May 14, 2003

STRATEGIC MANAGEMENT OF STRATEGIC MANAGEMENT OF HEALTHCARE ORGANIZATIONSHEALTHCARE ORGANIZATIONS

HOSPITAL/PHYSICIANHOSPITAL/PHYSICIANALIGNMENTSALIGNMENTS

Presented ByMr. Robert G. Rowland, MBA, FACMPE

Principal, ECG Management Consultants, Inc.

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AGENDAAGENDA

What Are We Talking About?

Down Memory Lane – PCPs at Center Stage

Where Are They Now?

The Next Wave – Subspecialty Arrangements

Beyond the Basics

Why Can’t We Get Along?

Case Studies

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LET’S GET TOGETHERLET’S GET TOGETHER

Collaboration in planning a budgeting (e.g., hospital committees).Informal agreements (scheduling of cath lab, OR).Co-marketing (“the best physicians, the best care”).Centers of Excellence, “Institutes,” (bone and joint, sports medicine, heart).Service contracts (ER, employee health).Joint ventures (ASC).Employment of physicians.

Hospitals and physicians (individually or in groups) can work together in a variety of ways from informal,

unstructured arrangements to very complex, legal, and financial relationships. Types of alignment can include:

Hospitals and physicians (individually or in groups) can work together in a variety of ways from informal,

unstructured arrangements to very complex, legal, and financial relationships. Types of alignment can include:

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DOWN MEMORY LANEDOWN MEMORY LANEThe Old ParadigmThe Old Paradigm

The good old days for physicians and hospitals consisted of a cottage industry characterized by a high utilization of care and high profit margins.

The good old days for physicians and hospitals consisted of a cottage industry characterized by a high utilization of care and high profit margins.

High margins.

Full beds.

Long stays.

The “doctor’s workshop.”

“Captain of the ship.”Focus on illness.Unlimited resources.Limited paperwork and interference.High income and status.

HospitalsHospitals PhysiciansPhysicians

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DOWN MEMORY LANEDOWN MEMORY LANEPhysicianPhysician--Hospital Arrangements of the ’90sHospital Arrangements of the ’90s

Hospitals needed to affiliate with physician networks and medical groups to:» Accept global risk.» Gain access to referrals to maintain market share.» Manage information.» Manage pricing structure.

Physicians needed to affiliate with hospitals and other physicians to:» Accept global risk.» Gain access to capital.» Manage information.» Utilize economies of scale for billing and other administrative functions.

Beginning in the late 1980s, the spectre of capitation drove hospitals to acquire physician practices. The

major factors bringing them together included:

Beginning in the late 1980s, the spectre of capitation drove hospitals to acquire physician practices. The

major factors bringing them together included:

ExamplesExamples: Medalia Medical Group, Swedish Partners Medical Group, : Medalia Medical Group, Swedish Partners Medical Group, University of Washington Physicians, MultiCare Medical GroupUniversity of Washington Physicians, MultiCare Medical Group

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DOWN MEMORY LANEDOWN MEMORY LANEPhysician Acquisition Physician Acquisition –– The Picture of SuccessThe Picture of Success

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A variety of factors prevented hospital-affiliated physician networks from succeeding.

A variety of factors prevented hospital-affiliated physician networks from succeeding.

DOWN MEMORY LANEDOWN MEMORY LANEPhysician Acquisition Physician Acquisition –– What Happened?What Happened?

Loss of PurposeLoss of PurposeManaged care revolution stalled, especially capitation.

Less-integrated structures worked (e.g., IPAs).

Loss of ControlLoss of ControlToo much centralization (staffing, billing, IT).

Too little integration (care management, governance).

Failure to create a new culture.

Loss of $$’sLoss of $$’sBuying frenzy inflated purchases.

» Physician compensation not carefully structured (WTMM).

Financial projections were unrealistic.

» Fallacy of physician mismanagement.

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HealthSystemHealthSystem

PPMCPPMC

PCP GroupsPCP Groups

Multispecialty Group

Multispecialty Group

IPAIPA

Multispecialty Group

Multispecialty Group

IPAIPA

From 1995 to 2003, many physician-hospital alignment models proved unsustainable and are no longer viable.

From 1995 to 2003, many physician-hospital alignment models proved unsustainable and are no longer viable.

Popular Physician Relationship Popular Physician Relationship Models Models –– 19951995

HealthSystemHealthSystem

Remaining Physician Relationship Remaining Physician Relationship Models Models –– 20032003

MSOMSO

PCP GroupsPCP Groups

Multispecialty Group

Multispecialty Group

PCP GroupsPCP Groups

MSOMSO

WHERE ARE THEY NOW?WHERE ARE THEY NOW?

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WHERE ARE THEY NOW?WHERE ARE THEY NOW?Current Status of Primary Care NetworksCurrent Status of Primary Care Networks

Most health systems that are in deep cannot/will not, get out.

Regardless of strategic value, the losses have been unsustainable.

Many are restructuring – some achieving “breakeven.”

Some have sold, transitioned, or downsized networks.

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WHERE ARE THEY NOW?WHERE ARE THEY NOW?PCP Networks Remain Strategically ImportantPCP Networks Remain Strategically Important

Market acquisition.

Community health opportunities.

Leverage with specialists (pay attention to this one).

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THE NEXT WAVETHE NEXT WAVEPressure, Pressure, PressurePressure, Pressure, Pressure

The last 15 years have resulted in new pressures for both hospitals and physicians.

The last 15 years have resulted in new pressures for both hospitals and physicians.

Compliance and compensation concerns.

“New revenue” mandate.

Information technology upgrade requirements.

Operational inefficiencies.

Declining compensation.

Limited access to capital.

Paperwork and the “hassle factor.”

Declining professional status.

Redistribution of power and income.

Accelerating trend to group practice.

HospitalsHospitals PhysiciansPhysicians

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0%5%

10%15%20%25%30%35%40%45%50%

Financial pressures brought on by the rise of managed care and declining reimbursements have played a large role in recent years in changing the traditional physician services

industry, with increases in physician incomes for most specialties falling behind inflation from 1989 through 1998.

Financial pressures brought on by the rise of managed care and declining reimbursements have played a large role in recent years in changing the traditional physician services

industry, with increases in physician incomes for most specialties falling behind inflation from 1989 through 1998.

THE NEXT WAVETHE NEXT WAVEPhysiciansPhysicians

Consumer Price Consumer Price Index (36%)Index (36%)

All Specialties All Specialties (25%)(25%)

Source: Medical Economics Continuing Surveys, 1999 AAMC Data Book. Cardiology Data Source: Medical Group Management Association Compensation and Production Survey, 1993–1999.

Increase in Increase in Earnings,Earnings,19891989––19981998

3%

GeneralSurgery

InternalMedicine

Pediatrics Orthopedics FamilyPractice

OB/GYN

9%

22%27%28%

34%

Noninvasive Cardiology

Invasive Cardiology

35%41%

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100,000

200,000

300,000

400,000

500,000

600,000

1995 1997 1999 2001Inpatient Days Outpatient Visits

1 American Hospital Association: Hospital Statistics, 2003.

Over the last decade, hospitals have experienced a significant increase in outpatient services, while inpatient services have

remained relatively flat or declined in certain areas.

Over the last decade, hospitals have experienced a significant increase in outpatient services, while inpatient services have

remained relatively flat or declined in certain areas.

Inpatient and Outpatient ServicesInpatient and Outpatient Services11

THE NEXT WAVETHE NEXT WAVEAmbulatory Care Ambulatory Care –– The Business is BoomingThe Business is Booming

But is there enough common ground to motivate hospitals and physicians to work together?

Inpa

tient

Day

s an

d O

utpa

tient

Visi

ts (0

00s)

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THE NEXT WAVETHE NEXT WAVEAlternative ApproachesAlternative Approaches

CollaborateCollaborateBuild branded products and services with physicians.Develop joint ventures.Pursue joint contacting arrangements.Share development of strategic plans and budgets.

CoexistCoexistInvest and support selected physician initiatives.Expand physician participation in management/governance.Assure favorable physician reimbursement terms with system-owned health plan.Resist initiatives that will be perceived as threatening to physician interests.

CompeteCompeteAcquire specialty and primary care practices.Recruit/employ replacement physicians.Leverage payor relationships to maximize hospital payments.Develop/expand hospital-owned ancillary and ambulatory services.

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The large financial losses experienced by most hospital-affiliated primary care networks have brought renewed focus on hospital/physician relationships. Many hospital systems are rethinking their primary care strategies and considering

subspecialty relationships, for the following reasons:

The large financial losses experienced by most hospital-affiliated primary care networks have brought renewed focus on hospital/physician relationships. Many hospital systems are rethinking their primary care strategies and considering

subspecialty relationships, for the following reasons:

THE NEXT WAVETHE NEXT WAVEThe Reemergence of Subspecialty Relationships The Reemergence of Subspecialty Relationships

The relationships provide the ability to integrate clinical care and governance.

With declining specialist payments, specialists are pursuing a variety of revenue-enhancing initiatives:

» Specialty hospitals.

» Ambulatory care centers.

» Specialty carve-out networks.

The Health Care Advisory Board estimates that 35% to 45% of a healthcare system’s revenues are vulnerable to defecting specialists.

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FACING THE FUTURE TOGETHERFACING THE FUTURE TOGETHER

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FACING THE FUTURE TOGETHERFACING THE FUTURE TOGETHERThe Strategic DriversThe Strategic Drivers

1.1. Outpatient services are more attractive from multiple perspectivOutpatient services are more attractive from multiple perspectives.es.Higher growth – Better payor mix – Improved profitability – Facilitation of expanded patient services.

2.2. Physicians desire additional technical reimbursement and controlPhysicians desire additional technical reimbursement and control..Physicians seek new and expanded treatment locations for their patients; at the same time they look for additional sources of revenue from each patient encounter to offset declining reimbursement and increasing overhead.

3.3. Affiliations can assist in physician recruiting.Affiliations can assist in physician recruiting.New recruits view an opportunity for additional revenue from the technical services provided to their patients as a sign of a group’s strength and increasingly will not consider joining groups without this advantage.

44 Patients prefer the convenience of nonhospital care settings.Patients prefer the convenience of nonhospital care settings.Parking, registration, finding where to go – everything is easier in an off-campus setting.

Physicians are motivated and well-positioned to be active partners in developing and servicing the

outpatient business and want to be involved.

Bottom LineBottom Line

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FITTING THE FUTURE TOGETHERFITTING THE FUTURE TOGETHERShow Me the Money!Show Me the Money!

Outpatient service affiliations are on the rise1 and offer physicians and hospitals a vehicle to increase market competitiveness, align incentives, and increase revenue, while maintaining autonomy.

Outpatient service affiliations are on the rise1 and offer physicians and hospitals a vehicle to increase market competitiveness, align incentives, and increase revenue, while maintaining autonomy.

Benefits to HospitalBenefits to HospitalSecures opportunity to expand services in high-growth areas of the community.Offers a new delivery model to the community (lower cost, ease of access).Through aligned incentives, supports collaboration and trust between hospital and physicians.

Benefits to PhysiciansBenefits to PhysiciansDiversifies revenue and increases compensation.Supports recruitment and retention.Secures strong market advantage –makes the hospital a partner instead of an adversary. Enables physician voice in facility’s operation.

Shared BenefitsShared BenefitsPotentially high return on investment.Improved patient care in convenient setting.Increased collaboration and trust.Aligned incentives.

1 According to a survey by the Governance Institute, eight of 10 hospitals face at least one competing physician-owned or co-owned venture; over half face three or more such ventures.

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BEYOND THE BASICSBEYOND THE BASICSFive Optional Alignment StructuresFive Optional Alignment Structures

Equity Joint Ventures (ASC, Imaging, etc.)Equity Joint Ventures (ASC, Imaging, etc.)JV scope and size vary from discreet services to free standing specialty hospitals

Strategic partners beyond physicians may be included (e.g., facilities and technologies).

Partners share risk and reward proportional to investment risk.

Hospital-based, outreach-based and mobile services.

Reinvestment exposes partner to capital calls.

Buy/sell potential is controlled to protected all partners.

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BEYOND THE BASICSBEYOND THE BASICSFive Optional Alignment Structures Five Optional Alignment Structures (continued)(continued)

HospitalHospital--WithinWithin--aa--HospitalHospitalHospital retains ownership and control of a clinical service line including revenues.An entire clinical service is “carved out” for purposes of management, and financial and operational reporting (e.g., service line revenue and cost accounting).Physician specialists together with hospital executives compose a service line executive management committee.A dedicated service executive is hired to report to the executive management committee.Medical directors are assigned.A co-management agreement is put into place with bonus opportunities.Other arrangements are “layered-in” (e.g., equity JVs and professional services).

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BEYOND THE BASICSBEYOND THE BASICSFive Optional Alignment Structures Five Optional Alignment Structures (continued)(continued)

Clinical Service Line CoClinical Service Line Co--ManagementManagementTime limited, renewable, contractual arrangement.

Physician time contracted to focus on clinical, operational, financial and strategic efficiency and effectiveness.

Payment in the aggregate at “reasonable rates” with hourly payments and bonus payments for clinical quality and service.

Contract(s) approved annually by the hospital board through the CEO.

Medical director contracts included with the co-management managers.

Physicians are active managers.

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BEYOND THE BASICSBEYOND THE BASICSFive Optional Alignment Structures Five Optional Alignment Structures (continued)(continued)

Under ArrangementUnder ArrangementProvided for within Stark II legislation.

Serve useful for a discreet line of business (e.g., cath lab, imaging suite, operating room).

Hospital retains actual ownership of service line but partners with physicians based upon what physicians bring to the “table” (e.g., facilities, clinical technologies, clinical staff, supplies, management).

Hospital must retain control over service and provide a “reasonable” level of service to partners based upon what each brings and risks assumed.

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BEYOND THE BASICSBEYOND THE BASICSFive Optional Alignment Structures Five Optional Alignment Structures (continued)(continued)

Full IntegrationFull IntegrationSubstantially all the specialists required as employed by the hospital or health system.

Practice assets are often purchased.

Employment agreements are provided.

Physicians become leaders in full program management and strategic and business decision making.

Compensation provides secure base salaries and bonus opportunities for full program performance.

Physicians participate in capital investments strategies and methods.

Physicians may have discreet equity opportunities.

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BEYOND THE BASICSBEYOND THE BASICS

Financing PlanFinancing Plan

Hospital/ Physician

Equity

Hospital/ Physician

Equity

External Financing

(Banks/ Vendors)

External Financing

(Banks/ Vendors)

Hospital/ Physician Debt

Hospital/ Physician Debt

Equity Options (Puts/Calls)

Equity Options (Puts/Calls)

Equity Purchase Schedule

Equity Purchase Schedule

Among the crucial design issues in affiliations are corporate structure, governance structure, financing arrangements,

determining which services/facilities are included, management structure, and operations structure.

Among the crucial design issues in affiliations are corporate structure, governance structure, financing arrangements,

determining which services/facilities are included, management structure, and operations structure.

Governance StructureGovernance Structure

Hospital ControlHospital Control Equal Share (50/50)Equal Share (50/50) Physician ControlPhysician Control

PartnershipPartnership Limited Liability Company (LLC)

Limited Liability Company (LLC)

S-Corporation/ C-Corporation

S-Corporation/ C-Corporation Tax-ExemptTax-Exempt

Corporate StructureCorporate Structure

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BEYOND THE BASICSBEYOND THE BASICS (continued)(continued)

Management StructureManagement Structure

Hospital ManagementHospital Management CombinationCombination Independent Management

Independent Management

New Facility and Services

New Facility and Services

Existing Facility With Expanded

Services

Existing Facility With Expanded

Services

Carved-Out Services in

Existing Program

Carved-Out Services in

Existing ProgramExisting Facilities

and ServicesExisting Facilities

and Services

Services PlanServices Plan

Operational StructureOperational Structure

Hospital EmployeesHospital Employees Joint Venture/ Independent Employees

Joint Venture/ Independent Employees

External OperatorExternal Operator

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BEYOND THE BASICSBEYOND THE BASICSOh Yea …Will I Go to Jail?Oh Yea …Will I Go to Jail?

Antikickback statute.

The Stark Law.

Hospital tax-exempt status issues.

Reimbursement considerations.

Securities law compliance.

Certificate of need.

Licensure.

Corporate practice of medicine.

Fee splitting.

Along with the financial, governance, operational, and strategicconsiderations, there are several legal considerations that may affect the structure of the joint venture. These considerations are covered

more thoroughly in ATTACHMENT A and include the following:

Along with the financial, governance, operational, and strategicconsiderations, there are several legal considerations that may affect the structure of the joint venture. These considerations are covered

more thoroughly in ATTACHMENT A and include the following:

Federal LawFederal Law State LawState Law

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WHY CAN’T WE GET ALONG?WHY CAN’T WE GET ALONG?Barriers to AlignmentBarriers to Alignment

Loss of revenue.

Loss of control.

Legal concerns.

Development complexities.

Relationship complexities.

Snowball effect.

Access to Capital.

Exposure to additional risk.

Noncompete agreements.

Development complexities.

Relationship complexities.

Lack of management expertise.

Retained earnings.

Although the benefits are compelling, the barriers to entry can be significant. Successful joint ventures are built from trust,identification of common goals, and a clear business plan.

Although the benefits are compelling, the barriers to entry can be significant. Successful joint ventures are built from trust,identification of common goals, and a clear business plan.

Hospital BarriersHospital Barriers Physician BarriersPhysician Barriers

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WHY CAN’T WE GET ALONG?WHY CAN’T WE GET ALONG?The Culture ThingThe Culture Thing

BigCommunity FocusLong-Range PerspectiveManagement ControlBureaucraticDelegated Decision MakingOrganizational FundsNeed and Want Integration With PhysiciansAddress Potential Differences

SmallInternal FocusShort-Term PerspectiveOwner (Doctor) ControlAnarchisticConsensus-BasedPersonal FundsNeed, but Do Not Want, Integration With HospitalsAvoid Confrontation

Many hospitals and physicians overlook the inherently different perspectives held by the organizations.

Many hospitals and physicians overlook the inherently different perspectives held by the organizations.

HospitalsHospitals Medical Groups/PhysiciansMedical Groups/Physicians

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CASE #1: BMC CARDIOLOGY NETWORKCASE #1: BMC CARDIOLOGY NETWORKFrameworkFramework

The PlayersThe PlayersPhysicians:» Cardiology Group A (10 cardiologists).» Cardiology Group B (10 cardiologists).

Hospitals (both hospitals are part of Sutter Health System):» BMC.» Riverview General Hospital (RGH).

The EnvironmentThe EnvironmentCardiology Group A is a well-organized medical group that has a dominant market position and practices primarily at RGH.Cardiology Group B is in San Francisco and practices at BMC, with significant competition from other nationally recognized cardiology programs. BMC and RGH are both part of Sutter Health System but have recently experienced increasing competition internally and externally.

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As a result of the planning process, the following decisions were made by the stakeholders:

As a result of the planning process, the following decisions were made by the stakeholders:

CASE #1: BMC CARDIOLOGY NETWORKCASE #1: BMC CARDIOLOGY NETWORKProcess ResultsProcess Results

The two medical groups would merge.

A unified cardiology program encompassing the two facilities would be created.

The two hospitals would provide additional financial and programmatic support.

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CASE #1: BMC CARDIOLOGY NETWORKCASE #1: BMC CARDIOLOGY NETWORKCardiology Program DesignCardiology Program Design

BMCBMC RGHRGH

Regional Cardiology Program

Regional Cardiology Program

Merged Cardiology Group

Merged Cardiology Group

$6.0 Million Capital Commitment

$1.0 Million Capital Commitment

Physician recruitment.» One cardiovascular surgeon.» One EPS physician.» One new cardiology chief.

Consolidated medical staff.Merged medical direction.Unified program vision and development.Commitment to expand and/or develop.

» Cath labs.» EPS lab.» Cardiac care unit.» Diagnostic rooms.» Ancillary space.

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CASE #2: ORTHOPEDIC JOINT VENTURECASE #2: ORTHOPEDIC JOINT VENTUREThe Players, Problem, and ProcessThe Players, Problem, and Process

The PlayersThe PlayersACME Orthopedic Group (AOG) – seven physicians, very successful and aggressive medical group.Memorial Hospital – 300-bed hospital in competitive market.

The ProblemThe ProblemAOG acquired land for a new medical office building and surgery center away from the Memorial Hospital campus.AOG represents a very large share of hospital volume.The hospital must come up with an attractive alternative.

The ProcessThe ProcessShared planning occurred around:

Office space.Ambulatory surgery needs.Managed care threat.Research institute.

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920

6471,567

3,877

All Cases Orthopedic Cases

1,002

1,0802,082

5,785

All Cases Orthopedic Cases

CASE #2: ORTHOPEDIC JOINT VENTURECASE #2: ORTHOPEDIC JOINT VENTUREAOG’s ImportanceAOG’s Importance

Inpatient Surgery CasesInpatient Surgery Cases Outpatient Surgery CasesOutpatient Surgery Cases

AOG (58.7%)

Other Orthopedic

Surgeons (41.3%)

Orthopedic Cases (29%)

OtherCases(71%)

AOG (48.13%)

Other Orthopedic

Surgeons (51.87%)

OrthopedicCases (27%)

OtherCases(73%)

AOG is a community leader in orthopedics and is very important to the success of Memorial Hospital’s orthopedic service line,

contributing over half of Memorial’s orthopedic surgical volume.

AOG is a community leader in orthopedics and is very important to the success of Memorial Hospital’s orthopedic service line,

contributing over half of Memorial’s orthopedic surgical volume.

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CASE #2: ORTHOPEDIC JOINT VENTURECASE #2: ORTHOPEDIC JOINT VENTUREThe ResultsThe Results

AOG, Memorial, and other physicians will participate in a joint venture to construct and operate an ambulatory surgery center on the Memorial campus.

AOG is to be the principal tenant in an office building to be constructed on the Memorial campus.

AOG, Memorial, and other providers will collaborate to develop an “Orthopedic Institute,” designed to meet provider and community needs.

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CASE #2:CASE #2: ORTHOPEDIC JOINT VENTURE ORTHOPEDIC JOINT VENTURE Orthopedic Institute StructureOrthopedic Institute Structure

Relationships among participants in the institute, ambulatory surgery center, medical office building,

and contracting network are illustrated below.

Relationships among participants in the institute, ambulatory surgery center, medical office building,

and contracting network are illustrated below.

ResearchEducationServices DevelopmentMarketing

Contract NegotiationContract AdministrationProvider Network ManagementMedical Management

AOGAOG

Orthopedic Institute at Memorial

Orthopedic Institute at Memorial

MemorialMemorial

Other Musculoskeletal

Providers

Other Musculoskeletal

Providers

Contracting Network

Contracting Network

AmbulatorySurgery Center

AmbulatorySurgery Center

Medical OfficeBuilding

Medical OfficeBuilding

(Owner)

(Tenant)

20%

40%

40%

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CONCLUSIONSCONCLUSIONS

Consider relationships with a full range of potential partners (even enemies).

Develop and refine multiple initiatives.

Realize that financial pressures facing physicians are likely tocontinue for some time, resulting in increased friction between and among primary care providers, specialists, and healthcare systems. It will not get better.

Involve physicians and board members in all stages of the planning process.

Although legal issues are shaping or narrowing hospital/ subspecialty relationship possibilities, do not allow the legal landscape to drive your strategy.

Design strategies with flexibility in mind, because the balance of power between medical groups, hospitals, and other providers could change over time and expose your vulnerabilities.

ATTACHMENT AATTACHMENT ALEGAL CONSIDERATIONSLEGAL CONSIDERATIONS

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LEGAL CONSIDERATIONSLEGAL CONSIDERATIONSA. Federal LawA. Federal Law

Antikickback StatuteAntikickback Statute – Federal statute prohibits the giving or receiving of remuneration in return for goods or services reimbursable by Medicare or Medicaid. Joint ventures should seek to conform to elements of established regulatory “safe harbors.” In order to obtain protection offered by a safe harbor, all elements must be satisfied. However, the failure to comply with a safe harbor is not a violation of the statute.

The Stark LawThe Stark Law – Federal statute prohibits the rendering of certain “designated health services” reimbursable under Medicare or Medicaid by entities that have a “financial relationship” with the patient’s referring physician unless a regulatory exception is applicable. Established exceptions to the Stark Law accommodate many typical relationships between hospitals and physicians.

Hospital TaxHospital Tax--Exempt Status IssuesExempt Status Issues – Federal tax laws prohibit a tax-exempt entity from bestowing a private benefit or inurement on individuals or taxable entities. Tax-exempt hospitals must operate exclusively in furtherance of their charitable purposes, and a private benefit should only be incidental to any hospital activity. Regulations and published Internal Revenue Service rulings provide extensive guidance to the structuring of tax-exempt hospital/physician joint ventures and other business relationships.

A-1

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LEGAL CONSIDERATIONSLEGAL CONSIDERATIONSA. Federal Law A. Federal Law (continued)(continued)

Reimbursement ConsiderationsReimbursement Considerations – Reimbursement under Medicare may vary significantly based on the setting in which the service is provided and the status of the service provider. Careful consideration should be given to the potential change in reimbursement resulting from a shift of patient services from a hospital setting to an outpatient joint venture environment.

Securities Law ComplianceSecurities Law Compliance – Federal and state laws regulate the offering of ownership interests in business ventures (i.e., securities). These laws generally seek to assure that appropriate written disclosure of the facts regarding the potential risks of the investment is made in advance by the offeror to the investors. There are broad exemptions available under federal and state laws, which will permit the offering of joint venture securities to “qualified” investors if appropriate notice is given to state regulators.

A-2

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LEGAL CONSIDERATIONSLEGAL CONSIDERATIONSB. State LawB. State Law

Certificate of NeedCertificate of Need – Many states require that certain providers (e.g., hospitals) seek prior approval for a purchase of capital equipment or to establish a new healthcare facility or service. In some cases financial thresholds are established so that only significant expenditures or projects are subject to these requirements. The requirements and procedural rules vary from state to state.

LicensureLicensure – Most outpatient healthcare joint ventures require the issuance of a state license for the services they provide (e.g.,ambulatory surgery centers). This is true even if the service provided by the joint venture would not require a separate license if delivered in a hospital or a physician’s office. The requirements may vary from state to state.

A-3

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LEGAL CONSIDERATIONSLEGAL CONSIDERATIONSB. State Law B. State Law (continued)(continued)

Corporate Practice of MedicineCorporate Practice of Medicine – All states prohibit the practice of medicine by a person or entity that is not licensed by that state to practice medicine. Some states, however, refuse to license an entity that is not solely owned and managed by a physician licensed in that state and prohibit the employment of physicians by nonlicensed entities for the purpose of delivering medical care. The specific requirements vary from state to state. In many states in which this prohibition exists, a joint venture between a physician (or his/her professional corporation) and a hospital would be limited to the ownership or management of a facility or the employment of nonphysician personnel in a facility in which the medical services are provided by a licensed physician.

Fee SplittingFee Splitting – Most states prohibit the sharing of a physician’s professional fee with another physician who did not share in the delivery of the medical care that generated the fee or with a nonphysician under any circumstances. These laws can prevent a joint venture from sharing the revenue generated by the physicians utilizing the joint venture facility or, at a minimum, they will affect the design of the structure of the venture.

A-4