Hospital Contracts: Important Issues for Medical Groups

As with any other contract, careful review and negotiation are important. Hospitals tend to take the position initially that the contract that is presented is the “standard contract” and that they are simply looking for the signature of an authorized member of the medical practice. Experience indicates that nothing is standard, and a medical group should never execute the hospital contract presented without careful review.

A medical practice should consider several general principles when reviewing a hospital contract. This article offers a general discussion of those principles followed by discussion of specific provisions and the best strategies to approach them. As with any other contractual relationship, the relationship should be a partnership between equals. Both parties are adding value to the transaction.

The reality is that hospitals want to dominate the relationship. The medical practice must recognize this desire on the part of hospital administrators to be able to deal with them effectively. One of the keys in negotiating a hospital contract is to differentiate between what constitutes necessary control sought by the hospital and compliance to ensure the implementation of reasonable standards of medical care and what is simply a hospital’s desire for control.

In their contractual arrangements with medical practices, hospitals typically want to establish a long-term relationship—as long as it is the best deal available—but at the same time desire a safety net and exit strategies to permit continuity of care in case the relationship does not meet their expectations (which may change with a change of business climate, regulations, or even hospital administrators). Often, the hospital safety net strategy is built around the hospital using the same physicians who have provided the medical care but receiving the right to do so outside the group. It is important for the medical practice to recognize this long- and short-term view and take the necessary reasonable steps to protect its rights and, just as importantly, preserve the group if such action by the hospital occurs.

In considering hospital contracts, the group must satisfy the needs of the hospital and its reasonable compliance standards, while at the same time maintaining its own independence. At the core of the conflict is this: hospitals would prefer that all physicians working for them be treated as employees, but without the attendant labor burden associated with employee status. This prevalent dichotomy should be recognized and resisted. Hospitals want to maintain control, but, at the same time, assign as many of the administrative and financial burdens to the contracting medical practice as possible. Unless pressed, hospitals typically will not contractually commit to providing the necessary administrative and services support, or the equipment, supplies, and facilities that are reasonably required for the medical practice to deliver their services in a competent and efficient manner. By default, if the hospital does not expressly agree to provide such support, the financial burden of providing it falls on the medical practice. Care must be taken by the medical practice to ensure that it obtains, in clear and certain terms, exactly what it needs from the hospital in order to perform its services effectively. If in doubt, the medical practice should ask for it. It should not be assumed that it will be provided.

Within the climate of insurance reimbursement and managed care contracts, hospitals are always looking to control managed care contracts while placing the financial risk on the medical practice.

Hospitals always want the medical practice to do more.

Hospitals rarely take into account the profitability of a managed care contract and its effect upon the group. It is the group’s responsibility to ensure that the risks that it is being asked to share with respect to the payer mix and managed care contracts are not unreasonably onerous.

Issues That Require Special Attention

The following sections address some of the most important issues that arise in hospital contacts and require special attention.

Term

The term of the contract is of considerable importance. The medical practice has made a significant expenditure of time and money in properly preparing for and maintaining a contract with a hospital or a similar healthcare facility, particularly in the area of recruitment which are long-term financial responsibilities of the group. After the period during which it gets established, the medical practice needs to have sufficient time to properly recoup its investment. Hospitals, however, would rather have contracts with shorter terms for maximum flexibility. As long as there are appropriate exit strategies in the event of breach, the medical practice should seek as long a term as possible, with as few opportunities for termination by the hospital as possible. This last issue is discussed in more detail in a later section of this article.

Services Required of the Group

The primary desire of any medical group is to provide medical services, diagnosis, and treatment to its patients. Moreover, unless it is a hospital-based practice, the group wants to maintain the flexibility to concentrate its efforts on other means of delivering healthcare services. Hospitals always want the medical practice to do more, particularly in terms of administrative responsibilities. They want the practice to take on extensive call coverage responsibilities and provide 24/7 coverage if possible. They want to impose the same standards of compliance and control as those they impose on professional hospital employees such as in-house medical staff, residents, and interns.

Hospitals rarely are inclined to pay for these additional ancillary services; they expect that this is simply part of the job. Because compensation by private practices is based largely on rendering billing and collection for medical services, such additional administrative requirements can place an undue and unreasonable burden on a medical group. Special care should be taken with respect to the nature and breadth of what ancillary services will be offered, and, if they become unreasonably onerous, what additional compensation will be offered for these services.

Qualifications of Physicians

Hospitals want qualified and board-certified physicians working in their hospitals under their contracts. This is obviously a more than reasonable request. The challenge comes with junior members of the group who may be brand new and not yet board certified. Attention should be taken by the group to provide for these individuals until they obtain board certification to avoid unintended breach of the agreement.

The group should not automatically agree to accept participation in every managed care contract that the hospital negotiates.

Hospitals rightfully require that all physicians practicing in their hospital abide by the medical staff bylaws and similar guidelines. Again, this is a legitimate and reasonable request. Care should be taken, however, to avoid the scenario in which the hospital seeks removal of certain physicians in the group for one reason or another. Hospitals often would rather avoid the formal due process procedures called for in the medical staff bylaws for political and legal reasons. Many times, they will attempt other means, such as a private request that a particular physician be “removed from the schedule” or what are often characterized as “hallway discussions,” whereby a hospital administrator will ask the representative of the group to informally remove a physician from practicing at the hospital even though they would still qualify under the medical staff bylaws. For the wellbeing of the group and its members, not only should such overtures be avoided, but specific protections should be included in the contract to avoid this scenario.

It is not being suggested that a hospital contract should not contain objective and clear criteria as to what would constitute the ability of the hospital to seek removal of one of the physicians. This is necessary for the good of the hospital and patient care. Rather, the concern involves the implementation of more subjective standards and procedures that do not fall within these parameters.

Billing and Compensation

Billing and compensation is a key component of the hospital contract. Traditionally, one of two models is offered. In the first, the group does its own billing and collection with no financial contribution from the hospital. In the other, the hospital pays the group based on a fixed amount or on RVUs or a similar calculation. Fairly recently, a trend has developed in which the group bills for its own services but also receives a stipend from the hospital. This is found particularly in areas where the payer mix may not be strong and the group has better financial opportunities elsewhere. If the payer or reimbursement mix is such that the group does not believe it can generate enough revenue to attract quality talent within its ranks, it should consider suggesting the combination of an additional stipend over and above the group’s ability to bill, pay, and collect for its services. In any compensation arrangement, it is important that ancillary services be recognized and paid for in accordance with applicable healthcare regulations.

Managed Care Participation

Participation in managed care is a key issue because of the number of managed care contracts the hospital enters into with third-party payers. The group should not automatically agree to accept participation in every managed care contract that the hospital negotiates. If the hospital insists on participation, then the group must examine each managed care contract and offer guidelines to properly protect it from such participation.

Support by the Hospital

Many times, the first draft of a hospital contract will make no mention of hospital support. Its inclusion is critical. If there is an expectation that the hospital will provide such things as facilities, administrative personnel, support personnel, and billing assistance, then that must be stated in the contract. This is particularly important when the method of compensation for the group is billing and collection by the group itself. If offices, computers, and other similar facilities are necessary, make sure those are included in the contract. Otherwise, the group may find itself faced with a situation in which it does not have sufficient facilities to adequately perform its services and be reasonably compensated for those efforts.

Exclusivity

Particularly with a hospital-based physician practice, obtaining a guaranty of exclusivity to offer services at the hospital is an important element of any contract. Although hospitals will provide exclusivity, they are always looking for exceptions and carve-outs that limit the true exclusive protection. Sometimes this comes in the form of permitting other specialties within the hospital to perform a similar service. Other times, it permits the hospital to refer patients to other sites or sister hospitals within their network. Still other times it is based on a concept of “medical necessity.” From the group’s perspective, these exceptions are best limited or avoided.

Governmental Healthcare Regulations

Governmental healthcare regulations make up an ever-changing paradigm because state and federal healthcare regulations affect healthcare contract relationships. The medical practice should view these with extreme care because the penalties for noncompliance are severe. There are certain provisions that must be in every contract to address the Physician Self-Referral Law (commonly known as the “Stark” law), fraud and abuse, and other similar issues. The assistance of counsel experienced in these types of issues is extremely helpful. At the same time, the medical practice should take all steps to ensure that the contract includes an appropriate safety net that will permit the parties to revise the contract to address future changes in healthcare regulations to prevent a situation in which the contract could be terminated because it may not be in compliance with new rules and regulations.

Termination

Although the issue of termination is discussed last, it is certainly not the least important. More issues arise from this scenario than any other, and the medical practice wants to ensure that it is properly protected.

The first issue is termination with cause. The hospital has a legitimate right to terminate the contract if a member of the group is in breach of the agreement or applicable healthcare regulations or is not fulfilling his or her professional duties and patient care is at risk. A standard set of objective criteria exist in which termination of the contract is warranted. However, to the extent that patient care is not at immediate risk, the group should seek reasonable notice and cure provisions so that any issues may be addressed and the contract not be terminated without an opportunity to address the problem. Additionally, any subjective criteria should be resisted, because they are open to interpretation and possible abuse.

The group should also seek the ability to terminate the agreement for cause as well (giving the hospital the same rights of notice and cure when appropriate) in circumstances where the hospital is in material breach of the contract or of applicable healthcare regulations. In these circumstances, the group must be afforded the opportunity to get out of the contract quickly.

Termination without cause is always a major issue in a hospital contract. For the group, the best scenario is as long a term as possible with automatic renewals that require sufficient notice from the hospital should it wish to terminate the agreement at the end of the initial term or a renewal term. Many hospital contracts, even with a long term and the renewal procedure outlined above, will have 90- or 120-day “without cause” termination provisions. The group should recognize that this renders the contract as a 90-day contract, which provides no security for the group and places it at great risk.

The group should also consider other protections from an early “without cause” termination. These would include a liquidated damage provision, a restriction on hiring a competitive group within a certain period of time, or the inability to exercise such a provision before a certain date within the contract. All of these items create disincentives for the hospital and could act as an impediment to the hospital exercising a “without cause” termination.

Conclusion

If the medical group is mindful of the issues raised in this article and addresses the specific issues described, it has a better chance of reaching a contract of “true equals” with its hospital as it negotiates its contract for medical services.