Home Comanagement The dos and don’ts of exclusive contracts

The dos and don’ts of exclusive contracts

August 2008

Published in the August 2008 issue of Today’s Hospitalist

The hospital where our private group works is offering us an exclusive contract to cover ED unassigned patients. How should we approach that offer?
Hospitalist groups are increasingly seeing these types of exclusive agreements where they agree to treat all of a hospital’s unassigned emergency department patients or provide all the surgical comanagement for the orthopedic team.

There does seem to be a good business rationale for such contracts. After all, inpatient anesthesiology, radiology, pathology and emergency departments usually are all governed by exclusive service agreements.

Exclusives offer you the security of knowing that you will be providing all of those hospitalist services at the hospital for a defined period of time.

If your group already works at the hospital, you’re not going into completely uncharted territory, so you have a leg up in the negotiations. If, however, this is a new hospital, be very careful, and know what you are getting into before you sign on the dotted line. Understand the types of services that you will be expected to perform throughout the duration of the contract so you can evaluate staffing costs. You need to determine if this is a financially viable opportunity.

Start by getting as clear a picture as possible from the hospital about ED case volume and payer mix over the past several years. Then, take those data to a sophisticated billing or financial consultant to get an idea of what they mean in terms of dollars and cents for your group. Find out what each case is going to cost and then build in a reasonable level of support that takes in cost-of-living increases. Those should be on the order of more than just 1% or 5% a year.

Also figure out if you have enough physicians on staff to handle the volume. Here’s something else to consider: Would taking on this exclusive preclude you from some other, perhaps more profitable service that your group would like to launch? Factor that into your staffing and support calculations as well.

That said, you still need to carefully do due diligence. For one, make sure that the hospital will take care of any bylaws issues that could arise from offering you an exclusive. Would that agreement interfere with the staff privileges as spelled out in the bylaws for other medical staff members? Or could another hospitalist group practicing in the same hospital claim that the agreement somehow restricts its trade?

If we do sign an exclusive agreement, how long should we agree to provide the service?
If this is your first exclusive with the hospital, you may want a short-term agreement of only one or two years. Once your group begins working with the hospital and is comfortable with the financial terms of the agreement, you may want to think about a longer term.

What if we agree to the exclusive, but then find that the volume exceeds our best projections?
Make sure to include the assumptions that you and the hospital agree on, such as patient volume and payer mix, in the contract as a schedule. Just like every other service that hospitalists take on, anticipate that the volume may grow beyond those expectations.

That’s why it’s critical to spell out in the original contract the ability to sit down with the hospital within a defined time period and look at how things are shaping up. This could be on a quarterly, semi-annually or yearly basis. If it turns out that your assumptions about volume and payer mix are incorrect, that should trigger a contractually mandated renegotiation of your subsidy.

Say our projections are fine, but we want to revisit the terms of the contract. What’s a standard contract renegotiation period?
If your contract is ready to expire, you ideally want to be able to renegotiate contract terms within 180 days before the end of the agreement. Usually, the sooner you start contract renegotiations, the better.

It typically takes at least 180 days for the hospital to gear up its legal and financial staff to re-open the discussion. If the hospital is going to hire a third party consultant to appraise the fair market value of what you’re being paid under the agreement, then plan to start negotiations even sooner than 180 days before the agreement ends to allow time for the consultant to conduct that appraisal.

What if we find after a year that we don’t want the exclusive anymore?
That’s the advantage of signing on for only a year. I would assume that if the hospital is happy with the arrangement, it would offer you more support. But if it’s not making financial sense for your group to continue to carve out the exclusive, you can give it back.

Make sure your original contract gives you the ability to terminate the agreement without cause. Also make sure the contract allows you to terminate the agreement “for cause” if the hospital is not living up to its end of the bargain.

And if your contract contains an automatic renewal clause, keep track of when you are required to give notice of your intent to terminate the agreement before that renewal automatically rolls over for another term.

Joan Roediger, JD, LLM, is a partner with the Philadelphia law firm Obermayer Rebmann Maxwell & Hippel LLP. E-mail questions you’d like to see addressed in a future column to joan.roediger@obermayer.com.