"Side-by-side" alliances may add financial stability to practices

If a hospital wants a business relationship with a physician practice but the practice doesn't want to sell, there is another way: the side-by-side, or embedded, arrangement.

The arrangement allows a physician practice to add another doctor who is employed by the hospital. The practice can have someone else recruit and add a physician while remaining independent. The hospital, in turn, can hire physicians without buying the practice or starting one from scratch.

Sounds appealing, right? So why do analysts say few of these arrangements, for the moment, exist?

It's because the business and legal issues in a side-by-side relationship can be fraught with peril. The practice and the hospital have to work closely together to ensure that the arrangement benefits both, without anyone getting in legal trouble.

Still, analysts said, side-by-side physician relationships may add financial stability to the practice and solve recruiting challenges. For example, a survey of 302 residents by the physician recruiting firm Merritt Hawkins & Associates released Oct. 5, 2011, found that 32% would be most open to hospital employment. Only 3% of residents near the end of their training said this in 2001. Ten percent were interested in a job with a single-specialty group, and another 10% would consider a position with a multispecialty group in 2011. The numbers in 2001 were 24% and 28%, respectively.

"Young physicians coming out of training programs are kind of leery of joining small groups," said Alyce Katayama, a partner with Quarles & Brady, headquartered in Milwaukee.

If side-by-side arrangements go well, they could remain for the long term or be a way for a practice to test the waters before selling to a hospital. The arrangement may be a transitional step for the hospital-employed physician to either become a partner or buy the practice from a retiring physician.

The side-by-side arrangement may be proposed by the hospital or the practice. Either way, both entities should have an established connection before going forward. Analysts say the arrangement works best for practices -- and hospitals -- as a temporary solution to physician staffing issues or when no other option is viable.

"Don't go into a deal with a hospital if you don't get along," said Marc Halley, CEO of Halley Consulting Group in Westerville, Ohio, who has helped practices with these deals. "You want to make sure you like each other before you enter into any arrangement. These arrangements can be a little more ticklish to manage if they are not set up with the right partners. Some have been very successful. Some, not so much. It's not a panacea, but sometimes it's a great solution if a physician does not want to be employed."

Experts say the first step for independent physicians thinking about such arrangements is to consider several questions. What type of physician would the practice like to bring in? What will patients be told regarding the employment status of their physician? Do they have to be told about the distinctions at all?

"Patients usually don't care," Halley said.

Do patient records of the hospital-employed physician have to be kept separate from those of the practice's? How will that be handled along with HIPAA compliance? Will the employed physician use a practice's electronic medical record or one provided by the hospital? Are these two systems compatible?

Independent practitioners need to safeguard their businesses when bringing in a hospital-employed physician. What kind of contract stipulations will be put in place to ensure that the new physician is building his or her patient population rather than taking from that of the independent doctor? How will services provided by the employed physician be billed? Is the employed physician running a hospital-owned practice within the independent practice? Or is the independent practice leasing the employed physician's services from the hospital?

"The practice and the hospital need to try to be clear with each other as to what they see as the parameters of the arrangement," Katayama said.

Generally speaking, receivables for the employed physician would go to the hospital, but the practice may charge the institution for the billing service. The practice may be able to collect rent for the space and equipment used by the hospital-employed physician.

Depending on the structure of the arrangement, the practice may be able to charge for supervising or mentoring the hospital-employed physician. Specifying who is in charge of particular decisions is key to reducing the risk of conflict in this type of arrangement. The hospital will be paying the employed physician's salary, but the independent practice most likely will want to retain control over much of the situation.

Any money paid must be set at fair-market value. The hospital may need to prove that the community needs another physician. The hospital might need to take other steps to ensure it is not violating any Stark and anti-kickback laws against paying for referrals.

Experts say that the physician who owns the practice should help recruit the embedded physician to make a good match more likely. Hospitals should not place an employed doctor in an independent practice that the physician-owner has not vetted.

"Make sure you very carefully select the right partner and the right physician," Halley said.

Contracts governing side-by-side arrangements should spell out how to end the deal if it doesn't work. How much notice will a practice have to give? Under what circumstances can either party terminate the contract?

"Physicians need to always be thinking what kind of terms in the contract can protect them if the deal does not work. How do you unwind the deal?" asked George Indest, president and managing partner of the Health Law Firm in Orlando, Fla. "This would be considered a prenuptial to protect you if it doesn't work out and you have to divorce."