Physician equity: Will this medical staff model work for your facility?

When physicians launch provider-owned hospitals, they own a portion of the facility’s equity. This arrangement is designed to provide physicians a source of revenue from their investment. It is also designed to ensure that physicians’ interests are aligned with the hospital’s interests. Experience shows that a physician investor is more likely to comply with cost-control efforts and honor block-booking rules and surgery start times if he or she has equity in the hospital. If the physician doesn’t, his or her fellow physician investors are the first to turn up the heat because the return on their investment dollars is at stake.

Many investor-owned, for-profit hospital chains are taking advantage of the physician equity model. In some communities, the hospital chain purchases what was previously a nonprofit hospital, converts it to a for-profit, and then sells hospital shares to physicians. Of course, they don’t just target physicians already on that hospital’s medical staff. They solicit investment from physicians on medical staffs at competing hospitals in an effort to grow the for-profit hospital’s market share. Nonprofit hospitals typically can’t offer similar financial opportunities—or can they?

Nonprofit hospitals are not sitting back and letting for-profit hospitals, ASCs, and other for-profit entities simply walk away with their physicians and patients. They are fighting back with creative financing vehicles, such as participating bond transactions (PBTs). Under a PBT, the hospital floats a tax-exempt bond, sometimes with a very attractive interest rate. Physicians may invest in this bond in return for signing a long-term non-compete agreement. If the hospital meets a predetermined operating margin and quality and customer service targets, physicians are paid the interest. In spite of the risk, the investment is attractive because if the hospital fails to meet these targets, the interest continues to accrue and can be paid out if the entity meets the targets in the future.

PBTs and other creative vehicles are leveling the playing field for nonprofit hospitals and may push the boundaries in a way that draws the attention of regulators. Hospitals considering such vehicles should work closely with their legal counsel to understand and minimize any risks Stark and anti-kickback statutes pose, as well as risks to their nonprofit status through private inurement.

Check out The Greeley Guide to New Medical Staff Models: Solutions for Changing Physician-Hospital Relations.