arrangements can take precedence in acquisition due diligence as organizations are focused on market growth, access, and service line development. That said, there are frequently numerous professional services agreements (PSAs) in place within large health systems that define the full complement of provider relationships. Provider denotes health professionals who provide healthcare services and includes physicians and other healthcare professionals, such as nurse practitioners, chiropractors, physical therapists, physician assistants, and others offering specialized healthcare services. The initial focus of this discussion centers on physician relationships, which comprise the bulk of PSAs; however, overall provider strategy is a fundamental component in developing best practices.

PSA basics

A professional services agreement (PSA) is a contractual arrangement whereby the one party or parties to the agreement agree to provide professional services in exchange for payment by another party or parties. In a healthcare setting, a PSA is often between a health system or hospital and an individual physician or a group of physicians and may include advanced practice providers. Examples of services that may be addressed within a PSA include:

• Coverage (e.g., emergency department/trauma call, hospital-based inpatient services, consultative services)

• Service line co-management

• Medical administrative services (e.g., physician leadership and medical directorships)

• Committee participation

• Provider recruitment

• Other clinical services, such as interpretations of medical tests

At times, a consequence of an initial focus on employment models is the lack of a timely and disciplined review of these PSAs, which, in turn, may undermine the larger strategy while delaying the realization of potential compliance concerns.

The risks associated with not thoroughly reviewing PSAs can be significant. The PSAs may include noncompliant and/or non-aligned terms that expose the health system to significant regulatory and financial risk. Not reviewing PSAs may also further impede the ability of the organization to achieve its intended clinical, financial, and strategic goals, which are typically the driving factors behind these M&A initiatives.

Worse yet, the financial implications of inadequate PSA oversight can add up quickly in the form of substantial penalties per violation for noncompliance, unnecessary spending on underperforming physicians, and loss of reimbursement resulting from poorly aligned provider and payer incentives. Health systems can incur immediate financial losses, as well, in the form of opportunity costs resulting from inefficiencies.

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