September 19, 2008

Perspectives on Integrated Delivery System Legal and Organizational Structure

Emerging and established hospital-physician integrated delivery systems (IDS) commonly question whether their legal and organizational structures will meet future needs.

Experience suggests that legal form should optimally follow function, goals and needs. Goals and objectives that may influence decisions regarding IDS organizational structure include:

  • Addressing existing challenges in IDS governance, leadership or operations
  • Promoting physician leadership and sense of "ownership" within the IDS
  • Facilitating effective physician practice operations, including physician-organization specific human resources, compensation, revenue cycle management, and other practices
  • Providing flexibility in employee benefit structures
  • Enhancing physician practice management focus and information transparency
  • Providing flexibility to access hospital-based and free-standing physician practice reimbursement rules, and to potentially avoid application of Joint Commission standards to free-standing IDS clinics

Basic Structural Options 

While there are many different IDS structures, three basic models tend to be used in IDS affiliated physician practice relationships and operations.

Direct Employment. Under direct employment models, physicians are direct employees of a hospital. The physician practice component functions as an operating division within the hospital much like other hospital departments. Physicians are hospital employees, participants in hospital-employee benefits, and subject to legal and other restrictions relative to physician compensation in a direct employment relationship.

Hospital-Captive Physician Practice Model. Some hospitals directly own and operate "captive" subsidiary practice organizations in separate legal entities that are hospital-owned or controlled (hospital subsidiary). The host hospital will capitalize the organization and provide ongoing financial support. Physicians will become direct employees of the Hospital Subsidiary. In some communities a physician who is aligned with the hospital serves as the sole shareholder of a captive professional corporation or other physician practice legal entity. This "friendly physician" model will commonly be used in "corporate practice of medicine" states that prohibit the direct employment of physicians by hospitals or other organizations that are not physician-owned. The medical practice infrastructure will also sometimes be coupled with relationships with a hospital affiliated management services organization (MSO).

Health System Parent-Subsidiary Model. Under the third common IDS structure, a health system will function as the sole owner or member of a subsidiary physician practice legal entity (health system subsidiary). The physician practice legal entity will constitute a brother/sister organization with one or more health system-affiliated hospitals, and all "sibling" organizations are subject to ultimate control by the health system parent. Financial support payments will commonly be provided from the health system to the health system subsidiary, and physicians will become health system subsidiary employees. This model may also be coupled with MSO structures to provide medical practice operational support and infrastructure.

Comparing the Options

No single structural option will automatically match every hospital or health system's needs. To the contrary, the "right" structure at a particular time will commonly be influenced by a host of legal considerations, business goals and other factors, including the IDS' maturity, operational effectiveness, current challenges and perceived future opportunities. Moreover, there are important differences between the three basic options referenced above related to governance, physician influence, operations and in other areas that should be considered in selecting the preferred structural model. Some of these differences are reviewed below.

Governance and Leadership. Each of the three basic structural options has implications for governance and leadership structures within the integrated system. Under a direct employment model, the hospital board and existing hospital management structures will typically function as leadership of the entire delivery system. The IDS will commonly retain a skilled administrator (e.g., a vice president of physician services) with a physician practice perspective to marshal the existing hospital resources and infrastructure in support of the IDS' physician practice component.

In the hospital subsidiary and health system subsidiary models, separate board and administrative structures are commonly used. Each subsidiary legal entity will have a separate board of directors, with potential membership overlap with the health system parent and/or hospital boards. Likewise, a focused management structure is typically developed to attend to the physician practice entity, along with practice entity-specific strategic and financial plans, budgets, and other management and operating systems.

Physician Influence Systems. The basic IDS structural options also vary in terms of how physicians commonly provide input and influence within the organization. Under a direct employment model, physician influence will commonly be exercised informally through an "operations committee" or similar body that provides input on clinical practice operations and other matters.

One or more operations committees will also commonly be used in a hospital subsidiary model, although the committees will commonly focus on the "local" operations of one or more individual physician practices in order to promote physician involvement in practice-specific budgets, staffing, scheduling, and other issues. Advisory boards and similar bodies may also be used to provide input to the hospital subsidiary's administrative leadership and governing board.

The health system subsidiary structure may provide the greatest flexibility in the range of potential physician involvement and participation opportunities. In these systems, physicians may (but need not) play a more active role in the enterprise's formal governance structure—subject at all times to the health system parent's "reserve" powers. Common organizational structures will frequently blend operations-specific committees that focus on individual physician practice operations, with one more physician advisory councils that provide input to the subsidiary's management and board on strategic, quality and other matters.

Other Variations

The range of issues and concerns influencing IDS legal and organizational structure are numerous, and the three basic structural options outlined above will vary along numerous lines.

Key differences among the basic structural options are summarized here. Each structural alternative is subject to legal considerations under federal and sate laws, as well as organization-specific operational and other details.

Conclusion

Decisions on legal structure will frequently be influenced by current conditions and future plans, including the existing structure's culture, strengths, weaknesses, and operating experiences.

Many integrated systems elect to change legal and organizational structures to help break free from existing cultural limitations and practices. These organizations conclude that a truly new organization needs to be created in law and in fact, and with it new management structures, practice operations, financial management, human resources and other systems. Creating something new is viewed as means to help enhance prospects for future success.

In other settings, the physician component of the IDS' organizational structure will be retooled within the existing legal and organizational platforms. The IDS will try to fix what's broken, rather than create something new.

When it comes to IDS legal and organizational structures, "one size" rarely fits all. Selection of the optimal IDS legal and organizational structure will therefore require a close consideration of numerous factors including IDS near and long term goals and objectives, Federal and State legal requirements and others. A close consideration of these and other considerations will help to ensure that the appropriate form is created for the IDS' intended function.

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