Many organizations need to add physicians to their medical staff, but most find that the more they explore, the more confused they become. Our clients most frequently cite that existing practices simply aren’t willing to take the risk, that the hospital doesn’t have the documented community need or employment infrastructure, or that it is just too costly.

The issue can’t be ignored. For various reasons, traditional employment may not be feasible. So what is one to do? We advise clients to consider embedding a physician into an existing independent practice.

What Is It and Why Should I Do It?
“Embedding” means that the hospital employs the physician, but allows him or her to practice with an independent practice.  The concept may initially seem foreign, but keep reading. Below is a list of reasons to do so:

•   Embedding is less costly and quicker to initiate than starting a solo practice or building a new group practice from scratch
•  It is an avenue by which a hospital can work in cooperation and not competition with an existing independent group practice
•  The physician is not isolated but, in fact, is surrounded by experienced colleagues and support staff
•  Productivity increases are common because the physician is located someplace that’s familiar to patients and referring physicians alike
•  Overhead reimbursement is not limited to incremental expenses
•  Paybacks and forgiveness are not associated with the agreement
•  The physician is not on the group’s payroll, so they are not at risk for guaranteeing a salary after the income guarantee runs out

Important Considerations
Just like any other, this model has limitations. Our experience finds that it is better suited for those looking for a short term solution and those that have the capabilities to maneuver the operational obstacles that arise. Consider the following:

•  Sorting through the Stark and Anti-Kickback statutes
•  Accommodating different fee schedules and different insurance plans that the embedded physician will bill under the hospital’s tax ID number
•  Establish billing protocol, since it can be done by the hospital or group’s
space utilization
•  “Exclusivity” of the block leasing arrangement

Set expectations.  Let the physician and group know that this is a short term situation. At the beginning of discussions, talk to the group about transitioning the physician into the practice after 1, 2, or 3 years. That should be time enough for the physician to establish a practice and prove themselves to the group and the medical community.

To satisfy arm’s length requirements, use an experienced third party to determine fair market value for the payments made by the hospital to the group for the space, staff, and services it provides to the embedded physician.  An experienced healthcare attorney will need to craft an appropriate agreement that meets necessary requirements. Said agreement should provide for a term of at least 1 year. When we are retained to determine FMV, we can also work with an attorney to structure the agreement.  Most clients find this service valuable because it saves them time.

You will also want to make sure the group has an appreciation of the operational difficulties that are inherent in this type of arrangement. Before the agreement is signed, make certain that both parties are comfortable with the figures specified in the agreement.  Not doing so will only create problems that aren’t easily undone. For instance, Stark mandates that, “…parties may not change the rental charges at any time during the term of the agreement. Parties wishing to change the rental charges must terminate the agreement and enter into a new agreement with different rental charges and/or other terms; however, the new agreement may be entered into only after the first year of the original lease term (regardless of the length of the original term).” In short, it is better to know that the group is not comfortable relinquishing 3 exam rooms on Fridays or that an extra day at a satellite location creates a problem before the agreement is executed.

Embedding physicians is not always a viable solution. However, it is a creative alternative when traditional methods of adding physicians, like employment, aren’t feasible.

Neal D. Barker

Partner and Managing Director, Compensation and Compliance