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Summer 2012

Hospital Contracting: New Rules for a New Era 

Jody Locke, CPC,
Vice President of Anesthesia and Pain Management Services, ABC

Negotiating a contract for anesthesia services with a hospital or Ambulatory Surgery Center (ASC) has never been an activity for the faint of heart. Even under the best of circumstances the process can bring out the worst in all parties. No matter that the relationship has been mutually beneficial something inevitably crops up as a point of contention. While most groups have typically had at least one member who could navigate a few minor challenges in the past, today’s new business challenges and the stresses of a competitive healthcare marketplace have completely changed the landscape and the result is a whole new set of issues requiring a completely different approach and strategy. The most common refrain among consultants and attorneys who represent anesthesia practices for a living has become: “getting the last contract done was a cake walk compared to this.”

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Many factors have pitted anesthesia practices against their administrations. The expansion of managed care and the perceived need to participate with key payors set the stage for a potential showdown. Certainly it was the significance of managed care contracting that triggered so many requests from hospital administrators to their anesthesia providers that they needed to form groups. Whatever the trigger, most can now identify a point in time after which things would never be quite the same again in their interactions with administration.

Paranoid cynics have tended to dismiss the change as a hostile affront to the professional integrity of the specialty and expressed their exasperation by means of a variety of passive-aggressive behaviors, but the more visionary among them saw this phenomenon for what it was, a paradigm shift that would require new approaches, that the beliefs and strategies that had gotten the practice to where it was would not get it to where it needed to be going forward. The lesson is clear, though: the earlier the rift set in and the longer it was left to fester, the harder it would be to cure and the more difficult it would be to negotiate reasonable terms for a service agreement.

How and why did this happen? Could it have been avoided? And what was the long-term impact? Many would argue that anesthesiologists have been quite myopic in their understanding of the environment in which they work. They have seen themselves as captive to a system over which they never believed they could have much influence or control. So long as this environment provided them above average incomes and favorable lifestyles, their relative captivity was not viewed as a problem.

Customer Service

It was not all that long ago—perhaps 15 or 20 years—that the anesthesia group with an exclusive contract with its hospital was the exception rather than the rule. In most hospitals they were simply not seen as necessary. How quickly things have changed. Two issues can virtually explain the origin of every anesthesia contract: the impact of managed care and a desire for the protection of exclusivity on the part of anesthesia practices. This is not to say that such agreements were entered into willingly at first or that they were generally viewed as advantageous. Many were considered a necessary evil and an unfortunate waste of time and expensive legal resources. The fact is that, as with so many other aspects of anesthesia practice, they have now become a standard fixture providing a modicum of protection until they become the catalyst for termination.

Ideally an anesthesia contract should define a franchise and codify ways to make it mutually profitable to all parties.

Ideally an anesthesia contract should define a franchise and codify ways to make it mutually profitable to all parties. The evolution of standard contract terms has been a reflection of the changing face of healthcare. Each party strives to maximize the potential value of the relationship while minimizing the exposure and risks associated with its obligations. In most cases there is more language dedicated to term and termination than economic potential and profitability. It is only recently that the proliferation of arrangements for financial support have begun to change the fundamental purpose of the document, but even here the heavy hand of the law is evident. Hospitals are strictly forbidden from paying anything more than fair market value for anesthesia services. It is a very arcane set of guidelines and conventions that defines how generous a hospital may actually be to its anesthesia providers.

To a large extent it was the very nature of anesthesia practice and the independent-mindedness of its practitioners that made the negotiation of the earliest contracts so problematic. Early negotiations were marked by some fundamental disconnects. While the administrators sought keep their options open with vague terms and loose terminology that only lawyers could interpret, the anesthesiologists kept demanding clarity and concision. While the administrators strove to minimize their risk and financial exposure, the anesthesia practices struggled to protect themselves and build in safeguards and safety nets. Worst of all, though, was the persistent request to see the books and understand just how profitable anesthesia was; this was the line in the sand that most private practices would not cross. The result was a careful, but often not-so-carefully choreographed dance around the real points of contention.

Opposite Perspectives

The history of anesthesia group formation only underscores the differences in perspective of the parties to this process. Administrators like numbers and balance sheets. Theirs is a world of averages and statistics. They use terms like ‘profitability’ and ‘bottom line’. Anesthesiologists, on the other hand, talk about the art and science of their specialty. While they plan for complications, ultimately each anesthesia provider responds to complications on an ad hoc basis. To them administrators are pencil pushers who speak an abstract administrative jargon. The anesthesia providers, on the other hand, are concrete problem-solvers intent on resolving life and death issues real-time. And so when they would sit down across from each other the administrators would propose and ponder options that anesthesiologists felt merited prompt and definitive decisions. Progress could only occur when they started to get their decision cycles in sync.

The legacy of these early days and the ensuing tectonic shift in the environment is a paranoid fear of losing control that continues to haunt specialty of anesthesiology to this day. Any attempts on the part of administration to limit the right to practice at a facility were and continue to be viewed as a violation of the rules of free trade. The single most egregious provision in most service agreements continues to be the “clean-sweep clause” that ties hospital privileges to termination of the contract. In retrospect, however, such issues and concerns were only a preview of coming attractions.

From the facility’s perspective the efforts necessary to bring anesthesia providers to the table as a single entity set the stage for a common realization that more often than not the “anesthesia group” was actually little more than a professional fraternal organization with no ability or commitment to discipline itself or speak with a single voice. Professional hospital administrators tended to be suspicious of these entities and their lack of clearly-defined business practices. Before long, administrators started to explore a variety of strategies to outmaneuver the anesthesiologists. Frustration at the inability of these group practices to speak with one voice, consistently make good on their contractual obligations and keep their own houses in order gave rise to the Request for Proposal (RFP) which in turn stimulated the growth of an entirely new industry: the anesthesia management company, of which Premier and Sheridan were prototypical examples.

No period in the history of anesthesiology has been so dramatically shaken by the winds of change as the decade of the 1990s. Health care reform threatened to undermine the viability of the specialty. Anesthesia residents fled their training programs in droves resulting in one of the most profound manpower shortages in history. The demographics of the specialty were clearly shifting as more women entered the specialty. As ambulatory surgery centers proliferated across the country, a shift in clinical venues rapidly eroded the economic underpinning of the specialty: the notion that a good day’s work in a well-placed facility would easily generate enough revenue to support the income and lifestyle requirements of the provider.

Organizationally, anesthesia practices struggled to come to terms with a whole new vocabulary that was as foreign to most as ancient Aramaic. As groups of physicians continued to form new entities, their attorneys tried to apprise them of the potential for antitrust violations. Democracy was all they knew but it did not seem to work. They struggled to adapt old ways of compensation to new forms of management, but nothing seemed to make sense. Never had the future seemed so uncertain. Is it any wonder that the American Society of Anesthesiologists(ASA) found it necessary to publish a practice management video and initiate a new conference focused exclusively on anesthesia practice management in 1994?

Many would describe the current state of anesthesia practice in nearly Marxian terms where all that matters is economics. There is more truth here than many are willing to admit. The fact is that the quality of anesthesia care overall has become so high that most patients are at greater risk driving to the hospital for a procedure than undergoing general anesthesia. Superior training and dramatic advances in technology and pharmacology have generally created the perception that serious anesthetic complications are a thing of the past. At the very point anesthesia practices need some leverage to argue their case for more financial support they find they have little to leverage; moreover, the market appears to be conspiring against them. What used to be the home court advantage of the local team is eroding quickly. The hospital now has the upper hand.

The fact is that the quality of anesthesia care overall has become so high that most patients are at greater risk driving to the hospital for a procedure than undergoing general anesthesia.

A survey of current subsidy arrangements reveals four broad categories:

  1. fixed annual payments,
  2. FTE-based support,
  3. service-line subsidies and,
  4. coverage formulas based on per diem anesthetizing location rates.

The simplest of these is the fixed annual payment where the parties sit down, throw numbers back and forth and finally agree on an amount that the hospital will pay the anesthesia group each year. This is the hospital budget driven approach. Despite administration preference for such an approach, there is little protection for the anesthesia practice and it is safe to say that what was the right number at one point in time may be totally inadequate later on. This fundamental limitation has given rise to some very creative approaches.

Sometimes the discussion will start with an assessment of the manpower necessary to meet the facility’s coverage requirements. It is not uncommon for administration to accept a staffing plan and then plug in compensation amounts and expense allocations. Inevitably the administration will also insist that the practice project collections, which are deducted from the projected cost to determine the subsidy. Such agreements inevitably define a pool of money that the group taps into based on need. More often than not, the pool is insufficient for the group to meet the projected budget.

Service-line subsidies can be far more complicated. These involve the identification of unprofitable lines of business that are deemed important to the facility. Examples might include cardiac call, obstetric coverage and the GI suite. The total subsidy each month or quarter normally involves adding up the specific types of financial support. Such an approach can be quite profitable until the hospital decides that the approach has become just too complicated and cumbersome and refuses to discuss support for any new service lines.

A new approach has been gaining currency in recent years. This method simply assigns a value to cover an anesthetizing location for a day. Typical rates range from $1700 to $2100 depending on staffing model and type of service. In the simplest cases the group will tally the number of locations covered in a month, multiply this tally by the rate agreed to and subtract actual collections to determine the invoice amount. Not all administrations will accept such flexible arrangements, but those that have, and there are many, like the potential for aligning the incentives of group and facility.

In other words, the need to provide financial support to an anesthesia practice has given rise to a very specialized form of consulting services. It is not uncommon in today’s environment for a group to hire a consultant to formulate a proposal and then for the hospital to hire another consultant to evaluate the proposal and provide its own proposal. Once the consultants agree, the terms then get turned over to the lawyers who hammer out the details of an actual contract. Needless to say, this has greatly complicated the process and added significant costs that must be borne by both parties.

Of particular note and concern to many anesthesia practices is the need to disclose considerably more financial information than used to be the case, especially as may pertain to individual provider compensation and benefits. Hospital consultants will scrutinize volume trends and payor mix to asses the adequacy of collections and accounts receivable management. No hospital wants to support a group simply because its billing function is lacking.

The need to provide financial support to an anesthesia practice has given rise to a very specialized form of consulting services.

In the final analysis, hospital contracting can be compared to running for public office. There is an expectation that once the contract is signed that the process stops and everyone goes back to work as usual. Too often this is not really what happens. More often than not the implementation of a new contract only opens a new chapter in the relationship with the hospital in which all the stakeholders are constantly evaluating whether they got it right and whether the relationship is stronger or weaker. A well known attorney, Judith Jurin Semo, Esq. often tells the story of a contract she worked on for 8 months. A month after it was signed the client came back to her asking how they could get out of the deal. Hospital contracting has gone the way of managed care contracting: a careful monitoring of each provision and condition is essential to the next round of negotiations.

Reasonable observers might well ask where all this is headed? It is a good question. Given the current uncertainty related to the future of healthcare reform and the terms of the Affordable Care Act, there is considerable speculation how much the relationship between hospitals and their hospital-based physicians is likely to change. The potential impact of Accountable Care Organizations (ACOs) is a topic of frequent concern, but such uncertainly should not mask the underlying trends that have already become very clear: most discussion of any medicalservice is now focused on cost.

It seems fairly safe to predict that four themes will inspire future discussions with hospital administrative staff. Any group anticipating a negotiation or renegotiation of a contract would be well advised to honestly consider each and to ask the tough questions necessary to use these to maximum advantage. These are more than just the buzz words of the day; they have clearly become the primary focus of hospital administrators all across the country: customer service, collaboration, cost and competition. Practices that lead with these in their proposals and interactions with administration are far more likely to achieve successful outcomes and feel more secure in their practices.

Many would argue that anesthesia has always been a quintessential service specialty. Despite the service nature of the specialty, anesthesia has come under increasing scrutiny for its lack of customer service orientation. This puzzles some providers, but others understand that what is being asked of anesthesiologists and CRNAs is a different perspective. No one doubts their qualifications to manage patients safely through the peri-operative continuum. What is not clear are how well they can address the variety of customer requirements and expectations outside the operative suite. Anesthesia practices have to reinvent themselves as more customer-friendly entities. There is an entire vocabulary of customer service that is quite foreign to the typical anesthesia practice that has little experience in satisfaction surveys, 360 degree reviews and pro-active involvement in operating room management. They also have to learn how to identify and reset customer expectations. It is clearly a new challenge for a new era in anesthesia practice management. Most anesthesia providers find it easier to manage a complicated AAA at three in the morning than to sit down with a surgeon over utilization metrics.

img src="/images/stories/Communique/Summer2012/Summer 2012 article 5 photo 6.bmp" border="0" alt="" height="220" align="right" style="margin: 10px 0 10px 20px;"If better customer service is the opening volley of a new dialogue, collaboration is what the dialogue is now about. The days of anesthesia providers showing up in the morning to do their cases and quietly disappearing at the end of the day are over. The administration wants what anesthesia brings to the table. Most anesthesia practices have more and better data about what actually happens in the operating room suite than the hospital. They also bring a tremendous body of experience to the table. The time has come for joint problem-solving and collaboration in the effective management of patients through the surgical experience. In fact, the more anesthesia groups step up to the plate and offer up their insights and ideas, the more secure they are in their franchises.

Defining Your Value Proposition

There is no doubt about the fact that the cost question poses unique and challenging questions. Hospitals do not necessarily need anesthesia groups to change how they provide care but they do need reassurance that the mode and method used is the most cost-effective possible for the value provided. The opportunity for anesthesia lies in shifting the focus of discussion from cost, per se, to value. Practices must be clear in the defining of and consistent in the implementation of their value proposition. Some assume that all hospitals would prefer to work with nurse anesthetists because they are perceived as cheaper. To the extent that such a discussion exists in a facility, anesthesia has failed to manage the terms of the discussion.

Today’s environment appears complicated to some and threatening to others but it is actually little more than the culmination of general themes and specific circumstances and should be viewed with no more skepticism than any other period in the history of the specialty. There have always been challenges and there will continue to be challenges. Success will be defined by those who can appreciate the past and use its lessons to their advantage while they develop the tools and strategies to assess the specific circumstances of their practices. In many ways it is the perfect anesthesia paradigm. We have come full circle. With each day that passes the business of anesthesia practice management starts to resemble the practice of anesthesia: careful training, timely and reliable data and the willingness and commitment to make bold decisions quickly are the only prerequisites of success. The only things standing in the way are history, tradition and an unwillingness to embrace change. The tools are and resources are widely-available and the opportunity is at hand.

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Jody Locke, CPC, serves as Vice President of Pain and Anesthesia Management for ABC. Mr. Locke is responsible for the scope and focus of services provided to ABC’s largest clients. He is also responsible for oversight and management of the company’s pain management billing team. He will be a key executive contact for the group should it enter into a contract for services with ABC. He can be reached at