Operationalizing Your Comanagement Arrangement: Major Steps and Common Pitfalls

14M06D02 LJH Operationalizing-Your-Comanagement-Arrangement

Amid healthcare reform and payment change, hospitals and providers are exploring opportunities to strategically band together to face continuous change and an uncertain future. The adoption of comanagement arrangements between hospitals or health systems and community physicians within designated service lines is increasingly popular. By sharing in the management and financial responsibilities of a service line, hospitals and physicians have a vested interest in enhancing care delivery and quality, as well as developing new service line opportunities. While interest in the development of comanagement arrangements is growing around the country, many health system executives and physicians lack a clear understanding not only of the structural components of these arrangements (as discussed in the first article of this series), but also how to effectively and efficiently take the steps necessary to design and implement a comanagement arrangement. Additionally, most comanagement arrangements have only recently been developed, adopted, and implemented; therefore, healthcare executives generally lack the experience to fully understand the complexities involved in comanagement development that could derail efforts or lead to difficulties down the road.

This article is the second in a two-part series dedicated to comanagement structures and development. The first piece in the series, titled “The Case and Components for Comanagement,” offered an overview of the structure of these arrangements and outlined physician and hospital rationale for their development. Here we provide physicians and administrators with an overview of the key steps involved in developing comanagement arrangements and discusses major pitfalls to avoid.

Agreement Development

Comanagement engagements need to be tailored to fit the needs, objectives, and priorities of individual participants, as well as the stated purpose of the arrangement. As such, a high degree of critical analysis, creativity, and customization is often necessary. However, as illustrated in Figure 1, there are five fundamental steps that are universally essential for the development of comanagement arrangements.

Step 1 – Define a Shared Vision and Goals for the Service Line

In this phase of development, it is helpful to conduct a series of interviews with hospital/health system leadership and physicians to obtain a better understanding of the objectives from each key stakeholder. A steering committee is then created to review stakeholder feedback and articulate a shared vision, principles, and programmatic goals to guide the planning process. It is important to include physician and hospital/health system representatives on the steering committee who can bring a strategic perspective to the discussions. However, utilizing service line and other operational administrators is also necessary to ensure that realistic opportunities for improvement can be identified later in the process.

Step 2 – Develop an Optimal Arrangement Structure

After a vision and goals have been clearly articulated and agreed upon, the steering committee should evaluate structural options for the comanagement arrangement. This evaluation needs to address governance structure, subcommittee roles and responsibilities, management company formation (if necessary), decision-making processes, and reporting. Figure 2 illustrates one common arrangement framework that would require further definition.

Once the organizational structure has been defined, the committee should develop the specific roles and responsibilities for each physician participant (e.g., service line chair, medical director) and draft applicable job descriptions.

Step 3 – Define Performance Measures and Targets

This is the most time-consuming step in the process. The steering committee will need to define specific performance measures and associated metric calculations related to quality, efficiency, patient satisfaction, outreach, and other potential measures. The development of performance metrics must take into account current performance, and parties should aim to utilize measures that specifically address performance deficits. Additional operational and financial experts familiar with service line performance may join the committee meetings in this phase to help identify and address opportunities for improvement. Example metrics developed for cardiology, orthopedic, and oncology arrangements are provided in Table 1.

Step 4 – Model and Document Compensation Arrangements

Once the structure and performance metrics of the agreement have been conceptually agreed upon by all parties, the steering committee should develop the financial and compensation arrangements for the participants, including an incentive structure. A third-party valuation firm will eventually have to be engaged to ensure that the proposed compensation arrangement represents fair market value (FMV) for the services provided.

Step 5 – Draft and Review Legal Documents

When the compensation arrangements have been defined and determined to represent FMV, the committee typically works with the hospital/health system legal counsel to draft definitive agreement documents to formalize all aspects of the comanagement program. The physicians frequently engage legal counsel as well in order to review the term sheet/agreement. In most circumstances, hospital legal counsel develops the administrative services agreement, which outlines the key services to be provided by the physicians and the compensation to be provided by the hospital. In a situation in which the physicians form a new management company, the physicians’ counsel will develop additional legal documents, depending on the structure of the company.

  • Management Company Articles – Outline establishment of the company.
  • Management Company Bylaws – Govern internal affairs of the company.
  • Member Agreements – Consiss of agreements between the management company and each participating physician.

The steps outlined above will ordinarily require several months to complete, and will be dependent upon physician interest, alignment of physician and hospital goals, and the complexity of the performance metrics to be utilized in the arrangement.

Legal and FMV Considerations

While there is little legal guidance available regarding the development of comanagement agreements, the Office of Inspector General (OIG) opined on such an arrangement in January 2013 (Advisory Opinion 12-22). The opinion describes the structure of the arrangement and comments favorably about several key provisions of the arrangement. The implications of the opinion are further explored in an ECG Executive Briefing titled “OIG Guidance on Comanagement Agreements,” published in January 2013.

Additional legal implications must be considered for comanagement arrangements that include incentives for cost-saving measures. While performance metrics designed to reduce the costs of care (e.g., implant/supply/drug cost per case measures) may not be constructed as gain-sharing incentives, legal concerns exist regarding compensating physicians for the standardization of clinically significant devices and supplies. OIG Advisory Opinion 05-06 outlines a number of safeguards that can help hospitals avoid sanctions, which should be incorporated into comanagement implementation as necessary and appropriate.

As with all physician compensation, total comanagement compensation for physician management services and incentive metric achievement should fall within an identified FMV range. Although approaches to fair market valuation vary across firms, and available valuation methodologies are limited compared to other physician/hospital financial arrangements, most valuation firms use a combination of cost- and market-based approaches described in Table 2.

Service Line-Specific Considerations

In general, the fundamental structure and approach to comanagement does not vary significantly across service lines. However, there are considerations unique to the service to be managed that should be taken into account, especially as the scope of services and metrics are defined. A few examples of service line-specific considerations are highlighted below.

1. Cardiology

  • The overall scope of cardiovascular arrangements is often an important consideration (i.e., cardiology-only or inclusive of cardiac and/or vascular surgery). The scope can affect the entirety of the arrangement, including the total amount of compensation available, the committee structure, and the performance measures included.
  • A significant number of national and regional benchmarks are available to help develop quality and operational performance metrics; further, many CMS core measures are focused on cardiovascular care. Performance targets based on widely recognized data sources will lend credibility to the arrangement in the eyes of FMV evaluators and the OIG.

2. Orthopedics

  • Orthopedic arrangements are commonly focused on joint procedure services (e.g., hip, knee, shoulder). Again, the scope of the arrangement can greatly influence all other aspects of the arrangement.
  • There are relatively few national and regional performance benchmarks available relative to orthopedic data. A greater percentage of performance measures may be based upon improvement over internal baselines, and overall metric definition may require more effort. The definition of physician responsibilities within oncology arrangements can be particularly difficult, as physicians already manage many of the services in an outpatient environment, and less care is provided in the hospital.

3. Oncology

The definition of physician responsibilities within oncology arrangements can be particularly difficult, as physicians already manage many of the services in an outpatient environment, and less care is provided in the hospital.

Potential Pitfalls

There are a handful of issues and challenges common to comanagement model development that, unless proactively addressed, can significantly delay agreement implementation.

  • The hospital and physicians are developing the arrangement for the wrong reasons. There must be a mutual desire to improve the efficiency, cost, and patient experience driving the development of the comanagement agreement. Pure financial motivations may decrease the likelihood of long-term success.
  • Compensation becomes the focus of the development process. From the perspective of the hospital or health system, it is important to obtain an FMV opinion relatively early in the process to demonstrate commitment to the physicians and ensure that arrangement compensation is not overpromised. At the same time, an FMV opinion should not be obtained so early that compensation becomes the focus over how to support service line performance improvement.
  • Too little thought is put into performance metric design. Often, not enough attention is given to potential legal concerns and how feasible it will be to track performance when developing metrics. In addition, both parties need to be prepared to adjust performance metrics in subsequent years of the agreement as improvements are made and the initial metrics become less relevant.
  • There are gaps in communication to stakeholders. Adequate communication with physicians who are not on the steering committee is essential, especially within the metric design process.
  • There is a lack of service line administrator engagement. The long-term success of a comanagement arrangement is largely dependent on the engagement of a strong service line administrator who can help facilitate development discussions and is willing and able to put in significant hours to manage and operationalize the agreement after implementation.


In the current healthcare environment, where some degree of alignment is becoming increasingly necessary, comanagement arrangements can provide considerable benefits for health systems and independent providers alike. The development of a comanagement arrangement can be particularly valuable for organizations preparing for reimbursement reform, as the process helps lay a solid foundation for enhanced performance tracking and value-based contracting efforts. Given their recent introduction to the market, complexity in design, and lack of legislative and regulatory guidance, hospitals and providers must work closely with experts who can walk them through the fundamental steps in designing and implementing comanagement strategies, while also avoiding common pitfalls. In the end, properly executed comanagement agreements present opportunities for systems and providers to collaborate in enhancing service line performance, growth, and leadership.