Growth opportunities are still available

Tuesday, November 23, 2010

Our industry faces unprecedented challenges. Competitive bidding, payment audits and revised supplier standards are just some of the recent regulatory requirements changing the way a supplier manages its cash flow and grows its business. But amidst these pressures, let's not forget that there are still many ways for suppliers to build referrals and gain leverage in their markets. One underutilized option is for a supplier to establish contractual relationships with referral sources. Many viable arrangements will satisfy federal and state anti-referral rules if they are structured and monitored correctly.

Much of the notoriety and the greatest legal scrutiny about these arrangements over the years has focused on healthcare joint ventures, in which a supplier and a referral source "team up" to engage in some sort of shared risk/shared reward partnership. Joint venture partnerships are riskier because of this enhanced scrutiny. But I am talking about simpler, smaller contract arrangements. Their greater simplicity usually reduces the legal risks, because there are fewer issues and tricky complexities that might raise the government's suspicions. Many times, this sort of arrangement is preferable financially, as well, because the fees (and profits) can be determined precisely and paid quickly. Further, the relationship can often be cancelled more easily, with minimal unwinding problems.

I have found it helpful to categorize these relationships. First are "access relationships" which offer the parties greater access to valued resources. One example is a preferred provider agreement in which a supplier in effect promises a hospital or other referral source, "If you give our name to most or all of your patients, we promise to do a good job servicing them." The referring entity benefits from this relationship because the supplier offers accountability, accessibility, continuity of care, visibility, input in setting new clinical standards, an extension of clinical services or a greater breadth of products or services.

Second are "operational relationships," where a supplier provides support services on behalf of another provider. A competitive bidding subcontract is one example. A management agreement with a sleep lab is another. These relationships can bring the contracting provider a greater degree of expertise and resources than it could easily and quickly develop itself.

Third are "service relationships," contract opportunities where a provider offers specific services to a supplier. One example is a medical advisers contract, where a physician is paid to provide input as to types of purchases, effective marketing approaches, clinical protocols, etc. Other suppliers have established contracts for professional services or support services with physicians, therapists or other providers who are located a significant distance away, where it is more cost-effective for the supplier to pay the provider a fee for certain services than to use the supplier's own personnel or resources for those purposes.

Other service relationships include leasing space from a provider for warehousing, educational programs or equipment setups. Loan closets can also be an effective method for a supplier to establish a preferred relationship with a provider.

These are just a few of the "smaller" relationships that can be crafted, with many combinations and variations. Each one of them must be structured and operated carefully, in strict compliance with federal and state law. A supplier should enter into such a relationship only after careful consultation with an experienced health lawyer. This is important when the other party comes up with the idea or drafts the documents. Even so, it is helpful for suppliers themselves to know some general rules that apply virtually to all of these contract relationships:

4 The relationship must be commercially reasonable, for reasons totally unrelated to referrals.

4 The relationship should benefit the patient and/or the payer in some manner.

4 The simpler the relationship, the safer the relationship.

4 The parties should document the structure of the relationship, its intended operation, and how the relationship demonstrates fair price for necessary services.

4 The relationship must be monitored to ensure that it operates consistent with its intent, as well as to ensure that the underlying circumstances which justified the relationship have not changed.

When used effectively these alternative contract relationships present a legitimate, profitable and valuable option to currently disfavored joint venture relationships. They serve as a reminder that abundant growth opportunities are still available.

After almost three decades of involvement with our industry, the only consistency I have found is that change is constant. We cannot hide from it, nor can we afford to be passively assaulted by it. Creativity and commitment will help suppliers take advantage of opportunities. Our ship cannot change the wind, but we can adjust its sails.

Neil Caesar is president of the Health Law Center, a national health law practice in Greenville, S.C. Reach him at 864-676-9075 or