Independent, Yet Integrated – The Increasing Popularity of PSAs

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For hospitals and physicians alike, alignment can be an intimidating concept. However, an increasing number of organizations are pursuing stronger affiliations in an effort to better coordinate care, improve access, and ensure long-term financial viability. While physician employment has received much of the recent press, the Professional Services Agreement (PSA) has gained prevalence as a mutually beneficial, high-integration alignment strategy. In some circumstances, hospitals are precluded from directly employing physicians (e.g., in the state of California), so a PSA is the most highly integrated option available. For many other organizations, a PSA is preferred over other alignment models because it allows for physician independence while still promoting a higher level of physician involvement in service line planning and development. This article highlights the basic features and benefits of a PSA model and offers an explanation for their increasing popularity. Although a PSA can be somewhat administratively complex compared to an employment model, there are a number of situations in which a PSA is typically the most successful and/or only viable approach to alignment. For example:

  • The physicians wish to remain independent and preserve some level of autonomy 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.

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

PSA Model Overview

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 payers and, in exchange, furnishes the physician or group with a

PSA payment (as shown in the figure on the front). In many cases, the practice management functions also remain with the physician group through an accompanying Management Services Agreement (MSA). If 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 contingent 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.

Management and Governance

Regardless of clinic ownership (hospital, foundation, or other), the physicians may continue to manage its day-to-day operations. If a practice is well functioning, this arrangement can be beneficial to both parties, so long as costs are reasonable and services are clearly defined. However, if the clinic is converted to a provider-based department, there are a number of decisions that will require hospital input, guidance, and/or approval. For example, although the physicians may be accountable for select functions, like staff hiring and firing, the hospital should ultimately be responsible for issues related to finances, compliance, and clinical protocols.

Further, although the physicians remain independent, healthcare organizations that utilize PSAs are increasingly choosing to incorporate some sort of Joint Operating Committee (JOC) for making key decisions. Defining accountabilities up front is a vital step in developing a successful arrangement and could help organizations to avoid significant conflicts in the future. A sample of collaborative governance and authority is shown in the accompanying table.

Funds Flow Structure

PSAs can utilize a variety of funds flow models, from fixed monthly payments to pure productivity-based plans. In contrast to the typical employment model, the hospital normally provides a payment to the group as a whole rather than to each individual physician. The group is therefore free to maintain its own income distribution plan. While physicians generally prefer the increased level of autonomy associated with this arrangement, it is important to ensure that the group’s overarching incentive structure is aligned with its individual compensation plan. For example, physician groups’ compensation distribution models tend to be productivity-based in focus; however, in anticipation of value-based payment methodologies, an increasing number of hospitals are incorporating service incentives related to quality, care coordination, and efficiency into their PSA funds flow structures that may not tie to the group’s individual compensation plan. Additionally, any structure will have to comply with federal and local regulations by not inadvertently creating incentives to reduce patient care or correlating payments to hospital referrals. Regardless of these potential complexities, it is important to engage physicians in the development of the PSA funds flow structure and work toward physician consensus for any proposed incentives.


With benefits to both parties, PSAs are increasingly becoming an optimal alignment model for hospitals and physicians. While hospitals desire access to more coordinated care and physician-integrated service lines, physicians welcome the increased autonomy that this model can provide. Structured correctly, PSAs can also create mutual financial benefit, a rarity in today’s healthcare economy. In summary, a PSA, like employment, is a high-integration alignment model that enables hospitals and physicians to advance their program services and be more sustainable in an ever-challenging market.