Addressing Physician Compensation within Rural Healthcare

Fatema Zanzi Attorney Drinker Biddle & Reath LLP Speaker Panel Jennifer Junis Chief Nursing Officer OSF Saint Luke Medical Center Karen Kole Manager Huron Consulting Group Kevin Marx Chief Practice Officer Katherine Shaw Bethea Hospital

Agenda 1.Introductions 2.Physician Alignment Options 3.Legal Framework 4.Fair Market Value Considerations 5.Examples of Physician Compensation Models OSF Saint Luke Medical Center: Medical Directorship and Mid-Level recruitment Katherine Shaw Bethea Hospital: Physician Employment and Residency recruitment 3

Physician Alignment Options 4

Legal Framework The “Rule” Book Federal laws Stark Law Anti-Kickback Law IRS Tax Exemption State laws Illinois Medical Practice Act has a fee-splitting prohibition Illinois anti-kickback and self-referral prohibitions 5

Legal Framework: Common Themes Is the compensation consistent with the fair market value (FMV)? Value in arm’s length transactions, consistent with the general market value: – General market value: The compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, at the time of the service agreement. – Fair market price: Generally based on bona fide comparable services agreements, where the compensation has not taken into account the volume or value of anticipated or actual referrals. (42 C.F.R ) 6

Legal Framework: Common Themes (II) Is the arrangement commercially reasonable? Assessing commercial reasonableness is separate from the analysis of FMV: – While FMV applies to the level of compensation for the physician’s services, commercial reasonableness applies to broader business issues related to the arrangement. – Commercial reasonableness is especially important in arrangements that include compensation for administrative and other non-clinical services. The services covered by the arrangement should be essential to the operation of the hospital/system and/or to addressing specific community needs Services provided are fully described. Hospital demonstrates sound business reason/need for the services. Physician must actually provide the services as evidenced by records/reviews. 7

Valuation Considerations Document and define the need Review various methods of compensation: Determine financial pro forma with new compensation arrangement Determining fair market value Reviewing multiple market surveys. Considering unique factors, including availability of such physician services in the rural market. 8 Medical DirectorshipsCo-Management AgreementsOn-Call Pay Base SalaryProductivity-BasedQuality Bonus Sign-on BonusRelocation BonusPerformance Incentive Drive TimeLoan ForgivenessBenefits

Risks to Watch Out For Guaranteed Compensation Long-term Contracts Stacking payments Not including all aspects of compensation in fair market value calculations No compensation cap Proposed compensation and purchase price Inconsistency 9

OSF Saint Luke Medical Center Critical Access Hospital with 25 licensed beds Not-for-profit and tax-exempt Has a Rural Health Clinic onsite Located in Kewanee, Illinois (Henry County) Serving Kewanee and surrounding towns and rural areas since 1919 Built replacement hospital that opened on May 31, 2008 Recently merged with OSF Healthcare System on April 1,

Medical Director Model Dyad structure with aligned goals Medical Director compensation based on goal achievement OSF Saint Luke Medical Center Emergency Department Case Study 11

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30 - Overall, would you rate the quality of care provided as: 13

Advanced Practice Nurse Model Inability to recruit Primary Care Physicians Hospitalist Program started to allow outpatient practice in clinic Family Practice APNs as a foundation versus extension Rural Health Clinic Case Study Certified Diabetic Educator Behavior Health Certified Registered Dietician 14

Katherine Shaw Bethea Hospital Independent, Not-for-Profit Hospital Located in Dixon, IL 80 Licensed Beds $126M Net Revenue 65 Employed Physicians 15

Recruiting Journey Started in 1990 Established “Center for Health Services” Leveraged Geography for Scholarship Recipients Networked with Illinois RMED Dixon Rural Training Track Developed Niche for International Medical Graduates 16

Fair Day’s Work for a Fair Day’s Pay Employed Physicians are Salaried Work/Life Balance, Community Citizenship CPI and Occasional Adjustments All “One Off” Deals 17

Burning Platform Growing Number of PCP’s Maturing Specialty Practices Varying Practice Styles Expected Cost Pressures Physician Engagement 18

Transition to Value Tiered Salary with Bonus Potential 10% Tied to Quality PCP’s First, Then Specialists Larger Specialty Groups for Hospital-Based Services Expect Fall-Out 19

QUESTIONS? 20

21 Karen Kole Huron Consulting Group 550 W. Van Buren Street Chicago, Illinois (312) Kevin Marx Katherine Shaw Bethea Hospital 403 E. 1st St. Dixon, IL (815) Fatema Zanzi Drinker Biddle & Reath LLP 191 N. Wacker Dr., Ste Chicago, IL (312) Jennifer Junis OSF Saint Luke Medical Center 1051 W. South St. P.O. Box 747 Kewanee, IL (309)