Independent, Yet Integrated – The Increasing Popularity of PSAs

For hospitals and physicians alike, the concept of alignment can be an intimidating one.  But in a market that is demanding better value, an increasing number of organizations are pursuing stronger affiliations to better coordinate care, improve access, and ensure long-term financial viability. Physician employment has received much of the recent press, but it isn’t always an option. In California, for example, hospitals are precluded from directly employing physicians. Nor is employment always the best option, particularly for physicians who value autonomy.

That’s one reason why the Professional Services Agreement (PSA) has gained prevalence as a mutually beneficial, high-integration alignment strategy. For hospitals that are legally barred from employing physicians, the PSA is the most highly integrated option available. Other organizations prefer a PSA because it allows for physician independence while promoting a higher level of physician involvement in service line planning and development.

When is a PSA typically the most successful and/or only viable approach to alignment?

  • The physicians wish to remain independent but recognize the benefits of increased hospital alignment.
  • The physician group practices at several hospitals, and employment may provoke a competitive response.
  • The physicians belong to a larger, multispecialty group that will remain intact.
  • An intermediate step is needed to build trust prior to considering full employment.
  • The hospital cannot employ physicians due to political or regulatory concerns.

A PSA can promote a more aligned partnership that will allow both parties to remain competitive, especially in light of a healthcare market that is demanding a higher quality of care at a reduced cost.

How does a PSA model operate?

Under a PSA, the physician or medical group is an independent entity that, according to the agreement, provides professional services in a clinic owned by a hospital (or foundation)1. The hospital typically retains all rights to the associated professional and technical fees from payors and, in exchange, delivers the physician or group a PSA payment (see figure below).PSA_Operating_ModelIf the hospital owns all associated revenue streams, it may have the option to bill for services as “freestanding” or “provider-based.” The designation is ultimately dependent upon the clinic’s setup, because a provider-based clinic must meet additional regulatory and operational requirements. However, if a clinic is converted to provider-based status, select services will then be eligible for Medicare hospital-based reimbursement rates, which are typically higher than freestanding rates.

While hospitals want access to more coordinated care and physician-integrated service lines, physicians welcome the preserved autonomy that the PSA model can provide. Structured correctly, PSAs can create mutual financial benefit, a rarity in today’s healthcare economy. Like employment, a PSA model enables hospitals and physicians to advance their program services and be more sustainable in an ever-challenging market.

To learn more about PSA management and governance and funds flow structures, read the Executive Briefing on our Web site.


1 In California, where hospitals cannot employ physicians, health systems may form a medical foundation, which in turn contracts with an independent medical group(s) to provide clinical services.  For the purposes of this post, the focus will be on hospital-owned clinics; however, many of these same PSA trends also apply to foundation arrangements.

This entry was posted in Business Planning, Funds Flow, Physician Employment, Physician Strategy and tagged , , , , , , by Katie Collings Ray. Bookmark the permalink.

About Katie Collings Ray

Katie assists community hospital and physician medical group clients, as well as academic medical centers, with a variety of projects, including strategic planning, compensation plan development, fair market valuation, and service line assessment. Specifically, she has been engaged in multiple cardiology and oncology hospital/physician alignment transactions where she performed financial analyses, including the evaluation of provider-based conversions and 340B Drug Pricing Program participation; developed governance and funds flow structures; supported hospital/physician negotiations; and led the subsequent implementation of a newly formed alignment. Prior to joining ECG, Katie worked as a registered nurse at Rush University Medical Center in the Departments of Interventional Radiology and Emergency Medicine. Katie has a master of business administration degree from the University of Washington Michael G. Foster School of Business and a bachelor of science degree in nursing from the University of Southern California. She is a licensed registered nurse.

2 thoughts on “Independent, Yet Integrated – The Increasing Popularity of PSAs

  1. Pingback: A Fond Farewell to 2013. | ECG Management Consultants, Inc.

  2. Pingback: When Employment is Not an Option | ECG Management Consultants, Inc.

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