American physicians are again rushing to become employed by hospitals—and hospitals are responding in kind, says D. Louis Glaser, JD, partner with Katten Muchin Rosenman LLP in Chicago, Illinois. "The trend is being driven by the uncertainty of the future," he says. "Physicians and hospitals are wondering how reimbursement is going to change, whether they will have to be part of an accountable care organization (ACO) or an integrated delivery system, and whether referral patterns will depend on whom they're linked with. Physicians ask themselves, am I better off on my own with some degree of control, or is it better to surrender control but have someone else take on the risks? The pendulum is swinging toward the latter." As both groups look to developing financial relationships with one another, a host of legal and regulatory issues are raised. "Hospitals and physicians have to make sure they structure their compensation systems to be compliant with Stark laws, tax-exempt restrictions, and so on," Glaser says. Complicating matters is the fact that many hospitals felt burned by the physicians they employed in the 1990s. "In the 90s, when hospitals started buying practices, they were offering 10-year fixed employment contracts, and they found that productivity declined," he says. "Being locked in for that long wasn't a good thing for them. So there's a balance to strike. The world changes, and you have to be flexible to account for that." Determining Physician Income With the lessons of the 1990s in mind, most hospitals today are seeking to link some portion of physician payment to productivity, Glaser says. "These days most people are looking at productivity-related systems, based on what the physician is generating in terms of RVUs and cash collections," he notes. But these systems come with regulatory scrutiny: "Under the Stark law, you pay someone fair market value for their productivity, but it has to be 'commercially reasonable.' There have been a lot of cases in the past year putting focus on situations where physicians have been paid a lot of money, and there were questions about whether this was reasonable." Adding further complexity to the issue is the fact that physician reimbursement has been on the decline, and that trend is likely to continue—especially once physicians become employed and can no longer rely on in-office ancillary services to supplement their reimbursement, Glaser notes. "As you pull diagnostics and ancillaries out and put them into the hospital, you're assured that the practice will lose money," he said in a 2010 Healthcare Financial Management Association presentation entitled "Employed Physicians: Improving Performance and Avoiding Excessive Subsidies." "But you may be gaining money somewhere else in the system." Another emerging factor in asset valuations is the concept of "personal goodwill." Glaser explains that personal goodwill emerged as an issue because of tax vagaries: when practices that are structured as C corporations sell their assets to a hospital, by the time stockholders receive their money, they have been taxed twice. "That's given rise to the argument that what's really being acquired is a personal asset of the shareholders or shareholder," Glaser says. He cites the Martin Ice Cream case as a famous example in which the owner successfully argued that his customer relationships were a personal asset. "There was nothing the corporation had that legally gave it rights to these relationships," he says. "He was able to argue that it was goodwill being acquired." Physicians seeking to take advantage of this potential loophole should be aware of one caveat, Glaser warns. "This is a way for practices to escape the double tax, but 'personal goodwill' requires a separate valuation," he says. "And in a lot of cases, practices don't have the right facts for that." Outcomes and Efficiency With ACOs, medical homes, and other forms of integrated delivery systems on the horizon, payment mechanisms focused on productivity may soon be subject to change, Glaser notes. "The challenge in coming years will be dealing with a variety of payment systems," he says. "It will get trickier and trickier as the market shifts away from fee-for-service medicine to outcomes-, efficiency-, and value-based purchasing. How do you make the transition in your compensation system? How do you balance both when you may have some payors remaining largely fee-for-service?" Current examples of striking this balance mostly involve bonuses, Glaser says. "There are payors and employers putting together systems under which they will pay 10% of a physician's compensation based on outcomes and efficiency measures such as whether they reduce readmission rates, comply with patient satisfaction measures, and so on," he notes. But these systems are about to be subject to complications of their own. "It will get interesting when 50% of the payors are paying fee-for-service, but others are getting into risk models like capitated payments," Glaser says. "You'll see more than just a bonus at risk, and hospitals will have to manage both sides." Payors are also coming under scrutiny thanks to new mandates that dictate how much of their premium dollars have to be spent on health care expenditures. "If 86% of every premium dollar has to be spent on health care, how do they pay that while working in these bonuses for quality and efficiency? It's a whole different story looking at the economics of being a payor," Glaser says. As a result, more and more providers are considering offering their own insurance product, a model pioneered by health systems like Kaiser and Geisinger. "Health systems are saying that if they're going to take on the risk, maybe they should be the payor," he says. Glaser concludes that although multiple factors are driving physicians to become employed, one predominant model for compensation has yet to emerge. "There's so much uncertainty," he says. "I don't know if anyone has a handle yet on where we're headed." What is certain, he says, is that both hospitals and physicians can expect to experience declining revenue if they do not take every opportunity to increase efficiency. "We were sitting with a hospital client once talking to a roomful of physicians about integration," he recounts, "and a doctor said, 'Let me get this straight. You're going to get paid less, we're going to get paid less, but together we're going to make more money?' "That's the big question," Glaser says. "How do we deliver care more efficiently, and thus make more money."Cat Vasko is editor of HealthCXO.