NEGOTIATING ANCILLARY SERVICES WITH PHYSICIANS

Transcription

1 This case discusses a negotiation between a group of physicians and a hospital-based health system for a proposed joint venture. The case highlights the issues surrounding this opportunity and the strategy to begin the negotiation. NEGOTIATING ANCILLARY SERVICES WITH PHYSICIANS This paper discusses a negotiation that will soon be facilitated between a group of physicians and a hospital-based health system. The paper presents an overview of the proposed business joint venture opportunity, the key issues surrounding the opportunity, and the strategy for beginning the negotiation facilitation. The selected strategy is grounded in the professional and academic literature as well as the preferences, priorities, and alternatives available to each party. Overview The shareholders of two gastroenterology medical practices (the medical group) formed a professional association for the purpose of providing endoscopy services in a setting outside of the local hospital. They approached their local health system about a joint venture to provide such services, which are controlled by their state s certificate of need (CON) program. The CON for endoscopy services has been issued to the health system and represents a right to develop and operate these controlled services, similar in nature to that of a license, and restricts other providers from providing similar services. There exists only one health system in the community. The medical group is seeking a way of gaining compensation for the facility fee, also known as the technical charge that may be billed when a patient receives certain procedures at the hospital. The health system is considering a partnership with the medical group for numerous reasons including public and professional relations, the ability to develop other patient care services with the physicians, and the uncertainty of CON laws remaining in effect, which would create open and unrestricted competition with the medical group. The health system has hired a consultant and an attorney to assist in structuring a potential business arrangement, and to help clarify key issues between the parties. The medical group and the health system (the parties) do not yet agree on certain initial assumptions about the scope of the business opportunity or how the economic value of the current business performed by the health system should be determined.

2 Goals for the Negotiation The goals for the negotiation include: the parties agreement on the legality of a business combination; a forum for productive communication between the parties on evaluating the scope of the business opportunity and for the mutual development and approval of key assumptions in the business model; and agreement on the approach to determine the economic value of the existing business that would be transferred to the new joint venture. Key Issues Each party to this negotiation has specific desires for conducting business, which are affected in part by their organizational and personal missions and by the current regulatory and reimbursement environments. These factors create conflict regarding who provides endoscopy services and receives the income. Uncertainty exists also since the health system chief executive is relatively new to the area and has not yet built a strong level of trust among the physicians in the community. There exits a sufficient amount of ambiguity about future changes in reimbursement, particularly if facility technical charges for endoscopy services that are done in physician office settings may be billed to Medicare and Medicaid. There is discussion already among private payers to begin payments to medical practices and Medicare will begin in 2002 to increase payments for the physician s professional services on endoscopy if provided in the office setting. These payments will narrow the gap considerably so that physicians will begin to provide services if health system facilities remain tightly booked. Ambiguity exists also on whether state CON laws may be repealed, which would obviate the need for this proposed venture since the physicians could then bill Medicare and Medicaid for facility technical charges. Lastly, the parties do not have a good understanding of the key issues that affect the determination of fair market value, and remain suspect on how this shall be determined. Strategy Development The scope of this negotiation suggests that traditional negotiation theories may work well to create a salutary environment for communication. Stone, Patterson and Heen (1991) posit a framework for approaching difficult or sensitive negotiations. The process involves taking the position of a third party unrelated to the discussion, taking the position of your opposing party, focusing on your own position, and problem solving. The authors indicate problem solving in terms of reframing interests,

3 options, and standards, getting the right parties to the table, and in negotiating new rules for the deal. Other authors (Fisher and Ury, 1991; Kelley, 2001; Marcus, 1995; McCarthy, 1991; Shell, 1999) indicate that framing positions and interests, particularly in the form of a best alternative to a negotiated agreement (BATNA) can help understand perspectives and yield a more creative approach. Cohen (2001) cites creativity specifically as a means to expand opportunities for agreement through considering unanticipated possibilities. This approach is also supported collaterally by Lum (2001) and Schatzki (2001) who indicate that this expansion of thought engenders trust and integrity, as well as the beginnings of agreements in principle, which are often the means to a final agreement. While BATNA remains a strong classical approach to examining options in a negotiation, McCarthy (1991) espouses that it is the balance of power between parties that is the key element in framing the limits of an acceptable agreement. Gary Burgess and Heidi Burgess have created the concept of estimated alternatives to a negotiated agreement, or EATNA ( Limits to Agreements, 2001). EATNA refers more to each party believing that the other party might have alternative BATNAs, and that this belief can create perceptions of strengths or weaknesses that can improve negotiation outcomes. Glaser (2001), summarizing the work of David Lax and James Sebenius, indicates that alternatives can change during negotiation, so that adaptation to the opposing party s changing BATNA may be necessary. It is this grounded yet fluid approach to negotiation that will apply to the development of the negotiation strategy in this case. Planning for negotiation will begin therefore with a review of the preferences each party has for their business goals, priorities for the implementation of the goals, and alternative actions. Health System Preferences and Priorities The health system would prefer to let the current business practice remain since they own the CON and enjoy the profits from this service line. Strong pressures from physicians to seek part of the profit for work they refer to the hospital are common across many medical specialties, and will remain a prominent threat to hospitals and health systems everywhere. The health system recognizes that relationships with its referring physicians are important, and seeks generally to balance the need to work productively with them with the economic realities of serving their mission. Significant regulatory issues may exist. The health system s legal counsel has indicated that a joint venture with the medical group would be approved by the state s CON office. The only other key regulatory issue is that the business transferred to the joint venture must be valued according to fair market value to

4 remain in compliance with tax statutes and Medicare Anti-kickback laws. The scope of the venture has yet to be determined, since these regulatory issues may affect the patient and payer population that may be served. It is not yet clear whether the entire outpatient endoscopy business is being considered for the joint venture or only the Medicare and Medicaid portion. Compounding this issue is the differential in the physician professional fee beginning in January of At this time Medicare will increase the allowable charge for the physician professional fee charged in the office setting so that it will be approximately 70% of the allowable total of a physician professional charge and a facility technical charge if the service were provided in a hospital setting. This narrow gap could be the BATNA for the medical group to begin performing all its procedures in their offices and forego the effort and unknown risk of entering into a joint venture. The health system could then lose this technical revenue. Similarly a repeal of the state s CON laws would allow for physicians to capture the technical charge and bill Medicare and Medicaid. As indicated earlier, this might also happen with private payers. Private payers have indicated to the medical group that they would entertain discussion about paying either a facility technical charge for procedures provided in their medical offices, or by increasing the professional reimbursement in lieu of a facility fee. This would mean that the health system would no longer be a provider of outpatient endoscopy services for these private payers as well. The overall goal of the health system therefore is one of making the best decision on working with the medical group. This decision may take the form of a joint venture and it may not, but the goal is to make the best overall decision while maintaining relationships in the community. Health System Alternatives The health system has few practical alternatives; they could choose not to partner with the medical group and hope that the CON laws protect them; they could partner with the group in the joint venture or they could seek to partner with the medical group on some other aspect of business. Not Partner with Medical Group. If the health system chose not to partner with the medical group, they could be assured that the group would begin to provide as much of the services

5 in their offices as possible when the reimbursement changes. If office expansion were to be required, they would likely pursue it, depending on the volume of procedures anticipated. The medical group would also seek out private payers to gain the best deal possible in order to capture more business at the expense of the health system. The health system could consider acquiring the medical practice, though this is fraught with operational and governance problems and may be rejected by the medical group. The health system could seek to recruit new or contract physicians to provide the services, but such competition is difficult to manage, costly, provides poor continuity of care, and is often distasteful politically. Joint Venture with Medical Group. The health system could seek to partner with the medical group in efforts to cover the risk of losing the business. This partnership would be able to control somewhat the effect of a repeal of CON laws with respect to the partnered medical group, and would also be able to control the migration of private payers into the partner physician offices. The partnership structure would determine the level of ownership, control, and economic benefit received by each party, though equal ownership is common. This method would reduce the income loss from the hospital somewhat, since they would retain 50% of the after-tax profits. Through creative mechanisms for allocating expenses, the parties could create significant pre-tax benefits that would further mitigate the effect of taxes on distributable income. Partner with the Medical Group in Other Business. The health system could choose not to partner with the medical group and hope for a favorable economic future, but seek alternative business relations with them to build trust and improve their economic position. The health system could choose to contract with the medical group to manage, serve as medical directors, or otherwise staff the endoscopy program which would serve to infuse capital to the medical group while retaining the procedures in the hospital setting. There may be other alternatives to pursuing the venture such as ambulatory surgery. Medical Group s Preferences and Priorities The medical group appears to seek two primary goals: to maximize its economic potential for its

6 shareholders and to provide patient care in an environment conducive to patient and provider convenience. Providing care in the private office setting or in a setting near their private offices allows physicians of many specialties more flexibility, control and is a more appealing environment generally than having to travel to the hospital. Many physicians feel that patients prefer care in these more intimate, personal settings compared with that of a hospital. The ability to combine this enhanced patient care experience with provider convenience is a powerful driver for the medical group. The medical group seeks also to enhance its economic potential. The CON laws restrict market entry in providing endoscopy services for Medicare and Medicaid patients, though the increased allowable professional fees are a favorable change. Partnering with the health system is the only means to gain access to part of the income stream derived from technical charges incident to endoscopy services for these payers at the present time. The volume of Medicare and Medicaid patients, the potential pool of charges, is yet unknown. The medical group would prefer not to compete outright with the health system, but continue affable professional relationships. The group would benefit also from the access to capital that a joint venture partner could provide. This might extend to an additional partner in a joint venture agreement, that of a facility partner to build and manage the real property of a new medical arts building or ambulatory facility. Medical Group s Alternatives The medical group s alternatives nearly mirror those of the health system: they could choose to partner with the health system and gain access to the CON to provide endoscopy services, or to add other ambulatory surgical services as well; they could choose to not partner with the health system and seek to develop its endoscopy services in the office setting, maximizing reimbursement from all payer sources in competition with the health system; or they could explore other business opportunities exclusive of endoscopy services. The strategic action plan focuses now on applying guidance from the literature to the foregone explanation that has outlined each party s interests and alternatives. Strategic Action Plan Guidance from the Literature The framework of Stone et al. (1991) combined with the use of external facilitation by the consultant and attorney serves as the first step in the process. Taking the position of a third party

7 unrelated to the discussion, issues are discussed with each party and summarized for acknowledgment, consistent also with findings of Marcus (1995), Shell (1999) and others (Fisher & Ury, 1991; Kelley, 2001; McCarthy, 1991) in their discussion of framing issues for each party. While each party will necessarily tend to focus positionally, the goal of openly exploring individual and mutual interests should be sought. Creative problem solving espoused by Cohen (2001) in terms of reframing interests and options should be a primary method for examining alternatives to conflicting desires, and a means of recognizing possibility of a future relationship rather than codifying what may be possible. Lastly, getting the right parties and negotiating new rules for the deal (Stone et al.) will foster trust and integrity (Lum, 2001) and serve to nourish stalled discussions by creating agreements in principle (Schatzki, 2001). The Foundation of Improvement / Plan, Do, Study, Act (PDSA) Cycle The quality improvement cycle as reported by Langley, Nolan and Nolan (1994) could be applied in concept and in practice to the process of facilitating the negotiation. The PDSA cycle begins by planning the issues around the problem or challenge area, in this case, the process of facilitating the negotiation. Objective and subjective data (as the positions and interests of the health system and the medical group) are organized to raise questions about the process subject to improvement, i.e., whether the process of negotiation is progressing in a positive direction. Such questions may lead to the development of a process of measurable intervention designed to improve the process. The proposed negotiation would therefore be implemented via meetings with key stakeholders with the authority for making decisions to outline interests, and to discuss them between the parties. Unproductive discussions or positions would be discussed, privately if necessary to determine positions that may be untenable, and the resulting new tact of approach would become the do portion of the cycle. This would be defined as the implementation of the effort intended to produce the change in a documented manner. If negotiations continue productively, the implementation, i.e., the facilitating intervention is studied, comparing findings to expectations, and the subsequent evaluation raises the issue of acting on the now organized information about what changes, if any need to be made to further improve the process or challenge area. Nolan et al. referred to three fundamental questions: what are we trying to accomplish; how will we know that a change is an improvement and; what changes can we make that will result in improvement? Combined with the PDSA cycle, these questions become their foundation of improvement model, and can provide

8 powerful guidance to the process of negotiation. Application to the Negotiation The goals for the negotiation, agreement on the legality of a business combination; a forum for productive communication between the parties on evaluating the scope and key assumptions in the business model; and agreement on the valuation approach are the form driving the function. The parties have engaged a consultant to facilitate discussion and, as a qualified appraiser, to provide an independent opinion of the fair market value of the business. The parties have heard a presentation and legal opinion from their attorney on the broad legality of creating a taxable business with the health system and either the individual physicians or the medical group as a whole as shareholders, depending on the ultimate form of the organization. The step by step process for implementing the plan of negotiation is as follows. 1. Meet with each party to confirm the understanding of the proposed business venture and confirm acceptance of the legal opinion as presented to them. 2. Summarize findings of initial meeting and identify key issues for each party for distribution and clarification. 3. Discuss the importance of key issues with each party, identifying the issues or levels that may be deal-breakers. Identify alternative structures, relationships, compensation, or other items that may expand or alter the area of consideration. 4. Review initial findings with the parties jointly for discussion. Begin to monitor the interaction via the Foundation of Improvement / PDSA process to ensure continued productive consideration and discussion. Challenge assumptions and expand consideration as needed to fully expose key issues and potential deal breakers. Determine the scope of initial consideration of the joint venture: does it include private payers or is it only Medicare and Medicaid? 5. Begin review of historical business data based on the scope of the initial consideration providing a historical summary for the parties to review. Discuss and confirm assumptions for the business stream to be transferred as determined by the appraiser under the standard of fair market value. 6. Perform valuation analysis of the business to be transferred into the new venture, including analysis of return on investment based on the valuation. Present draft results to

9 the parties for discussion. 7. Facilitate follow-up discussion as necessary to modify assumptions, change the business model, or consider other alternatives. Review the process of facilitation and make modifications as necessary to continue productive conversation. Identify new resources that may be necessary to evaluate other issues between the parties as they arise. Conclusion This paper discussed a strategic plan of action for facilitating a negotiation between independent professional parties competing to provide similar services. A process was designed using the professional and academic literature to frame the facts and circumstances of the negotiation. The approach presented is grounded yet fluid enough to ensure that productive discussion has the opportunity to occur between the parties. The business desires of each party will influence strongly the range of possible outcomes, but the framework of this negotiation plan should serve to improve the process over that of an unplanned approach.

10 References Cohen, S. P., (2001). Negotiating Your Way Through the New Health Care Minefields. November 29, 2001, Conflict Research Consortium. Limits to Agreement: Better Alternatives. (2001). November 29, 2001, Fisher, R. & Ury, W. Getting to Yes. New York: Penguin Books. Kelley, S. (2001). 13 Step Mediation - Process Guidelines. November 29, 2001, Glaser, T. (2001). The Power of Alternatives or the Limits to Negotiation. November 29, 2001, Langley, G.J., Nolan, K.K. & Nolan, T.W. (1994, June) The Foundation of Improvement. Quality Progress, pp Lewicki, R., Saunders,D., & Minton, J. (1999). 13 Step Negotiation Process. November 29, 2001, Lum, G. (2001). Assess Trust and Improve Trustworthiness. November 29, 2001, Marcus, L.J. (1995). Renegotiating Health Care. San Francisco: Jossey-Bass. McCarthy, W. (1991). The Role of Power and Principle in Principled Negotiation. November 29, 2001, Schatzki, M. Agreement in Principle. (2001). November 29, 2001, Shell, G.R. (1999). Bargaining for Advantage. New York: Penguin Books. Stone, D., Patton, B., & Heen, S. (1991). Difficult Negotiations with Difficult People. November 29, 2001,