Professional service agreements offer hospitals an alternative to employing physicians. If they are set up correctly—both financially and in terms of expectations—these agreements can benefit the hospital, the physicians, and the patients. With labor costs steadily rising at hospitals, these agreements can also offer relief in terms of paying benefits to some of the highest-paid members of the medical team. Such arrangements offer facilities a way to save in their billing departments, too. However, along with the pros, there are cons to using these agreements versus employing physicians, so if you haven’t looked at your PSAs in a while, it may be time to pay them a bit more attention.
In the 1990s, many hospitals believed that managed care and capitation were a foregone conclusion, so hospitals built integrated networks, bought primary care practices, and employed physicians in record numbers. Alas, capitation was mostly hype and petered out. For a while after, hospitals were less than eager to employ doctors and many opted to contract using PSAs, among other agreements, with doctors instead.
But in the past few years there has been a resurgence in the number of hospitals employing physicians. When the recession hit a couple of years ago, physicians found themselves running for financial cover, and they sought shelter from their local hospital. Simultaneously, hospitals were left trying to dig themselves out of debt brought on by the variable-rate bond market nosedive, and bringing in more doctors to help grow more business seemed to be a great strategy.
Physician compensation expert Max Reiboldt, president and CEO for The Coker Group, an Alpharetta, GA-based healthcare management consulting firm, refers to these PSA arrangements as "employment lite”—and he says they can offer a good opportunity for both hospitals and physicians. Unlike traditional service agreements, in which a person is hired for a specific function or for limited service, PSAs allow the facility to work with the doctors, allowing them to keep their independence while the hospital can build in quality measures to help create greater alignment for the physician with the hospital’s goal.
"A PSA takes the shape and look of employment, but the physician or practice retains its independence, and if the deal doesn’t go well, then the doctor can go back to private practice,” he says.
PSAs mean that physicians are considered self-employed and therefore they need to supply their own health insurance, vacation pay, retirement accounts, etc.
"From a compensation perspective, it’s really just a different way to slice and dice this, but you still end up paying about the same level of pay as if they were employed,” explains Reiboldt. "Where you really save is in the risk, where the hospital does not have the responsibility of covering the practice overhead.”
If the PSA is written so that the physician or group practice handles all its own billing for reimbursement and then the physician or group practice invoices the hospital for actual services rendered, then the risks associated with reimbursement losses are moved off the hospital’s plate. If the physician doesn’t get paid, he or she absorbs the loss. Additionally, the hospital pays the physician directly from the invoice without withholding taxes, so the physician is responsible for filing and paying all taxes and the hospital is spared the additional administrative work.