Practice Management: What Surgeons Need to Know about Financial Arrangements with Hospitals

Frank L. Fazzalari, MD, MBA
Chair, STS Workforce on Practice Management

STS News, Winter 2020 — Practicing cardiothoracic surgeons have multiple pathways for entering into formal financial arrangements with hospitals or health systems. The most common include physician employment agreements, medical directorships/co-management agreements, and professional service agreements. Understanding the intricacies of each pathway can help surgeons choose what will be most beneficial for their careers.

Physician Employment

The most common situation in current cardiothoracic surgery practice in the United States is a physician employment agreement, or PEA. A majority of cardiothoracic surgeons today are hospital employed, whether it be in an academic setting, a community hospital, or a large, multihospital health system. In this scenario, individual surgeons enter into a contract with the hospital or, more specifically, a multispecialty group that is part of the hospital system.

The major components of a PEA include the length of term, compensation methodology, provision of support personnel, responsibilities (clinical, administrative, teaching, research), restrictive covenants, and coverage of malpractice and practice expenses.

Contracts typically last from 1 to 5 years, and there often are provisions for automatic renewal based on satisfactory performance. It should be noted, however, that most contracts also have the ability for either party to withdraw with 90-day notice, generally without cause.

Compensation can be complicated, and there is no perfect method. Most contracts have a base salary, plus a bonus component related to productivity (such as Relative Value Units) and/or other benchmarks such as quality outcomes and administrative or academic performance. Restrictive covenants (also known as noncompete clauses) are almost always present and enforceable, so care must be taken to understand these upfront.

A majority of cardiothoracic surgeons today are hospital employed.

Although it can be expensive, surgeons may want to consult an experienced health care attorney when negotiating a PEA. Good attorneys are skilled at understanding and negotiating the various subtleties of these contracts. Also, it may be useful to have someone on board early if issues should arise years later.

Co-Management Arrangement

In a co-management arrangement, one physician out of a practice is hired and paid by the hospital to serve as a medical director of a particular service line. For example, a senior cardiologist from a private practice would serve as the cath lab director at a hospital and receive a stipend for that service. Typically, the individual will maintain a private clinical practice as well.

This is beneficial for the hospital because it automatically establishes a level of expertise in the management of the service line. Co-management arrangements are particularly useful for new service line development such as establishment of a transcatheter aortic valve replacement program or a minimally invasive surgery program. The medical director can assist in strategic planning and budgeting, value purchasing, and clinical protocol/pathway development.

The stipend for this service (like all payments to physicians from hospitals) must be of fair market value, and work hours are usually formally documented. This is to ensure that neither party is violating federal regulations prohibiting the exchange of anything of value for referrals to a hospital that receives US taxpayer funding through the Centers for Medicare & Medicaid Services.

Professional Service Arrangement

In a professional service arrangement (PSA), a group of private practice cardiothoracic surgeons would provide the spectrum of hospital or health system. This would include 24/7 clinical coverage, medical directorship duties, and quality assurance. That group may or may not be the only group at that hospital, but it usually is exclusive.

The group still remains an independent private practice and may have arrangements with other independent hospitals in the area, depending on geography and terms of the agreement. The main advantage for the hospital is that the facility has stable quality coverage for a service line that it can then use to attract other high-quality physicians such as interventional cardiologists or pulmonary oncologists.

Usually in the PSA, the hospital will pay a management fee to the group, and then either the group will collect their own professional fees or the hospital bills for the professional services. Although the group still remains in private practice—with all the associated overhead costs—the PSA allows for a lot of freedom and flexibility without the restrictions of complete hospital employment. Since the group often represents the entire service line, it has significant bargaining power with the hospital. Terms of the arrangement typically are 1 year.

Regardless of the specific type of agreement, all hospitals generally want the same things: to be profitable, be the local market share leader, and boast a high-quality program. Hospitals also want to encourage a positive culture that attracts and retains the most talented physicians, nurses, and technicians—and therefore also attract the most patients for care. Cardiothoracic surgeons who can help deliver these goals will be the most successful.


View more practice management columns at sts.org/practicemanagement.