Knowing the Difference between Comanagement Arrangements and Medical Directorships-And Why it Matters

Most hospital executives are at least familiar with the term “comanagement arrangement,” but the concept has different meanings for different people.

Broadly speaking, a comanagement arrangement is an agreement under which physicians contract with hospitals to manage care delivery for a given service line in partnership with hospital administration. The physicians are involved in managing daily operations and incentivized to achieve target goals for agreed-upon performance measures.

But before exploring the details of what a comanagement arrangement is, it may be helpful to understand what it is not. Specifically, a comanagement arrangement is not a medical directorship. A medical director provides leadership to the service line and assists with operational, fiscal, and human resource management.

While a comanagement agreement includes the same services, it goes further. Physicians involved in a comanagement arrangement are able to offer more in-depth services than a single medical director could and are more coordinated with hospital management.

The difference between the terms is neither trivial nor academic—and it can have a direct impact on how fair market value (FMV) is determined.

Understanding the Difference

Some cynical observers have described comanagement as “medical directorship on steroids”—a thinly veiled justification to increase medical directorship hours and hourly rates. Such allegations might ring true if comanagement was simply a means for medical directors to make more money while maintaining an operational status quo. But additional compensation for medical directors—even when warranted for achieving extraordinary results—does not transform a directorship into a comanagement service.

A true comanagement arrangement is more than just a few administrative hours provided by physicians, or a third-party management fee where the hospital has little administrative involvement. If done correctly, comanagement arrangements can be powerful tools to drive value across an enterprise, especially for hospital patients. Comanagement agreements should be structured in a thoughtful way that coordinates services among multiple physicians and hospital leaders. The service line should experience an increase in quality and deliver a more efficient service to patients as a result.

The two arrangements may incorporate aspects of each other, so it is not surprising that “comanagement” means different things to different people. The following chart helps illustrate the differences between the two arrangements:

Getting the Valuation Right

Failing to distinguish between a medical directorship and comanagement arrangement will directly impact the valuation of the agreement. A hospital could overpay physicians if a medical directorship is valued as a comanagement arrangement, or could underpay them if the physicians are providing a more comprehensive service offering.

The process of assessing the value of a comanagement arrangement is more complex than it is for a medical directorship on account of the additional providers involved and coordination required in executing the agreement. Medical directorships are typically valued based on time spent.

Failure to appropriately value your arrangements can have two major impacts.

Getting What You Pay For

A comanagement arrangement without the proper incentives can function as more of a medical directorship. Incentive metrics are frequently overlooked in FMV and CR opinions, and valuators should carefully scrutinize them. Health systems are unlikely to see a positive shift in service line performance if compensation is not sufficiently tied to the incentive component, or if performance is already at the target metric and no improvements need to be made. Performance measures must be based on some level of improvement to the service line; otherwise, physicians are being paid to maintain the status quo.

Government Scrutiny

Organizations that fail to appropriately structure and value comanagement arrangements can run afoul of federal regulations. In August 2018, William Beaumont Hospital was ordered to pay $84.5 million to settle false claims act allegations arising from improper payments to referring physicians. The government cited a whistleblower who stated that cardiologists were provided medical directorships in which little to no work was performed, and that the true purpose of the payments was to induce referrals.

Part of the issue in the Beaumont case stemmed from the hospital paying for medical directorships separately from the comanagement arrangement—a commercial reasonableness concern, as organizations are more likely to pay for the same service twice. Because the base fee services are very similar, medical directorship duties are often included in the comanagement agreement. If medical directorships are paid separately from the comanagement arrangement, then organizations run the risk of stacking services and paying for services where nothing was provided.

Keeping up with Your Comanagement Arrangements

Since comanagement agreements are, by nature, meant to move specific performance goals forward, service line executives should review the performance metrics on an annual basis. Do the metrics improve the service line or simply maintain it? If the service line is not improving, then physicians should not continue receiving payment for performance metrics.

Additionally, if a management entity is expected to transform the service line, more compensation should be available to the physicians. But this arrangement should not be continued into perpetuity; if incentive compensation is being paid, this means performance targets are being met, and as such, new goals should be developed for the next arrangement year.

Given this complexity of these arrangements, and the potential for their goals to change over time, comanagement agreements should be periodically reviewed by an independent appraiser to ensure FMV and CR are being met.

Published June 26, 2020