Co-management Economic Impact Elements to Consider

Co-management agreements continue to grow in popularity as organizations turn to pay-for-performance reimbursement models.

These agreements are typically quality focused arrangements in which physician groups contract with hospitals to manage a particular service line to ensure efficient and effective care is provided to patients. Co-management arrangements also allow for hospital-physician collaboration without requiring physicians to become hospital employees.

Determine the Structure of the Arrangement

To assess the economic impact of a potential co-management arrangement, the first step is to determine the structure of the arrangement, beyond just the service line.

For example will this include inpatient and outpatient services and/or medical and surgical services? These services will also need to be further defined through a combination of selecting coding (e.g., MS-DRGs, ICD-10 codes, and CPT codes), specific physicians, and physician specialties. The definition of the structure should be clearly defined and not overly complex, to establish a baseline and enable the development and execution of recurring reports, which will measure future performance.

The structural design will be an iterative process, using actual data to test that the volumes, associated with the definitions, are substantial enough to develop a meaningful baseline and internal benchmark, in order to effectively evaluate the performance of physicians.

The baseline is the historical physician performance for the services within the above defined structure of the co-management arrangement. Important metrics for the baseline include volume (discharges and visits), average length-of-stay (“ALOS”), direct variable cost, case mix index (“CMI”), and other quality indicators as agreed upon.

A minimum of one year of historical data is typically required to have statistically significant volume to identify trends and project the future impact of performance improvement. It is important for participating physicians to understand how the baseline and benchmarks were developed, and agree to its accuracy.

For benchmarking inpatient services, the CMI, which reflects clinical complexity and resource need of the population served, can be used to weight or adjust the length-of-stay or direct variable cost, for a more meaningful comparison of a single physician’s performance to peers or top performers, by taking into account patient acuity.

The gap between the historical performance and the internal benchmark will identify opportunities for improvement. Internal benchmarking is useful when external benchmarks are not available, however, if possible, external benchmarks should also be reviewed and used in conjunction. Using national or other external benchmarks can ensure internal top performers are actually top of field when compared to competitors.

Assess the Cost of Implementation

It is also important to assess the cost to implement.

Typically, co-management arrangements include base management and incentive fees. The base management fee is compensation to physicians for their participation in furthering the goals of the co-management arrangement (e.g., committee participation, clinical protocol development, and daily oversight).

The incentive fee is compensation for achievement of performance goals such as financial, operational, quality, and patient satisfaction metrics. It is important that co-management agreements be set up in a way to ensure compliance with civil monetary penalty and anti-kickback laws. Organizations should take time to ensure their fees and services are of fair market value and meet commercial reasonableness requirements, in order to avoid legal complications.

Additional costs to consider include consulting and legal fees and additional staffing needs for program management and analytics. Also, consider the impact of current medical directorships and whether or not these will roll-over into the co-management arrangement.

Hospital management should use this process to assess the effectiveness of existing medical directorships and decide which ones should be:

  1. kept separate from the co-management arrangement;
  2. rolled into the co-management arrangement; or
  3. allowed to expire or be terminated.

The implementation of the co-management arrangement will standardize care delivery, reduce supply costs, reduce length-of-stay, and improve quality which will lead to savings and improved value.

Achievement of these savings will ramp up over the period of the arrangement, generally three years. If targets are exceeded in year 1 and/or year 2, loftier targets and metrics should be included in future iterations. This is to ensure that the service line incentives keep pace with the progress being accomplished by the collaborative efforts of the physicians and hospital management.

An assessment on return on investment should include risk for achievement of savings.

Setting the Foundation

A well-conducted economic impact analysis will serve as a foundation for the creation and implementation of the co-management arrangement. The assessment can be used to educate and align participating physicians and hospital management.

It will also set the stage for the work to come, which will include developing an optimal structure, defining performance measures and targets, modeling compensation arrangements, and the execution of the services.