residency program survival: blueprint for an effective defense

RESIDENCY PROGRAMSURVIVAL

A Blueprint for an Effective Defense

A Toolkit Provided by the

FOUNDATION

With Funding Provided by the

Residency Program Survival: A Blueprint for an Effective Defense 1

Table of Contents 2 Acknowledgements, About the Authors 3 Introduction 5 Chapter One: Positioning your program 11 Chapter Two: Signs of trouble 14 Chapter Three: Your program is in trouble 22 Chapter Four: What to do if your program cannot be saved 30 Chapter Five: Building the business plan Appendices 40 A. History of Graduate Medical Education 42 B. Glossary 45 C. Templates/Samples 45 Affiliation agreement 64 Clinic affiliation 70 Proforma 71 FY 2001 graduate medical education reimbursement 74 D. References

2 California Academy of Family Physicians

Acknowledgements The authors of this report gratefully acknowledge the contributions of Blueprint reviewers: Eric B. Gordon, MD, JD, Partner, McDermott Will & Emery, LLP Robert Norman, MD, Program Director, San Jose-O’Connor Family Medicine Residency Program Perry Pugno, MD, Director, Division of Medical Education, American Academy of Family Physicians Cheryl Storey, CPA, Health Care Partner, Moss Adams, LLP We would also like to acknowledge members of the California Academy of Family Physicians Medical Student and Resident Affairs Committee and Scott Christman, GIS Coordinator, California Office of Statewide Health Planning and Development for their input into the development of the Blueprint. Kiki Nocella, PhD Sandra Newman, MPH About the Authors: Kiki Nocella, PhD, a family medicine scholar, currently serves as the founding vice provost of health affairs at the University of California, Riverside. She completed her PhD in public administration at the University of Southern California. Her dissertation was on the characteristics of family physicians who trained in California and who practice in rural areas. Dr. Nocella has worked with various rural hospitals and communities in California regarding their operations, governance, business development and medical workforce. She has also consulted for various academic medical centers and regional health systems on the intricacies of graduate medical education financing and residency program design. She has established and moved multiple family medicine residency programs. Sandra Newman, MPH, is the Director of Health Policy for the California Academy of Family Physicians. In this capacity she works on a range of health issues, including medical practice affairs, quality improvement, workforce development, and CAFP's chronic disease collaborative, New Directions in Diabetes Care. Prior to this position, she served as a Policy Specialist for the National Center on Caregiving at Family Caregiver Alliance, where she focused on policy development and applied research in family caregiving and long-term care, authoring or co-authoring a wide range of journal articles, monographs, policy briefs, and other publications. Ms. Newman also worked as a Legislative Assistant to US Senator Barbara Mikulski. Ms. Newman holds a Bachelor's degree in Women's Studies and a Master's degree in Public Health – both degrees are from Tulane University. Funding for this project was generously provided by the California Academy of Family Physicians Foundation. © 2008 California Academy of Family Physicians. All rights reserved.


Introduction Family medicine residency programs have a rich history of providing high quality training to medical students interested in this diverse specialty and in serving the varied health needs of patients. In 1969, family practice became a specialty when the American Medical Association (AMA) recognized the new American Board of Family Practice (ABFP). In 1970, the first certifying exam of the ABFP was held. It was not until 1972, however, that California state senate bill (SB 665) established “family practice as a distinct entity in California state-supported medical schools.” One year later in October 1973, Governor Ronald Reagan signed SB 1224, the Family Practice Bill, commonly referred to as the Song-Brown Act, which allocated $3 million over three years for development and expansion of family practice residencies and departments of family practice in medical schools. The following month, the California Academy of Family Physicians’ (CAFP) Congress of Delegates voted to phase out or change general practice residencies to family practice residencies. Family medicine residency training programs provide essential services to the communities and medical facilities in which residents train; despite this, the programs often are the target of cost-cutting measures. For family medicine departments, the challenge to residency program viability commonly comes from the office of the dean of the affiliated medical school, an entity which has been known to challenge the need at all for such a department.1 For most residency training programs, however, when there are concerns regarding viability, often the dynamic is one of fiscal pressures and an adverse payer population aggravated by declining U.S. medical student interest in the specialty. The planned closure of the sponsoring hospital because of fiscal insolvency, a merger/acquisition change, or unwillingness/inability to meet earthquake retrofitting requirements can also precipitate challenges to programs. Even though hospital net operating margins have been improving in California since 2000, they still hover near the breakeven point, with the 2005 median operating margin at 1.31 percent.2 This, coupled with declining match rates in family medicine for U.S. seniors, has resulted in closures or near-closures of programs throughout the nation, including in California. The Accreditation Council on Graduate Medical Education (ACGME) reports that 64 family medicine residency programs around the country have applied for withdrawal since 2000.3 Of those, five programs have been located in California, with another to close in 2008.4 For most programs, closure can be attributed to fiscal pressures5 and the ongoing subsidy of operations caused by the burden of uncompensated care for large indigent populations.6 Programs may also close because the affiliated hospital closes, the sponsoring institution (SI) and/or program has serious fiscal issues, or the SI has changed priorities. The loss of a family medicine residency program has many effects. The disruption to the matriculating residents as well as to the program’s associated faculty and staff is obvious. But there is a ripple effect because physicians often choose to practice in the same community in which they complete their training. Consider that one family physician equates to $889,156 in annual revenue and creates 22.9 jobs.7 This underscores that a closed residency program is a significant economic and access to care loss to the community as well.


CAFP decided to develop this Blueprint as one step in addressing the health care workforce issues facing the state. Blueprint has three goals: 1) to assist residency program directors in building a profile of their programs and community footprint to demonstrate and improve recognition of the programs’ value and, ultimately, its viability; 2) to provide guidance on how to be financially astute to avoid downsizing and/or closure of programs; and 3) to outline the “next right steps” to facilitate the smooth transition of a program to another sponsoring or major participating institution should it be faced with closure. Key to achieving these goals is an understanding of graduate medical education funding. The federal government supports allopathic and osteopathic medical postgraduate training via a complicated mechanism of reimbursement. Graduate medical education funds are comprised of two sources: direct graduate medical education (GME) payments and indirect graduate medical education (IME) payments. A brief synopsis and history of GME can be found in Appendix A. Additional key terms and definitions can be found in the Glossary (Appendix B). The hope is that most readers will never have to read beyond the first chapter. But for those whose programs face threats in the months and years ahead, this Blueprint compiles resources, available data, lessons learned, and more. Professionals from a variety of backgrounds have participated in developing the Blueprint; however, this document does not replace legal counsel, cost report consultation, or business counsel.


Chapter 1: Positioning Your Program

Hospitals and health systems have faced, and will continue to face, significant financial challenges. Complicating matters, federal and state policy can be slow to respond to negative financial trends, those faced by hospitals in general and by residency programs in particular. Among policy, fiscal, and other issues, program directors often have a difficult juggling act, focusing efforts on the administrative issues of their programs, fulfilling the educational and training goals for residents, meeting the health care needs of patients, recruiting and retaining faculty, and responding to issues and concerns of their SIs. This leaves little time to consider how to position your program within your SI, ways to raise your profile, and the long-term concerns of, and potential threats to, your program. While much of this Blueprint addresses downsizing and closure issues, this chapter is devoted to providing tools and resources that will benefit any program, and could deflect a threat. More specifically, there is a series of steps that will help raise the profile of a residency program within its respective SI and community. Raising this profile and ensuring that key stakeholders recognize the residency program’s value is key to avoid cost-cutting efforts. In all likelihood, some family medicine residency programs will face such efforts, but even those who do not can benefit from a better understanding and enhanced positioning of their programs. How Not to Be the “Bull’s-Eye” of Cost Cutting Efforts Add Value Program directors, faculty, staff and residents work hard daily caring for patients, providing benefit to the community, referring patients to subspecialists, visiting schools, conducting clinics and more. But in doing all of this work, the following questions should be asked: Can the value of your work be measured? What data prove the value? For whom does this work add value and in what tangible ways? When a hospital starts a residency program, it’s often a prized possession. The hospital has worked hard and is proud of its new program. Jump ahead 10-15 years and four to seven CEOs. Programs in these situations face questions such as “why do we have a family medicine residency program?” and “why does it cost so much?” With the average tenure of a hospital CEO around five-and-a-half years,8 constant education on the value proposition of residency training is important. As new decision makers come into an organization, you can contribute to the alignment of their values with yours. Two Web sites have useful data to help highlight the value of your family medicine residency program. The Robert Graham Center9 Web site provides “footprint” maps of the historical relationship of a residency program and its graduates with the counties and states in its region. The Graham Center Web site notes that programs have used these maps for internal reflection on whether or not they are fulfilling their mission, and to demonstrate their value to hospital and community leaders. The second site, www.healthlandscape.org, provides additional information for the footprints, incorporating demographic and other community level information.


Meet the Needs of Your Customers Ask, and answer, the following questions: • Who are the “customers” of your program: patients, administrators, community members, and/or

some other group? • What is the overlap and synergy between your customers and the hospital’s customers? • What are your customers’ expectations? • Are you using baseline and trend data to assess your performance in meeting or exceeding

expectations? Have you shared data regularly and widely?

Be Visible Encourage faculty, staff, and residents to be involved in hospital, medical staff and community events. Be known and visible. This may seem obvious, but given the hectic nature of medical care, it’s easy to get caught up in day-to-day educational, clinical, and administrative responsibilities and not have time or energy to engage in activities beyond them. By being active in the community and identified clearly with your program, you can create and maintain awareness of its value.

Case example: The program director of a county-sponsored residency program was getting nervous as a result of several meetings at the hospital. She decided to research the financial status of the hospital and determine the financial and community value of her program. First, she went to www.calfinance.net. She learned that the hospital’s operating margin was consistently in decline. Even with non-operating revenue, her hospital showed a negative total margin. She then went to www.oshpd.ca.gov to see the latest posted quarterly hospital financial information. The most recent quarter was no better. She wanted more, so she requested financial information from the CFO. Finally, she went to www.healthlandscape.org and www.graham-center.org/x820.xml. With these data, she was able to paint a picture of the value of the program through a map that indicates the footprint of program graduate placements. Sixty-nine percent of program graduates remained in California, with 66 percent staying in the three counties surrounding the hospital. Fifty-one percent of the graduates practiced in Health Professional Shortage Areas, of which 60 percent were in the three-county region. At the next hospital staff meeting, she shared the information about how program graduates were meeting the needs of underserved areas.

Case example: In prior years, a California program was faced with the risk of closure. The sponsoring hospital was hemorrhaging millions of dollars a month, and the CEO was looking for cost reductions everywhere. The program director and faculty had been in the dark about program finances for years. Unfortunately, the hospital was in the same situation because management mishaps resulted in lost billing records and other financial information. Because the medical staff recognized the value of the program to the hospital, the CEO agreed to retain a consultant to reconstruct financial information to have the basis to negotiate a new contract. Without recognition of the program’s value by the medical staff, it’s likely the program would have been a target for closure.


Highlight Your Successes Don’t be the best kept secret of your hospital or community. CEOs and CFOs shy away from cutting programs and services that are so valued by their communities and medical staff that doing so would result in negative public relations. Specific activities to undertake include: working with the hospital’s public relations department to regularly appear in internal and external communications; offering to write a regular column for the local newspaper or for a community newsletter with a broad reach; issuing press statements about incoming and graduating classes or any other activities of note; and, regularly presenting at medical staff meetings. Out of sight is not just out of mind. Out of sight risks program reduction. Academic Performance Academic performance, and data to support it, is essential. Know your program’s strengths. If your program is strong in its test scores, let it be known. If it is not, know what academic aspects of the program are strengths and have the data to support and demonstrate them. The data used to illustrate those strengths should be specific to your program. National benchmarks can be useful, but may not be relevant because of program variations. Having someone else point out that the benchmark does not apply would not strengthen your position. Position Your Program Part of highlighting your program’s value to decision makers is understanding what matters most to them. Different sectors of health care utilize distinct metrics for decision making. These metrics differ depending on whether the program sponsor is part of a for-profit, not-for-profit, municipal, or managed health care system. For-profit A for-profit hospital and health system most likely will use “EBIDTA” – Earnings Before Interest, Depreciation, Taxes, and Amortization – as its metric for assigning value and making decisions. When working with that for-profit institution, a financial approach that demonstrates education as a break-even proposition may be best. Secondary financial benefits to the hospital (e.g., patient census, use of for-profit centers such as x-ray, etc.) should also be highlighted, and quantified, if possible. Not-for-profit For not-for-profit hospitals and health systems, the argument may focus less on profit and more on mission, but the financial argument is important as well. Although less tangible, the dollar amount of the community benefit provided by the program (i.e., care for under- or uninsured), the benefit that ties directly to the organization’s mission, may be just as important, if not more so. In addition, residency programs are access points for the poor and/or uninsured; programs serve as a justification for the facility to continue with its not-for-profit status. Market share may also be a consideration. Managed Care For managed care organizations (e.g., Kaiser Permanente), the argument could focus on community benefit or member health benefits, such as through the provision of health education, preventive services and care management.


Municipal For municipal entities it’s about workflow. What benefit to workflow does your residency program provide? In addition, California’s Section 17000 obligations to provide access are often fulfilled by residency programs and the family practice center (FPC).

Financial Performance No one should care more than the program director and faculty about the accuracy of program finances. Ignorance is not an excuse. Of the 10 respondents to an online survey sent to California family medicine residency program directors, four stated they had no knowledge of the program’s Medicare GME reimbursement or the program’s annual profit and loss (P/L). There are many reasons not to know this information – some hospitals simply don’t want to share it. But effective positioning and advocacy requires access to and knowledge of this critical information. Without it, you are completely blind to potential risks and the steps needed for an effective response, and you cannot illustrate the value you bring to the community. It is imperative that the program director and faculty are 1) aware of their budget; 2) aware of their financial performance within that budget; and, 3) active in discussion of methods to improve the overall financial performance of the program. Learning Your Program’s Finances One method is to think of this as a performance improvement process, using the methods of quality and performance improvement introduced by W. Edwards Deming. Mr. Deming, a noted improvement expert, said “In God we trust, all others bring data.” Having your data, knowing your data, and presenting your data in meaningful ways to your customers at regular intervals are key components of documenting your program’s value and mitigating threats. Gathering each of the data elements below will take time. But knowing how to access the data and the story they tell about your program will help in optimal positioning. You should access:

1. Copies of monthly cost center reports. There will be two cost centers on the hospital’s general ledger for hospital-owned programs, so you should receive two different sets of financial information.

2. The hospital’s monthly financial reports as presented to the board. If they are not readily available, data are available on the Office of Statewide Health Planning and Development (OSHPD)10 Web site. Included are comparative financial data for the requested quarter, the quarter immediately prior and the quarter one year prior. Annual hospital data11 are also available; however, neither data set will be real time (i.e., how did the hospital perform financially during the current month?).

3. Trend data (e.g., month-by-month and quarter-by-quarter information on your program) available from your program’s administrator, to include: a. Hospital net revenue b. Hospital expense c. Hospital P/L d. FPC net revenue


i. Technical component ii. Professional component

iii. GME iv. IME v. Other (e.g., Song-Brown funding)

e. FPC expense f. FPC P/L g. FPC admissions h. FPC referrals to subspecialists

4. The California HealthCare Foundation developed a Web site which graphically presents state hospital trend data and financial metrics for the last five years. 12 This can help tell the story of what is occurring at your facility.

5. Quarterly review of the program’s financial performance with the hospital CFO in order to set budgets and goals together.

6. Historical data on the program’s GME reimbursement. Appendix C contains an example of these data, from fiscal year 2001. More recent and expansive data should be obtained from the hospital CFO or cost report consultant. Identify: a. Number of FTEs claimed for GME and IME b. Number of FTEs denied for GME and IME and, if denied, the reasons for the denial. c. The hospital’s resident FTE caps for GME and IME and if the hospital is over or under its

cap. d. Any history of overlaps as to resident time claimed with other hospitals where your

residents rotate and, if so, the status of resolution. 7. Records of your resident rotations from a reimbursement perspective to oversee retroactive

reimbursement disallowances by fiscal intermediaries. This frequent practice results from a lack of documentation from a resident’s file or missing or late-dated contracts with ambulatory rotation sites (non-provider settings). a. In order to claim an ambulatory rotation, the hospital must incur “substantially all of the

costs” of the residency program, defined as 90 percent of total resident salary and fringe benefits and teaching physicians’ costs incurred by the outpatient clinic. Lack of documentation is a common reason for a denial by the fiscal intermediary. The Web site of the law firm McDermmot, Will & Emery contains a brief summary of this issue.13

b. At least annually, assign someone to reconcile legal agreements with ambulatory rotation sites, including the start date of the agreement with the actual dates of the rotations. To the extent the contracts don’t exist, or the resident begins the rotation prior to the date of execution of the agreement, the rotation can be disallowed. This reconciliation process will minimize the number of disallowed rotations. Written agreements may not be required,14 though they are preferable. Timely payment to non-provider settings is required. See Appendix C for an example.

Additionally, you should:

1. Develop a financial proforma (see Appendix C) to demonstrate hospital savings or enhanced revenue due to the services of the residency program. It should incorporate the above data and the following, as applicable:


a. Program contribution to Joint Commission (JCAHO) preparation. b. DSH dollars, because to the extent the residency program serves as a safety net, it can be

argued that a portion of the DSH revenue should be credited to the indirect financial performance of the residency program.

c. Reduced expenses for physician recruitment to region. This can be based on the percent of residents who remain in the hospital’s catchment area.

d. Revenue generated by program graduates who remain in the region and continue to refer to the hospital.

e. Savings due to case management of unfunded patients throughout transitions of care, particularly as they reduce emergency room (ER) utilization, length of stay (LOS), etc.

f. Differential of cost savings due to the presence of residents and faculty versus the hospital hiring or contracting with others (e.g., hospitalist services, ER and OB call, etc.).

2. Request a meeting with whomever your hospital uses (either employed or contract) for cost report preparation. During that meeting, review the historical number of full-time equivalents (FTEs) who were reimbursed by Centers for Medicare and Medicaid Services (CMS) for GME and IME. Together, discuss the reasons that FTEs were disallowed, if applicable. Develop a plan for improvement, as appropriate.

3. Annually, query your customers to ascertain their expectations and assess the program’s performance in meeting their expectations. Document this process and share the outcomes with hospital decision makers.15

4. Meet with the hospital’s public relations (PR) department. Develop a PR plan for your program; target both internal and external audiences.

5. Participate in hospital strategic planning activities. 6. Request an annual presentation to the hospital board on the outcomes and highlights of the

residency program. Include in that presentation: a. P/L of program (validated and endorsed by the hospital CFO) b. Results of multiplier effect analysis c. Expenses saved by services performed by residency program

7. Design your faculty compensation model to include compensation for hospital and community service. Track the amount of service and outcomes, not only to allocate compensation, but also to document value.

The recommendations detailed above are general. Ultimately, it is critical to 1) know your audience; 2) learn to speak their language; and, 3) provide data that directly correspond to the decision-making metrics for your institution.


Chapter 2: Signs of Trouble Programs that face the threat of downsizing or closure often must respond to this threat very quickly. When hospital administration reveals the program will be closing or costs must be decreased, program directors and faculty may be caught by surprise. Frequently, there are signs of potential trouble either from the hospital in general or as it relates to a specific program. As noted in Chapter One, advance due diligence may forestall such threats, but knowing these signs is crucial to provide more time to gather the additional necessary data and information to defend the program. The November-December 2003 edition of Family Medicine includes a descriptive study of family medicine residency programs closed between 2000 and 2002. After conducting a survey of program directors from 27 of the programs that requested voluntary withdrawal from ACGME, study authors identified three categories of warning signs:16 • Financial • Political/Leadership • Other Financial Challenges The predominant reason for program closure or downsizing in California has been financial. A variety of factors have affected the financial viability of residency programs: • Decreasing hospital margins: more than half of California hospitals have negative patient care

margins;17 • Capital needs to meet seismic retrofitting as required by SB 1953;18 • Nursing expense due to workforce shortages, staffing ratios and increased costs; • Downgrading of bond ratings; • Technology improvement needs; • Decreased federal Title VII funding;19 • Reimbursement shortfalls (e.g., Medicare, Medi-Cal, health plans); and, • An increase in uninsured and underinsured populations. OSHPD conducts annual analyses of financial, access and quality trends based on data submitted by the state’s hospitals. Data from 2005 gathered 382 comparable reports; of these, 256 hospitals (67 percent) had positive net income and 126 hospitals (33 percent) had negative net income. These 382 hospitals had an overall net income of $2.21 billion. Net income by hospital type of control was: county/city ($103.6 million), district ($92.3 million), investor ($170.5 million), and not-for-profit ($1.84 billion). In addition to net income, two common financial ratios – operating margin and total margin – are also used to measure profitability. Operating margin is computed by taking net income from operations and dividing it by total operating revenue. Total margin is defined as net income divided by total operating revenue. Net income represents the “bottom line” after including non-operating revenues, such as investment gains/losses, income taxes, extraordinary items, etc.


Based on OSHPD data for 2005 and 1995, margins by hospital type were as follows:20

• City/County Hospitals 2005 1995 o Operating Margin <24.5%> <23.9%> o Total Margin <2.41%> < 5.6%>

• District Hospitals o Operating Margin <0.90%> 0% o Total Margin 3.31% 3.9%

• Investor Hospitals o Operating Margin 1.72% 5.1% o Total Margin 2.28% 5.0%

• Not-for-Profit Hospitals o Operating Margin 3.19% 1.6% o Total Margin 5.15% 4.1%

City and county hospitals, long the domain of training programs, have negative operating margins, and, as such, must carefully watch residency program costs and balance them with the perceived workload benefit. Most teaching hospitals receive nowhere near their teaching costs from federal and state GME reimbursement, placing many programs at risk. County and disproportionate share (DSH) facilities are even harder hit, since they usually have very low Medicare percentages. Not-for-profit hospitals, the other historic domain of training programs, indicate positive, although not large margins. Issues such as SB 1953 can affect residency programs because not-for-profit hospitals and health systems are looking for ways to save money to increase investment in capital construction projects without negatively affecting operating margins. Residency program reductions can be viewed as such a savings opportunity.

The difference between net income from operations and net income consists of non-operating revenue and expenses, income taxes, and extraordinary items. Another way to look at this information is that operating margin represents only the net income from operations divided by revenue from operations. This would answer the question of whether or not the hospital made or lost money solely from operations. Total margin takes into consideration revenue and expenses not related to the direct operations, revenue such as tax revenue for a district hospital.

Operating margin is computed by taking net income from operations and dividing it by total operating revenue. Total margin is defined as net income divided by total operating revenue. Net income represents the “bottom line” after including non-operating revenues, such as investment gains/losses, income taxes, extraordinary items, etc.


What are the warning signs that the hospital or the residency program might be in trouble? There is a range of issues signaling financial concerns associated with a program’s SI that could affect the residency program. They include: • Declining profit margin of hospital • Financial losses of parent institution • Decreased hospital census • Shift to a less favorable payor mix • Increased utilization of financial consultants • Hiring freezes or delays • Delays in plans for construction or growth • Change in leadership • Lack of involvement in planning efforts • Loss of accreditation of other residency

programs in the hospital

• Restructuring • Use of words such as “downsizing” • Strategic objectives shifting away from

primary care • Budget reductions • Shift in the sense of value of the program

or its people • Complaints about the program, its faculty

and/or residents • Missing, irregular, or inaccurate financial

reports Case example:

One program, sponsored by a community hospital, experienced several events affecting the bottom line: CEO turnover, bad luck, and accounting mistakes. In addition, the hospital manager assigned to the residency program had been terminated and critical financial records were destroyed. No one knew the program’s financial performance. The hospital administration was looking to cut anything it could; all at once the program was in trouble. The program director and faculty were able to buy time by convincing the hospital to use an outside consultant to reconstruct the missing financial data. The CFO of the hospital was committed to the program, “as long as the hospital breaks even.” The CEO expressed concerned about negative public relations if the program closed and was willing to give time for financials to be done and let the CFO lead the negotiations. A team was gathered, financials reconstructed, a new business model developed, and financial terms reached that were acceptable to the CFO. The program negotiated a five-year contract. Could this have been anticipated? Probably. Had the program director and residency coordinator been receiving program financial information on a regular basis, they would have known reports had stopped. Had there been quarterly financial meetings with the CFO to discuss trends and concerns, they might have known that the hospital was on the brink of financial trouble.


Chapter 3: Your Program Is in Trouble

Either directly or through the grapevine, whether anticipated or a surprise, you learn that your program is in trouble. Some programs may receive more than a year’s notice while others might not be so fortunate. In the past, some California programs have bought critical time and protection by requiring termination notice be given before the date the program is committed to entering the match. This would provide for a matriculation of the PGY-3s and appropriate, thoughtful, and seamless transitions of the PGY-1s and 2s. Others have had 90-day notice or less. Contractual protections in the agreements with the residents and with program faculty can do much to buy time and provide for a better transition.

Immediate Steps to Take

I. Get your facts and get their facts 1. Make an appointment to meet with the administrator who made the decision to downsize or

close the program. Try to obtain the following: a. Commitment to regular meetings with the decision maker (approximately every one to two

weeks, depending on timeline given). b. Assignment of a financial expert (ideally an external person or company) to conduct an

independent analysis of the program. c. If not an outside company, assignment of an internal financial expert, in addition to any

resources already assigned to the residency program, to assist in financial analysis and impact modeling.

d. Copies of any work papers that were the basis for the decision. e. Transparency of information and decision making. f. Time for you and your team to review work papers and decisions to formulate a plan, and, if

possible, to have a thoughtful transition. g. Particularly in a case of closure, access to funds to contract with consultants to develop

scenarios to start the program anew at a different facility. Financial, reimbursement, and legal consultants are critical to such an analysis and financially beyond the resources of most residency programs. Funds should be requested to support such an endeavor as part of the transition plan.

h. A measure of the level of commitment to the program and any terms or conditions around that commitment. Is it a dead issue, since all commitment is gone? Is there a glimmer, if only you were to consider an alternative? Try to figure out what such an alternative could be.

2. Get the business people to the table early. Residency program finances and business models can

be complicated because of GME reimbursement rules. Learning curves are steep on these issues. In addition to continuing with day-to-day operations of the residency program, you will likely be spending time managing the politics, developing scenarios, assessing educational implications, managing resident, faculty, and staff concerns, exploring new business models and scenarios, and understanding the GME and legal ramifications and options. Help will be needed not only for expertise, but also because it is very difficult for a program director to take on all of this


additional responsibility and run a program. At a minimum, the following individuals should be on your team: Finance expert who can: • Conduct a comparison of the hospital’s work papers and your financial proformas to ensure

that the program and hospital are working from the same set of agreed upon financial information;

• Do financial modeling of new scenarios; • Develop financial analyses regarding the costs of closing or downsizing the program. • Assess options for financial improvement other than cutting or closing; and, • Have legitimacy with the hospital CFO so that program numbers and analyses have

credibility. Cost Report Consultant Few hospital CFOs or hospital reimbursement staff know the intricacies of GME reimbursement to the degree needed to provide options or scenarios. Federal and case law also change frequently. You need current, accurate information so no time is wasted on a learning curve and there are no “oops” moments later because decisions were made based on flawed information. Legal Counsel There are many legal ramifications associated with cutting or closing a program. The hospital has undoubtedly consulted its general counsel as part of making the decision to cut or close, but the program also will need legal advice on a variety of options: closing the program and starting anew at a different facility, moving off the hospital license, organizing the FPC as a professional corporation, etc. Residency Program Solutions (RPS) Depending on the hospital’s plans, finances, and timelines, request a RPS consultation.21 Ask for a consultant versed in the business of residency programs. A RPS consultant can serve a critical role in meeting with a variety of stakeholders, hearing their thoughts and concerns, and having an opportunity to educate and inform during the assessment. Requesting a consultation will also help you buy time. Faculty member (or you) responsible for ACGME liaisons You will want to communicate with ACGME, and specifically the executive director of the family medicine Residency Review Committee (RRC), as you go through this process, particularly if a program closure is likely. The RRC has been through these scenarios many times and can provide valuable assistance as you try to navigate the decisions and process. Graduate Medical Education Committee (GMEC) If the GMEC is not aware of the situation, it needs to be informed as soon as possible. If there is more than one residency program at your SI, a decision to close or downsize may affect the other programs as well.


3. If you have not conducted the types of analyses and financial steps discussed in Chapter One, now is the time to do so. At this point, hospital financial performance trends are not relevant. But it is very relevant to develop your own financial analysis, compare it to the hospital’s, and incorporate those types of direct and indirect revenue sources and cost-offsets not traditionally incorporated in a hospital’s financial review.

II. Reconcile “The Facts”

The hospital’s “facts” and your “facts” may be different. A decision to downsize or close has been based on the hospital’s facts. Assuming you have successfully bought time to conduct due diligence, you have the opportunity to present an alternative picture. In order to reconcile the facts, you must make a sound, data-driven financial argument through: 1. Development of a financial proforma: As with all programs and services, there is a financial model for family medicine residency programs. When negotiating, push for the SI to include revenue line items or cost offset line items for services that residents and faculty provide that the hospital would otherwise have to pay for. Not all programs remember to do this. Since family medicine residency programs are traditionally safety net providers, they often affect a hospital’s ability to receive DSH funding. Therefore, argue that the proportion of DSH that pertains to residency program volumes should be credited to the program P/L. The P/L may also include outpatient activities of the FPC, if under the hospital’s license. 2. Negotiate credit for what you do: Additional Services: Residency programs do a great deal for their sponsoring hospitals and their communities. Unfortunately, dollar values are often not given to these efforts nor put into the P/L of the residency program, but they need to be. Each of these services adds value and should be assigned a dollar value. Once you assign a reasonable dollar value, add that value into your proforma. Residency programs may partner with the hospital to: • Provide a range of services, including:

- ER call coverage for uninsured or unassigned patients, thus saving on-call fees to local physicians

- Round-the-clock in-house coverage to assist local admitting physicians - Hospitalist services - Code blue team - OB back-up

• Undertake initial history and physicals for inpatients, e.g., psychiatry • Support administrative functions, such as developing a stroke team or prepping for Joint

Commission (JCAHO) accreditation


Reductions in LOS: Residency programs that provide ER coverage of unfunded or Medi-Cal patients can often demonstrate reduced length of inpatient stays among this population. The residency program should track its ER encounters and conduct a pre/post evaluation of LOS or benchmark LOS to similar facilities without a family medicine training program to obtain an important economic measure for inclusion in the financial analysis. It is important to note that the Civil Monetary Penalty Law prevents a physician from being paid for reductions in LOS. However, one can assign value to reductions in LOS in connection with a review of the program’s financials when in a situation where a hospital is evaluating whether or not to close the program. Reduction in Non-Urgent ER Services: Does the presence of your program reduce the number of primary care visits that occur in the ER and the number of ER visits that are avoided because patients were able to see a resident or faculty member in the FPC? Are the data available to support this? This represents additional cost savings to the overall health system in the region because the right level of care was provided at the right time. The Multiplier Effect: Although developed with sound research design and supported in the literature, arguing the multiplier effect for primary care is at times discounted by hospital administrators. A 1999 study found that for every $1.00 of primary care collections, $4.71 is generated to a subspecialty physician and $10.32 is generated to hospital partners.22 One must take into consideration the payor mix of the residency program’s ambulatory practice, since the argument for a multiplier effect of this size might be a challenge. There definitely is some multiplier effect for the physicians and hospitals thanks to the presence of a residency program, however. Although it is important to track and know this information, it is also important to be mindful of federal and state anti-kickback and self-referral laws. While the hospital can consider the impact of hospital revenue generation in determining the financial viability of the residency program, it cannot pay for referrals or admissions, nor should there be any expressed or implied understanding that continued referrals or admissions are contingent on the hospital providing any form of remuneration. Furthermore, representing that funding a residency program will result in “X” dollars coming back to the hospital in inpatient and ancillary fees is not only foolhardy, but will annoy the CFO more than it helps your program. So, know the data, but avoid any discussion or representations, even through financial spreadsheets, that might implicate these laws. 3. Calculate the cost of closing: Often CEOs do not calculate the cost of closing a program before making the decision to close. In these situations, the costs of closing the program, terminating contracts, laying off employees, etc., are all part of the final financial statements and often not a major focus of the CEO and CFO as they implement the decision to close. In situations where the hospital is not closing, yet there is a decision to close the program, attention must be given to closing costs as there are both one-time and on-going expenses to be factored into the hospital leadership’s analysis. In fact, one hospital CEO changed his


decision once he realized that the cost of closing would be greater than the savings needed that fiscal year. Identify the costs associated with program closure: There are several predictable costs associated with closing a program. They include: • Cost of transitioning existing residents – this can be significant, depending on the terms of the

resident and faculty contracts. One hospital made the decision to terminate its program and realized afterward that if it did so as quickly as it liked, it would have jeopardized the accreditation of the other programs it sponsored. It was faced with continuing to fund the residents’ education through their matriculation. This was not the financial savings originally anticipated.

• Termination costs of faculty contracts • Severance costs of staff • Lease commitment for physical space • Legal expenses and potential liabilities should anyone sue In addition to the actual closing costs listed above, there are costs associated with reduced workforce. Anecdotally, this was demonstrated through an unpublished study conducted at a large southern hospital by a major consulting firm. The study found that: • Replacing residents with staff physicians would cost between 1.5 and 1.7 times more than

retaining the residents and would not affect, positively or negatively, the patient load. • Replacing residents with a combination of nurse practitioners and staff physicians would cost

between 1.3 and 1.6 times more than retaining the residents. - These replacement calculations included all costs associated with the residency, including

those costs associated with the utilization of lab, x-ray and other services. • Teaching programs enhance the quality of care for patients. Besides direct costs associated with closing the program, what else “goes away” for the hospital? One hospital experienced increased costs associated with the expansion of emergency room services to meet acute care needs generated by the loss of preventive services that had been provided by the FPC.23 Consider what happens if your program goes away. Make a list of all the services the residents and faculty provide and estimate the cost of replicating each. Highlight the impact on the workforce shortage in your region: The strong, positive relationship between primary care physicians, as part of the health care infrastructure, and the economics of a community have been well-documented.24 Between the projected shortage of physicians by 201525 and the economic engine generated by each primary care physician in a community, downsizing or closing a residency program in today’s health care market is shortsighted. How many graduates from your program have stayed in the area? How many still admit to your hospital? How many more physicians are projected to be needed in your region? You can access information regarding your county from the report California Physician Workforce: Supply and Demand Through 2015.26 In addition, as discussed in Chapter One, AAFP’s Health Landscape Web site27 provides for custom GIS mapping of certain datasets that may prove invaluable, as does OSHPD.


Consider available benchmarking data with caution: Although it would be useful to have benchmark data of other programs to compare with your program, and to use that comparison as part of your argument to the hospital CEO and CFO, be careful with this approach. The National Institute for Program Director Development has a wealth of financial data on various programs. Another approach to gathering benchmark data would be to contact multiple programs within your state to obtain their financial information. While these data may be useful, it’s important to consider the methodology used to develop and report such data. This methodology can vary from hospital to hospital. Most hospital CFOs will only consider benchmark data that is an “apples to apples” comparison. If it isn’t, it’s possible that your entire analysis will be discounted. Likewise, if the hospital is using its own benchmark data, determine if this also is an “apples to apples” comparison.

III. Trigger Your Network

On one hand, it is important to let your customers – those who value your program – know that the program may be at risk. On the other, it is important not to sound the alarm too quickly or too carelessly lest it panic applicants, residents, faculty and key stakeholders. The ability to trigger a network represents one of the benefits of the hours of community service, board participation, committee participation, outreach, etc., given by faculty and residents. Involve them, let them know of the risk, help them see how it directly affects them, and ask for support and assistance. The vast majority of California programs threatened during the past five years were able to survive due in part to the program directors triggering their networks. One succeeded by garnering community political support and pressure. Another survived by letting the word out among the family medicine program directors in the state, thereby connecting the program with resources that helped facilitate the program’s closure and immediate reopening at a new SI. Still another reached out through its network to the hospital system CEO to provide an interim contract and gain time to redesign the program. One program director advises that political involvement is something you cannot put off until a crisis. Stay connected and involved. Develop a reputation as a problem solver and reliable resource for information. VI. Counteract the Rumor Mill If there are already rumors about your program, there are several actions you can take. They should all contribute to the transparency of the situation. This is particularly important because the rumor mill in the family medicine community can be strong. Ensuring that key stakeholders have consistent information, and instilling confidence that changes will be promptly shared, will engender trust in and reliance on your information, rather than that of the rumor mill. Scheduling regular meetings with all affected by changes is an important first step. Meetings with faculty may be separate than those you have with residents, but there should be a regular opportunity to share what you know. Second, use these meetings to work on strategy. Given the information you have, identify threats, opportunities, resources and future options. Use a visioning process to outline


what your program might look like, given potential changes. Identify the factors that are core to your mission. This will be an important reminder of your program’s strengths. Understanding the potential threats is important, too. This is an opportunity to mediate the affect of those threats. For example, if your program is transitioning to a different model or to a different site, the transition process could be seen as a weakness. Working with faculty and residents to develop a transition plan will help mitigate this threat by providing reassurance that the weakness is being addressed. It will also help to engage faculty and residents in the process, as all parts of the team are working together toward the same end goal. Other components that will help include regularly updating your Web site and publications with any transition news. The more people don’t know, the more they will speculate and that contributes to the rumor mill. Likewise, continue to be active in local, state and national events. Having a presence sends a signal that your program is still vital. Finally, all of these activities may be going on in the context of residency recruitment. Successful recruitment is dependent, in part, on the excitement of faculty and residents involved in the process. If they don’t feel confident and excited about the program, it will affect recruitment. Identify a program coach or cheerleader. This cheerleader can provide reminders about all of the things that make your program special, and the plans to address any weaknesses. This will help to maintain confidence throughout the recruitment process. V. Pull Your Contracts and Review Them Do you know what is stated in your contracts? For example, what contractual guarantees exist within resident contracts? This can often prove to be a rate limiting factor. Some contracts allow for residents to be terminated with 10 days’ notice. Others require the hospital to provide more than a year’s notice and provide for costs associated with relocation. Still others require the hospital to matriculate all residents in the program prior to program closure. You also need to know the terms of your faculty medicine group’s contract. How much notice is required? What liabilities exist for the hospital should it terminate the contract? It is also important to know the timelines and costs, per the contracts, of a decision to close or downsize. VI. Next Steps 1. Schedule an appointment with the decision maker. 2. Obtain from the decision maker the items listed under I above. 3. Pull all contracts and review terms. 4. Call a faculty meeting to notify members and request their assistance. 5. Develop a plan regarding communication with:

a. Current residents b. Incoming residents c. ACGME

6. Put word out to program directors, CAFP, AAFP, consultants, and others who can help.


7. Obtain a clear and specific understanding of timelines envisioned by the hospital. 8. Develop an understanding of the level of commitment and the opportunities for “saving” the

program. 9. Meet with key leaders in your community and at your hospital. 10. Compile financial information as detailed above and in Chapter One. 11. Develop a strategy. One part of the strategy will focus on how to preserve the program as it is.

The other part, depending on the nature of the decision made, will focus on how to either effectively downsize or how to sunset and open a new program.

12. Reconcile financial information with the hospital CFO so that he or she will attest to its accuracy. Jointly present the revised financials to the decision maker.

13. Meet regularly with decision maker regarding financial information and timeline. 14. Meet regularly with your faculty and key stakeholders to maximize communication and

minimize rumors. 15. Develop an internal and external communications plan. Finally, remember one program director’s advice on what had the greatest impact on saving the program: “Data, data, data.” The presence of concise and accurate data that are legitimate in the eyes of the CEO and CFO is invaluable. As discussed previously, this means data on finances, value, impact and outcomes.


Chapter 4: What to Do If Your Program Cannot Be Saved It is disappointing, time consuming and demoralizing when a program, in its current form, cannot be saved. But there is a range of options to consider when faced with a program closure. This chapter outlines the steps to take on the road to re-establishing a residency program. Semantics may not seem like a priority if your program is in trouble, but they are very important. You are not “moving” the program. You are “sunsetting” the program (in other words, closing the program) and developing a new program at a new hospital. References to “moving” can result in GME being denied at the new facility, which is one way terminology can affect the future of your program. Keep in mind that no one feels good telling a program director that his or her program is closing. Even the toughest CEOs and CFOs are looking for a way to feel a little better about the news they are delivering. Now is a great time to ask for what you want (i.e., the right to purchase the assets, money to fund the transition, etc.). If your requests are approved, immediately memorialize them before the situation changes. If your program cannot be saved in its current form, there is a series of actions to undertake to lay the groundwork for successfully sunsetting and working with another SI. Steps to take include: 1. Get information 2. Buy time 3. Meet with the faculty and residents 4. Get the word out 5. Notify the RRC 6. Organize your team 7. Begin scouting for new facilities 8. Develop your business and educational plans 1. Get Information Information to obtain: As soon as possible, obtain or determine the following information: 1. Status with the RRC

a. Is the program in good standing? If not, your ability to sunset the program and start anew may be compromised.

2. The legal structure of your current faculty group a. Is it already organized as a single corporation with a hospital contract for teaching and

residency program administrative services? If not, to be successful in starting the new program, you may need to begin the process of creating a corporation.

3. What will be happening to the current SI and by when? a. If the entire hospital is closing, what is the anticipated date? Is this realistic, or will it really

be sooner, particularly as volume and services dwindle?


b. If it is just your program, are there other ACGME residency programs with the same SI? i. To the extent that the hospital sponsors other ACGME programs, you may be able to

negotiate more time, since the ACGME wants to see appropriate and thoughtful program closures. Doing other than that may jeopardize the other residency programs at the SI.

c. If it is just your program, will you want, or be allowed, to have rotations at the hospital in the future should you successfully start a new program at a different SI?

4. Is the current FPC a 1206(d) clinic? That is, is it on the hospital license? Or, is it a clinic that is owned and operated by a faculty professional corporation or some other entity? Will you need to vacate your space should you decide to start a new program at a new facility?

5. Is there anything that prevents the faculty from sunsetting the program and starting a new program at another hospital, even at another hospital that directly competes with your current hospital? Is it your program to move?

6. If the faculty members are able to find a new hospital sponsor, can the current program sunset the residents at the old hospital, or will the old hospital either not allow it or be closed by then?

7. Will the hospital provide any resources (e.g., money, relocation assistance, financial, legal, etc.) to help with the relocation of residents or sunsetting and establishment of the new program?

8. Pull all contracts with the hospital and, if different, the SI. What is stated about termination? How much notice must be given? How much time is allowed until the program is closed? What are the responsibilities of the hospital to the residents, as stated in the contract?

9. Should the program be required to vacate the current FPC, does it have right of first refusal to purchase the assets of the FPC at fair market value?

10. When is the next family medicine RRC meeting? What is the drop dead date for submitting documents for consideration at that meeting?

2. Buy Time

Time is critical to the successful creation of a new residency program. Many of the strategies to buy time have been outlined in previous chapters, but there are several additional steps you can take. These include: • Requesting an outside financial analysis to provide an objective assessment of the residency

program; • Including contractual language in the faculty contract that requires the hospital to give notice to

the faculty before January of any year to take effect that next July; • Supporting political and legal pressure from residents; and, • Negotiating an interim agreement (e.g., one year) with specific deliverables to be achieved during

that year, such as obtaining grant funding, developing a business plan, etc. 3. Meet with the Faculty and Residents

Opening a new program requires the support of faculty who must be fully invested in taking on the new tasks of program development. Without their help, it will be virtually impossible to sunset the program and open a new one. It’s common to wonder what do I say to whom and when? You may


want to avoid sharing information about the potential for closure for fear of losing good faculty; not telling them is worse because it prevents your access to their knowledge, support, networks, and ability to help. What to say to residents is also a challenge, especially when notice of termination occurs during interview season. You hope you can change the situation and therefore don’t want to tell the residents and risk losing good candidates, but interviewing residents deserve to know the situation.

When you meet with residents, discuss the following: • Those things you know to be fact • Those things that are still unknown to you • What you see as options at the moment • A plan for communication • Any questions or concerns When you meet with faculty, discuss the above, and the following: • A communication plan, targeted to internal and external stakeholders • An approach for exploring new sponsors • An approach with the RRC • Discussion of the best hospitals to approach • Options for buying time • Agreement among the entire faculty on your plans 4. Notify the RRC

Multiple factors go into the decision of when to notify the RRC (timeline for closure, the time of the year, and the feasibility of options for a new program are all factors). The RRC does not want to see good programs close. Because of extensive experience with program closures, the RRC will know of resources, tactics, and options. The RRC is a program director’s ally and resource and should be notified early and consulted often. Doing so will facilitate getting a new program through the pipeline quickly, if that is the intended route.

5. Organize Your Team (before, during and after the transition)

In addition to continuing to run the day-to-day operations of your program, you must now start exploring potential new sponsors. This is a complex challenge. The Balanced Budget Act of 1997 (BBA ’97) established new rules for residency program reimbursement and few hospital CFOs are familiar with them. Creating a new program requires a team of individuals. Ideally, your current SI will fund the necessary consultants. At a minimum, you will need:

Legal Counsel Medicare reimbursement law is a level of legal expertise not possessed by every health care attorney. GME reimbursement, as a subspecialty of that, is even more esoteric. Some hospitals insist on using their legal counsel to start a residency program, only to regret the decision when mistakes made left


hundreds of thousands of dollars on the table. Choose a legal counsel who has started a residency program during the past five years.

Who should retain the legal counsel? Ideally, you have identified a possible new sponsoring hospital and that hospital should retain this legal counsel. Your job, as the program director or faculty working to sunset the program and start a new program, is to: 1. Know that legal counsel experienced in GME reimbursement is critical; 2. Know of individuals and firms qualified to perform this service; and, 3. Notify potential new sponsoring hospitals of the critical nature of including such an individual on

the team, early in the process.

This is not to say that the faculty group, however legally structured, won’t need legal counsel. The faculty needs a competent transactional health care attorney, ideally with academic experience. This attorney’s role is to work with the hospital’s counsel to develop a legally sound faculty contract. There are two major risks should the faculty group not retain counsel. The first is technical: you run the risk of executing a contract with legal and business terms that disadvantage the faculty. The second is psychological: faculty, seen by hospital administration as relatively desperate to secure the program with a new SI, will not push back on business and legal terms that are patently unfair. Legal counsel not only provides the technical expertise, but can serve as a buffer to minimize the sense of desperation or vulnerability that might be perceived, and acted upon, in the heat of negotiation. The cost of legal counsel for the faculty group may be negotiated with the old sponsor as a term of closing the program.

Cost Report Consultant It is well worth the consulting fee to bring in an outside cost report consultant to conduct the initial reimbursement analysis and participate in the business plan development. Similar to legal counsel, the new sponsoring hospital should retain the cost report consultant. Hospitals often have the mindset that the only financials they believe are financials that come from them or their consultants, and rightfully so, since the Medicare cost report is, in many ways, the financial backbone of their organizations. It is also a document that, if completed fraudulently, can result in criminal and/or civil penalties for the individuals involved. No CEO wants to spend time in jail because of an outside consultant or a program’s numbers. Cost report consultant advice is important long before running the numbers for a new sponsoring hospital. Without that expertise, it will be more difficult to identify primary candidates for a new SI.


Financial Analyst Most program directors and faculty didn’t go to medical school to crunch numbers. Further, most physicians speak “medicine” or a dialect of “medical finance.” They don’t speak CFO. To make matters more difficult, CFOs don’t speak “medical finance.” This can mean that in the midst of a crisis, with only weeks or months to start a new program, you have a communication disconnect between the programmatic and financial side of the house. Without a bridge, you will be at a standstill.

Among the members of your team, a finance expert is essential to help you cross that bridge. The expert must be one who can quickly build legitimacy with the hospital CFO while understanding the world of family medicine residency training. Physicians can do this, but it’s not ideal since, in the eyes of hospital administration, they often lack credibility on financial issues. As with the others, if you are lucky, the entity closing your program might pay the costs associated with such an individual.

6. Begin scouting for new facilities

There are many factors to consider when determining the short list of potential new hospitals; picking the right one can be a difficult decision. Several factors will help you determine the appropriate next step.

1. Ten miles and thirty minutes The FPC, per the RRC, must be no more than 10 miles and 30 minutes away from the sponsoring hospital. If the plan is not to move your FPC, then draw a circle on a map with a 10-mile radius. Any acute hospital within that circle is now a potential candidate, assuming one can drive between the two points within 30 minutes.

If you need to vacate the current FPC as part of the program closure, you can move as far as you think your patients will follow. A program that closes in San Diego could open in Los Angeles, but its educational mission, graduation competencies, and focus on community service might also change. And, the patients likely would not follow.

2. Cap of Zero As discussed in Appendix A, BBA ’97 created a cap for each hospital on the number of resident FTEs for which it will be paid. This amount is based typically on cost reports that ended between January 1, 1996 and December 31, 1997. Hospitals with no residents or fellows posted on their 1996 and subsequent cost reports may have a cap of zero. These are the only hospitals that can

Case example: One program director lost precious time while multiple hospitals – each considering becoming the new residency program’s SI – argued as to how the GME rules work and whether or not each of them would be reimbursed. Not only were none of them correct, but the program director then had to scramble to find a new sponsor. This could have been avoided if someone, even the faculty, had retained a cost report consultant to answer questions and discuss options.


start new programs and increase their caps. Hospitals that trained residents but failed to include them on the cost report may nevertheless be challenged by CMS in their ability to increase their caps or establish a new Per Resident Amount (PRA).

There are two sources of information used to determine whether or not the hospital has a cap of zero. One is to ask the hospital CFO. Have the CFO check historical cost reports back to 1996. The Robert Graham Center also has these resources, available in two datasets on its Web site. The first provides the name and Medicare hospital ID number.28 The second provides the Medicare hospital ID number, the number of residents and fellows on their cost report and their reimbursement.29 By determining a cap of zero, you can quickly eliminate hospitals within the 10-mile radius or, if moving the FPC, eliminate nearby hospitals that might still provide a similar educational experience but won’t be able to financially support a residency program.

3. Percentage of Medicare and number of beds The formula for calculating GME and IME reimbursement is based on a number of factors, including the Medicare share of total reimbursement at the hospital and the number of licensed and set up acute beds. [See Appendix C for formulas]

As a rule of thumb, any hospital with a Medicare percentage of 35 percent or more (including Medicare Advantage), should rise to the top of the priority list. A small hospital with a high Medicare percentage falls to the bottom, however. This is due to both the low number of beds and to the fact that it may be difficult for a hospital of that size to offer the educational and organizational environment appropriate for sponsoring a training program.

4. Will the FPC need to move? This has partially been addressed in #1 above. If you can stay in the FPC, that’s great. But you’re limited to the 10-mile radius. If you have to move, then your options increase; however, there are numerous factors to consider: • Will your patients follow to the new site? • How long will it take to get the new FPC licensed?

o As a 1206(d) clinic? o For Medi-Cal?

• How close is it to the new hospital? • Will construction and/or tenant improvements be required? • Who will pay for them? • Can you bring your existing equipment, inventory, etc. with you? • Will the program curriculum substantially change due to this move? • How will the move affect your community medicine curriculum? • How will the move affect your community service initiatives? • How will the move affect your mission?

o For example, if your mission is to focus on the Latino population and the FPC moves to a location with a smaller percentage of Latinos, what will that do?


It’s also important to consider the effect of a move on:

1. Mission, philosophy and core values Do the new hospital’s mission, philosophy and core values “fit” with those of the residency program and its faculty, staff and residents? Do they need to? This is a marriage. If there is a fundamental disconnect, the program and residents will suffer and eventually fail.

2. Scope and volume of services

Does this hospital have the types and volume of services to provide a quality educational experience? If not, does the hospital understand and support the fact that certain curricular components will take place at other facilities?

3. Medical staff

What are the issues and politics of the medical staff? Is this an environment that will be supportive of residency training, specifically family medicine residency training? Will the medical staff support opportunities being created for the residency program faculty and staff? Will the medical staff participate in education? Is there overlap of medical staff between the old hospital and new hospital?

4. Bylaws

Do the current bylaws of the hospital support the scope of practice of family medicine? If not, will there be significant resistance to changing them? Can family physicians do obstetrics? Will a new program have support from the medical staff for any changes needed?

5. Financial performance

How is the hospital’s financial performance both today and historically? Does it have a positive operating margin? How much so? Does it have the capital to address policy mandates such as SB 1953? Has the hospital had a positive trend of sound financial performance or has it been a rollercoaster? Does the hospital have the reserves as well as the tolerance of its board to endure cash flow delays while waiting for the fiscal intermediary to begin interim payments for the residency program?

6. Institutional commitment and support What is the commitment of its board (i.e., to a residency program, administration, medical staff, etc.)? What has this hospital historically done, if anything, during lean financial times? How does the program fit into the hospital’s strategic objectives?

7. Capabilities and capacity of CEO and CFO

Do the CEO and CFO appear financially astute, strategic, visionary and competent? Does the medical staff respect them? Do they follow through on their commitments? What is their reputation? Can you work with them? Will they stick with your program through thick and thin?


8. Presence of sound business principles for undertaking this commitment

Why does the hospital want this program? What are its stated reasons? What do you believe are the unstated reasons? Are the reasons sound, sustainable and logical?

9. Hospital ownership

As discussed earlier, the ownership type of the hospital (e.g., for profit, not-for-profit, municipal) can affect the program’s mission. It is also integrally related to the business plan and how decisions are made within the organization.

10. Perception of hospital by your patients

What do your patients think about the hospital? How is it viewed by the public? Will your patients go there for care?

11. Payor relationships of hospital

Inquire about contracts early in the process. Does the hospital hold the same payor contracts as the faculty group? If not, is it willing to contract for them? Does the hospital contract with Medi-Cal?

12. Develop your business and educational plans

Extensive detail about developing the business plan is provided in Chapter Five. For now, know that the development of the program information form (PIF) and the development of a business plan happen concurrently.

7. Negotiate the deal Once the business plan is complete and medical staff has expressed support, you are ready to submit the PIF and need a binding letter of intent, at a minimum, from the hospital to send to the RRC with it. It’s time for the negotiation. Negotiating is an art – in many ways one for which family physicians are well-suited as a result of their behavioral medicine background and training. Reading the other party’s emotional intelligence and understanding what they need out of the negotiation is important. The challenge, however, is the emotional attachment program directors may have. More than one program has been compromised by a passionate program director who, early in the negotiating process, gave in to save the program despite less than positive terms. One tactic is to have a counterpart in the negotiation to play “good cop, bad cop.” In this way, the program director can demonstrate the passion and enthusiasm that CFOs and CEOs like to see, while someone less emotionally invested points out issues and concerns. A classic text in the field of negotiation is Getting to Yes: Negotiating Agreement without Giving In.


Chapter 5: Building the Business Plan

Options for Business Models There are various business models available for structuring or restructuring the relationship between a family medicine residency program and a hospital. Each has pros and cons to consider. Schematics and explanations of each are provided below: Model A (1, 2 and 3): For this model, the hospital is also the SI. Hospitals that have never sponsored a residency program may become SIs. The hospital will need to appoint a designated institutional officer (DIO) and create a GMEC. If the hospital already has a residency program, it can increase its Medicare resident FTE cap only if it is within the three-year timeframe of setting the cap. To add a program, the hospital must successfully complete a formal SI approval process by ACGME prior to the matriculation of the initial class of residents. Model A assumes the following: • The hospital is the SI; • The hospital contracts with a separate medical group to provide teaching and residency program

administrative services; and, • The hospital develops an academic affiliation with a medical school. Models A-1, A-2, and A-3 differ in the location and licensure of the FPC. BBA ’97 provided that for IME and GME purposes, resident time in ambulatory rotations could be included if the hospital could document that it was paying “substantially all of the costs” of education at the ambulatory sites.30 Model A-1 would have the FPC located in space licensed as part of the hospital (in California, referred to as a “1206(d)” clinic), whereas Model A-2 would be in a physician ambulatory practice. Model A-3 refers to location in a FQHC. FQHCs have the ability to claim GME. Because their Medicare utilization often is low, however, this is usually not a financially viable model. If an FQHC does not claim the GME on its cost report and the hospital pays substantially all of the costs associated with the residency program, then the hospital can claim both the GME and IME. The hospital and FQHC may negotiate a payment for the services the FQHC provides to the residency program. This negotiation is separate from any negotiation with the medical group for teaching or program administrative services. If payment goes directly from the hospital to the medical group in this model, and the hospital intends to claim the time in the FQHC for GME/IME purposes, then it is unclear whether the payment for teaching physician services from the hospital needs to be run through the FQHC. The fiscal intermediary should be consulted in this regard.


Pros: Model A-1 Cons: Model A-1 • The hospital has ultimate responsibility and

accountability for the residency program. • The medical group bills the professional

component of the encounter and the hospital bills the technical component.

• The hospital contracts with the medical group for administrative and educational services. The hospital does not contract for any clinical services because the medical group is responsible for billing and collections.

• Hospital-wide initiatives usually include the FPC (e.g., new quality programs, implementation of electronic health records, etc.)

• Staff members are employed by the hospital, not by the physician group.

• The hospital “owns” the program. This seems to provide an emotional connection that translates into the program benefiting from opportunities that it might not be given if not under the hospital license (e.g., program expansion and integration with other hospital-based programs, business development, fundraising, etc.).

• Professional collections will decrease, due to the hospital billing the technical component. The medical group is not responsible for the expenses related to the technical component (e.g., clinical staff, leases, supplies, equipment).

• The FPC is subject to all policies and procedures of the hospital. Often, these are more rigid and onerous than what exist in a typical physician practice.

• The FPC is subject to Joint Commission, DHS, and other regulatory entity surveys. Such surveys are not typical for physician offices and may seem onerous.

• Hospital-wide initiatives can be viewed as unnecessary or burdensome by physician groups.

• Many private payers do not recognize the hospital technical component of outpatient evaluation & management (E&M) codes and other routine services. If the hospital doesn’t receive payment for a service but does incur costs, this creates potential regulatory issues.

• Many payers do not pay the technical component to hospitals for ambulatory visits. This represents lost revenue.

• The hospital and medical group must have the same payer contracts if they intend to successfully bill both components.


Hospital (Sponsoring Institution)

University Affiliation

Medical Group – Private, For-profit; Private, Not-for-profit; or Public

Model A - 2: Sponsoring Institution = HospitalSeparate Medical Group has Teaching ResponsibilityAcademic Affiliation between Sponsoring Institution and University

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Pros: Model A-2 Cons: Model A-2 • Hospitals often do not want ambulatory

practices. When they do have them it is often not an ideal situation. In A-2, the physician practice is solely responsible for clinical operations in the ambulatory setting, alleviating the hospital of operating an ambulatory clinic.

• The medical group has more autonomy in day-to-day operations.

• The medical group bills for services and public programs pay at higher levels than if the hospital were billing a technical component. However, the medical group is also responsible for all costs, including staff, lease, supplies, etc.

• Hospital services (e.g., marketing, business development, contracting) provided to the FPC at below fair market value rates (or without a fee) raise potential regulatory risks.

• Should the contractual relationship terminate for any reason, the medical group could be at risk for the lease for the balance of the contract, employee severance costs, etc.

• The hospital has little control over the policies and practices in the FPC.


Hospital (Sponsoring Institution)

University Affiliation

Medical Group – Private, For-profit; Private, Not-for-profit; or Public

Model A - 3: Sponsoring Institution = HospitalSeparate Medical Group has Teaching Responsibility within

an FQHCAcademic Affiliation between Sponsoring Institution and University

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FPC located in a Federally Qualified Health Center

Pros: Model A-3 Cons: Model A-3

• Similar to A-2, with the following additions: Outpatient encounters are reimbursed by CMS under cost-based reimbursement methodologies. FQHCs have a payment cap and productivity requirements, and they are paid the lesser of the cost per visit or the FQHC cap.

• Physicians tend to have less autonomy and authority since they are working under the policies and procedures of the FQHC.

Model B Models B and C (discussed below) are based on a contractual relationship between the hospital and a university. These models are identical, except that in Model B the university assumes some risk, in model C, the majority of risk. In Model B, the university provides the academic affiliation while its practice plan, as a separate legal entity, assumes the financial risk for the provision of administrative and educational services.


Pros: Model B Cons: Model B • Hospital financial risk is a set, known

amount.

• Problems can arise if the incentives of the hospital, university, and practice plan are not aligned.

Model C Model C is one where the hospital, as the SI, contracts with a university for both the academic affiliation and the provision of educational and administrative services. Similar to Model A, the university practice plan would provide the clinical care in the FPC, either with the FPC under the hospital license (A-1) or with the university owning the FPC (A-2). The university receives all compensation from the hospital and is responsible for the medical school’s practice plan to deliver under the terms of the contract.


Pros: Model C Cons: Model C • A pro for the hospital is that much of the

risk is transferred to the academic institution.

• A pro for the academic institution is that it has greater control over issues of quality and education.

• Cash flow delays from the hospital to the academic institution may be problematic. One of the entities must assume the risk for cash flow.

Model D Model D assumes the FPC is located at an FQHC.

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Pros: Model D Cons: Model D • To the extent that the presence of the

residency program increases the number of patient encounters at the FQHC, then the FQHC collects additional cost-based reimbursement.

• FQHCs have a different culture than hospitals and academic practices. Incentives must be carefully aligned and maintained.

• There is no separate billing for the professional component in a FQHC, rather there is a global payment for services.

• FQHCs cannot bill for GME. The hospital must pay substantially all of the costs of education and claim the resident FTE time on their cost report.


Finances: What’s In; What’s Out When identifying the finances to include in your business plan, a number of factors should be addressed. Table 1 provides guidance in this regard. Although hospital-related and medical group-related expenses are listed below, it is important to separate hospital revenue and expenses from those of the medical group. Showing professional fees as part of a hospital proforma may give the impression of kickback, even if that’s not the intent. Table 1

REVENUE Facility Fees - Applicable only if FPC is under the hospital license or within an

FQHC. - If under hospital license, the hospital pays for all costs of FPC (e.g., staff, rent, etc.) and bills/collects a technical component. Physicians are responsible for the costs associated with the professional component and are responsible for billing/collecting that component.

Professional Fees - List the professional fee charges, contractual adjustments, and net collections. Billing office expenses should be detailed in the expense section, not as an adjustment to revenue.

GME - Per Resident Amount (“PRA”) x percentage Medicare x FTE residents

IME - Based on cost report estimates * actual allowable rotation. - Incorporate into this calculation any lost FTEs due to contracts not being signed, incomplete files, non-educational activities, etc.

Grant Revenue - Include offsetting expense associated with any grant revenue EXPENSES

Resident Salaries - Provide separate schedule with detail Staff Salaries - Provide separate schedule with detail

- If FPC is under hospital license, this expense will be the hospital’s. - If FPC is part of a private practice or university model, the expense will belong to the private practice.

Benefits Professional Services Agreements

- Detail any teaching costs to group ambulatory practices or inpatient physician groups. - A proposal to pay the medical group more than fair market value should be reviewed by legal counsel and may cause regulatory concerns. - Includes contract to faculty group, which also needs to be documented as fair market value.

Non-Wage Rent - If under the hospital license, then this is a hospital expense.


- If part of the faculty practice group, then this is not a hospital expense.

Equipment Leases - If under the hospital license, then this is a hospital expense. - If part of the faculty practice group, then this is not a hospital expense.

Medical Supplies - If under the hospital license, then this is a hospital expense. - If part of the faculty practice group, then this is not a hospital expense.

Office Supplies - If under the hospital license, then this is a hospital expense. - If part of the faculty practice group, then this is not a hospital expense.

Residency Programmatic Expenses

- Include separate schedule of expenses - Includes recruitment, graduation, travel, licensure, etc.

Depreciation OFFSETS TO REVENUE

Unpaid & In-kind Services

- Quantify services provided by residency program to hospital for no fee (e.g., ER call, initial H&Ps for inpatient services, code blue team, Joint Commission prep, etc.)

Recruitment & Relocation Expense Savings

- Quantify the cost outlay the hospital will save by not having to search for, recruit and retain physicians to their region due to the graduation of their own residents.

DSH - To the extent the FPC is generating safety net services on an inpatient basis, this will increase the Medi-Cal percentage which increases the DSH. This should be credited to the program

Other Next Steps

1. Determine the extent of financial risk and exposure that the faculty group is willing and/or able

to assume. 2. Meet with CEO and CFO of the new hospital and discuss business models.

a. Identify amount of financial risk and exposure that the hospital is willing to assume. Then identify the preferred model and begin developing financial scenarios.

3. If the model requires the faculty to have its own professional corporation, immediately begin the process to incorporate.

4. Prepare a resident rotation schedule, by half-day blocks, to calculate FTEs to develop GME reimbursement estimates.

5. Ask the hospital cost report staff and/or consultant to calculate projected GME reimbursement based on rotation schedule and hospital financial indicators.

6. Conduct a conference call with the hospital’s fiscal intermediary, cost report team, and CFO to notify the fiscal intermediary of the program coming on board and to obtain guidance and direction.

7. Identify a location for the FPC.


a. Develop financial proforma similar to Appendix C. 8. Meet with the hospital’s medical leadership. 9. Negotiate business terms, including:

a. Compensation for providing educational services and administrative services b. Terms for renegotiating compensation c. Identification of who is employing the residents d. Identification of which entity is responsible for operating and staffing the FPC e. Length of contract

10. Negotiate legal terms. a. Some of the terms you want in your contract include:

i. Termination language that requires notification prior to submitting match lists. Ideally, negotiate termination notification no less than 18 months prior to termination date.

ii. Responsibilities upon termination: include specific language to require the SI to pay the residents’ salary and benefits plus training costs until a) residents are successfully transferred to another program; and, b) all other residents matriculate.

iii. Lease provisions: to the extent that the FPC’s lease is the responsibility of the faculty, negotiate a clause that requires the sponsoring institution to pay for the lease payout should the contract be terminated.

11. Obtain a binding letter of intent (LOI) from the hospital. 12. Develop a PIF, including either a binding LOI or preferably, the definitive agreement. 13. Submit all documentation for the new program to the RRC, while concurrently submitting a

request for voluntary withdrawal of the existing program. Establishing Your Program There are many additional details to consider as the program is established at a new facility. Assuming the new facility will qualify for Medicare GME purposes as a new teaching hospital, one such detail is the PRA, calculated during the first cost report year that residents train in the hospital. The hospital’s cap is set based on the resident FTEs in the third cost report year. It is critical that the program maximizes its resident FTEs in year three of the cost report to set the maximum cap possible. Keep in mind that cost reports are settled between the fiscal intermediary and hospital a year to 18 months after the fiscal year ends, and the fiscal intermediary may reduce the number of allowed resident FTEs. In any year this occurs, the hospital’s reimbursement decreases, negatively affecting the financial performance of the program. Even more concerning is the extent to which resident FTEs are disallowed in the cap-setting year. To the extent that FTEs are disallowed, the cap will be set lower than the actual number of residents who are in the program. Therefore, you want to build up the number of residents in that third year, and do so in concert with the cost report and finance experts of the hospital. Additionally, keep detailed and accurate records of rotations and resident’s files. Finally, be careful with the non-provider based rotations. In order for non-provider based rotations to count for GME and IME, the hospital must incur substantially all of the teaching costs of the non-provider site. This is a term of art that requires the input of legal or consulting experts. These costs should be calculated and carefully documented before the start of the rotation. While regulations do not require a written agreement


with the non-provider site, the alternative is that the hospital must prove reasonably concurrent payment of the site’s teaching costs (within 90 days of their being incurred). A written agreement executed before the resident sets foot in the non-provider site is strongly encouraged, particularly in the cap-setting year (year 3).


Appendix A

Overview and History of Medicare Graduate Medical Education Funding

With the passage of Medicare in 1965, the government made a policy decision to pay for medical education in addition to health care services. It was seen primarily as a vehicle to enhance the quality of patient care. Congressional testimony regarding Medicare enactment indicated that support for medical education could serve as an interim step, “until the community undertakes to bear such education costs in some other way, that a part of the net cost of such activities (including stipends of trainees, as well as compensation of teachers and other costs) should be borne to an appropriate extent by the hospital insurance program [Medicare].”31 In the early part of the 20th century, physicians rarely pursued additional training, and if they did, it was hospital-based and they received room, board, and laundry services in addition to training.32 As medical knowledge and technology evolved, the need for specialization increased. From World War II until the creation of Medicare, physicians participated in hospital-based internships for which hospitals paid, using reimbursement from patient charges, the costs of training. Once Medicare was established, hospitals were paid Medicare’s proportion of “reasonable costs” for the salaries and benefits of residents, along with faculty and administrative costs of the educational programs. This payment came to be known as GME funding. Other payers reimbursed hospitals based on usual and customary charges. Both models – that of reasonable costs and usual and customary charges – are ones where hospitals are paid based on costs, referred to as cost-based reimbursement. Under this model, there were no disincentives affecting the number of residents or the provision of additional services to patients. If it was provided, it was paid for. Payment was rendered retrospectively; there were no financial limits or constraints on establishing or expanding residency programs.

In 1982, the federal government identified the need for a second component to the GME financing mechanism. IME was instituted in 1984 in order to offset additional costs hospitals incurred due to having interns and residents involved in patient care. The creation of IME happened concurrently with Medicare’s shift in payment for inpatient hospital services from a retrospective, cost-based reimbursement model to that of a prospective, set payment based on diagnoses. Undertaken in order to control hospital costs, the new model was appropriately named the prospective payment system (PPS) and was a significant Medicare reform. Under PPS, hospitals were paid GME based on a PRA. A hospital’s PRA was determined based on the amount each hospital paid to the resident in salary, benefits, and malpractice, as well as the cost of faculty, educational administrative expense, and educational facility expense. The PRA was multiplied by 1) the number of FTE interns and residents at a hospital; and 2) a fraction equal to Medicare’s share of the hospital’s inpatient days. Hospital PRAs varied widely, ranging from $7,500 per resident to $200,000 per resident.33 IME was also paid to each hospital, to the extent the resident trained within the hospital, to offset the hospital’s extra utilization expense due to the presence of a teaching program. It was calculated as a percentage add-on to the hospital’s diagnosis-related groups (DRGs).


Balanced Budget Act of 1997

Concerned with Medicare expenditures and the projected surplus of physicians, Congress included significant changes to GME in BBA ’97. The legislation dramatically altered the Medicare program, with an ultimate goal of balancing the federal budget by 2002. Although BBA addressed many components of the health care system, sweeping and dramatic changes were made to GME. The stated objective of the GME modifications was to address the issues of physician supply, specialty mix, and maldistribution by changing the incentives for training that existed at that time.34 Specific changes were made to provide incentives for increased training in underserved areas as well as for residency programs to develop rural training tracks (RTTs),35 though the rural component was not fully realized until the Balanced Budget Refinement Act (BBRA) was enacted in 1999. RTTs have demonstrated success in the recruitment of residents to rural areas;36 other incentives for residencies created by the BBA have not been demonstrated in the literature, however. In general, BBA ’97 capped residency programs at their 1996 resident FTE levels, regardless of specialty. More specifically, the number of residents on the hospital’s 1996 cost report, with few exceptions, represented the maximum number of FTEs for which Medicare would pay hospitals GME and IME funds. There are limited means for a hospital to increase its cap. BBRA refined one such way; a hospital could establish an RTT. In an RTT, the first year of a resident’s training occurs in the sponsoring urban hospital and thus allows an increase to their resident cap; the final two years occur at a rural hospital and allows them to increase their cap as well. The payment formulas and accompanying rules relating to GME and IME have grown increasingly complex over the years and are outside the scope of this report. As noted in Chapter 4, cost report and legal consultants specializing in this area can be a valuable and often necessary resource.


Appendix B

GLOSSARY

ACGME Accreditation Council for Graduate Medical Education The Accreditation Council for Graduate Medical Education is a private, not-for-profit council that evaluates and accredits medical residency programs in the United States.37 CMS Centers for Medicare and Medicaid Services CMS is the government agency that administers Medicare, Medicaid, and the State Children’s Health Insurance Program (SCHIP). Created in 1965, its mission is to assure health care security for beneficiaries.38 COGME Council on Graduate Medical Education Authorized by Congress in 1986, the Council on Graduate Medical Education provides an ongoing assessment of physician workforce trends, training issues and financing policies, and recommends appropriate federal and private sector efforts on these issues. COGME advises and makes recommendations to: the Secretary of the U.S. Department of Health and Human Services; the U.S. Senate Committee on Health, Education, Labor and Pensions; and the U.S. House of Representatives Committee on Commerce.39 FPC Family Practice Center Family medicine training emphasizes continuous, comprehensive, cost-effective, family-oriented health care. This knowledge is acquired through experience in a model office, called the Family Practice Center. The Family Medicine Residency Review Committee (RRC) has specific requirements for FPCs, which can be obtained by going to www.acgme.org and by talking with the executive director of the Family Medicine RRC. GME Direct Graduate Medical Education Hospitals that train residents in approved programs are entitled to receive Medicare’s direct graduate medical education payment, also known as GME. GME for PPS hospitals is based on an amount known as the hospital-specific per resident amount (PRA) which was determined by the Health Care Financing Administration (now CMS). It is periodically updated using an inflation factor. GME covers the direct costs of training residents (e.g., resident salaries, teaching physicians’ salaries, related overhead). Medicare pays a portion of the hospital-specific PRA for each hospital receiving GME.40 It is calculated by multiplying the PRA times the weighted number of FTE residents working in all areas of the hospital (and non-hospital sites, when applicable), and the hospital’s Medicare share of total inpatient days.41 The Balanced Budget Act of 1997 capped the number of FTE residents for which a hospital may be paid at historical levels. GME Cap Section 1886(h)(4)(f) of the Consolidated Omnibus Budget Reconciliation Act established limits on the number of allopathic and osteopathic residents that hospitals may count for purposes of calculating GME and IME payments.42 Hospitals with a cap other than zero are typically unable to


increase their cap except through the creation of rural training tracks or “sharing” cap with another hospital through an affiliation agreement. Hospitals with a cap of zero are typically able to increase their cap through the establishment of a new program. IME Indirect Graduate Medical Education Prospective payment hospitals that have residents in an approved program receive an additional payment for a Medicare discharge to reflect the higher patient care costs of teaching hospitals relative to non-teaching hospitals.43 IME Calculation C x [(1+r).405-1] where C = a multiplier set by Congress and r = an IME adjustment factor that is calculated using the hospital’s ratio of FTE residents to beds. IMG International Medical Graduate IMGs graduated from a medical school outside the United States and Canada. These schools are not accredited by the Liaison Committee on Medical Education (this committee is sponsored by the AAMC and the AMA). IMGs may be citizens of the U.S. who choose to be educated elsewhere or non-citizens. IMGs must undertake residency education in the U.S. to obtain a license to practice medicine, even if they were fully educated, licensed and have practiced in another country.44 Institutional Requirements The ACGME requirements of a sponsoring institution. See Appendix C for institutional requirements. Major Participating Institution A RRC-approved participating institution is one in which residents rotate for a required educational experience. Generally, to be designated as a major participating institution, in a one-year program, residents must spend at least two months in a required rotation; in a two-year program, the rotation must be four months; and in a program of three years or longer, the rotation must be at least six months. RRCs retain the right to grant exceptions to this formula.”45 Medical School Affiliation A formal relationship between a medical school and a sponsoring institution.46 NRMP National Resident Matching Program A private, not-for-profit corporation established in 1952 to provide a unified date of appointment to residency programs. Five organizations sponsor the NRMP: American Board of Medical Specialties, AMA, AAMC, American Hospital Association, and Council of Medical Specialty Societies.47 PIF Program Information Form The PIF is the specialty-specific document completed by the program director in preparation for a site visit. The document is a compilation of requested information that reflects the current status of the residency program.48


PRA Per Resident Amount Hospital specific or locality adjusted national average or total cost of resident salaries, benefits and appropriate overhead, whichever is less. Program Requirements Each medical specialty has specific educational and training requirements, established by the ACGME RRC. Programs are accredited based on their adherence to these training requirements. Residency Program Director The physician designated to oversee and organize the activities for residency programs. The program director is responsible for the implementation of the specialty’s program requirements.49 RRC Residency Review Committees The ACGME has 27 residency review committees (one for each of the 26 medical specialties and one for a special one-year transitional year general clinical program). Each RRC is comprised of six to 15 volunteer physicians appointed by the ACGME’s member organizations and the appropriate medical specialty boards and organizations. 50 RTT Rural Training Track A rural training program in family medicine may be one of the following: 1. RTT program: at least 50 percent of training is based at a rural location. 2. Integrated rural-located training track program: at least 50 percent of its graduates in the previous

three years have chosen to practice in rural communities, or one that includes all of the following components: a. At least three rurally-located block months; b. A minimum of four months of obstetrics training, or the equivalent in longitudinal

experience; c. A minimum of four months of pediatric training in an urban or suburban location; d. A minimum of three months of operative surgical training, or the equivalent in longitudinal

experience; e. A minimum of two months of emergency medicine rotations; and, f. A required rural public health experience.

3. A rurally located area is classified as one with a population of 50,000 persons or less (Rural-Urban Commuting Area – RUCA 4 or higher).51

Rural There are multiple definitions of ‘rural’ and different definitions are used by different entities. For example, AAFP uses the RUCA definition of ‘rural’ for RTTs, where CMS uses the Office of Management and Budget definition. SI Sponsoring Institution The institution (or entity) that assumes the ultimate financial and academic responsibility for a residency program.52


Appendix C – Templates/Samples Affiliation Agreement:

AFFILIATION AGREEMENT

THIS Affiliation Agreement (this “Agreement”) is entered into to be effective in accordance with its terms (the “Effective Date”), by and between (1), a California non-profit public benefit corporation (“Hospital”) on the one part, and (2) (the “Medical Group”) and SCHOOL OF MEDICINE a California public benefit corporation (“SOM”) on the other part to implement the terms of the binding Letter of Intent entered into by such parties on or about _____(the “LOI”)

WITNESSETH:

WHEREAS, Hospital owns and operates a general acute care hospital known as Medical Center located at (the “Hospital Campus”).

WHEREAS, SOM is the sponsor of a Family Practice Residency Program (the “Terminating Program”) that historically utilized ______ as its Major Participating Institution, and is the sponsor of a new family practice residency program (the "New Program") anticipated to be recognized and accredited retroactively to ______by the ACGME. Such Program is sometimes referred to as the “New Program” to distinguish it from any interim operations that may be conducted under the terms of this Agreement during the period prior to the date (as referenced in these Recitals and to be established in accordance with the relevant provisions of this Agreement) upon which such New Program shall receive necessary ACMGE approvals/certifications.

WHEREAS, SOM has requested that Hospital serve as a major participating institution and the inpatient service site for the Terminating Program (to the extent necessary) and the New Program and Hospital has agreed to take on such responsibilities under the general terms and conditions set forth in the LOI.

WHEREAS, the responsibility for the conduct of the Terminating Program and the New Program with respect to SOM’s and Medical Group’s obligations and responsibilities thereunder will be allocated between by SOM and Medical Group in accordance with certain agreements, policies and practices which are the subject of contractual and other arrangements between SOM and Medical Group.

WHEREAS, the parties recognize that in the event the New Program is not recognized by either ACGME or the Medicare Program effective as of ________, that certain of the operations contemplated hereunder will need to be treated, to the extent possible, as part of the Terminating Program. References hereunder to the “Program” shall mean the Terminating or New Program as applicable consistent with the previous sentence.

WHEREAS, in accordance with the provisions of the LOI, as extended pursuant to the agreement of the parties through ______, the parties desire to set forth in this Affiliation Agreement (including any exhibits, schedules, addenda or other documents incorporated herein) a full statement


of their respective rights and obligations with respect to the operations of the Program during the term hereof.

NOW THEREFORE, for and in considerations of the premises and for other good and valuable consideration, the receipt and adequacy of which is hereby acknowledged, it is hereby agreed by and among the parties hereto as follows:

Chapter 2 1. LOI Superseded. As of the date of execution of this Agreement by the parties and except as may otherwise specifically be set forth herein, the LOI and any obligations arising thereunder shall be deemed to have been terminated and superseded by the provisions of this Agreement.

Chapter 2 2. “Family Medicine.” This term refers to both SOM and Medical Group with respect to their collective operations and responsibility for the management and operation of the Program; it being understood that the specific allocation of such responsibilities shall be determined by such parties pursuant to the contracts and arrangements referenced in the Recitals to this Agreement. The use of such term shall not be deemed to relieve either the SOM or Medical Group of any responsibility for their respective acts or omissions. Accordingly, unless such right is specifically assigned to one of the Family Medicine parties with respect to any matter pursuant to this Agreement or otherwise by written agreement of the parties hereto, and subject to and in accordance with any other limitations on such accountability set forth in the other provisions of this Agreement, Hospital shall have the right to hold both SOM and Medical Group accountable for any failure by Family Medicine to fulfill Family Medicine’s obligations or responsibilities hereunder

Chapter 2 3. “Clinical Rotation Sites.” This term refers to certain outpatient service sites located at other institutions or facilities that have been or will be identified and approved by Family Medicine from time to time and which will enter into appropriate contracts with Hospital consistent with Program requirements to which Residents participating in the Program may be assigned on a rotating or other basis. A list of the initial Clinical Rotation Sites is attached as Exhibit __ to this Agreement. Notwithstanding Hospital’s role as the contracting party with respect to such Clinical Rotation Sites, Hospital has delegated to Family Medicine and Family Medicine has accepted, as between the parties hereto, the sole responsibility for the establishment, application, and monitoring of credentialing standards and requirements applicable to such Clinical Rotation Sites, including the addition and deletion of any such sites during the period this Agreement shall be in effect. Notice of any proposed deletion or addition shall be given to both the Hospital liaison officer appointed pursuant to the provisions of Section 11. hereof; and, if such officer is not the Hospital’s chief financial officer (“CFO”), to such CFO. Pursuant to such delegation, and except as otherwise provided hereunder or in any other specific written agreements among the parties, as between the parties hereto Family Medicine shall be solely responsible for any and all regulatory, quality of care and other aspects of the participation of such Clinical Rotation Sites in the Program and of the assignment, supervision, and all other aspects of the training of the residents and their services provided at such Clinical Rotation Sites. Each Clinical Rotation Site shall warrant and represent that during the period it shall participate in the Program it is and shall continue to be duly licensed (if and to the extent licensure is applicable) and otherwise qualified to participate in the Program. Each such Clinical Rotation Site shall also covenant that it maintains adequate professional liability and other insurance coverage


throughout the term of this Agreement and for any extended reporting period thereafter as may be necessary to assure that such coverage will apply to any occurrence during such term, and will provide satisfactory assurances thereof. The parties shall cooperate in good faith, including such reasonable support therefore by Hospital management, to endeavor to assure that the financial and reporting elements of such relationships are consistent with Medicare, accreditation, and other regulatory guidelines; and, in particular, with the requirements thereunder that relate to Hospital’s qualification to receive appropriate reimbursement for its GME costs under the Medicare program related to its participation in the Program under the terms of this Agreement. In the event that Hospital shall experience any difficulties or problems in obtaining information or assistance it may require from any of the Clinical Rotation Sites in such regard, or if it shall identify other problems related to any of such Clinical Rotation Sites it shall promptly advise Medical Group of such matters and the parties shall cooperate on an expeditious good faith basis to investigate and resolve the matter. The delegation of responsibilities to Family Medicine provided for under this Section 3 is not intended to and shall not preclude the right of Hospital to take such action with respect to its relationship with any such Clinical Rotation Site which Hospital shall reasonably determine to be necessary to protect its financial or reputational interests hereunder or to respond to any patient safety or related issues of which it shall become aware relating to the operations of any such Clinical Rotation Site.

Chapter 2 4. Adoption of Resident Rotation Services Schedule and Other Requirements. Hospital and Family Medicine agree to adopt, as soon as reasonably practicable, a Resident Rotation Services Schedule and any other documentation regarding the operations of the Residency Program that may be required to establish and maintain the continuing accreditation and qualification of the program under applicable Accreditation Council for Graduate Medical Education (“ACGME”) and Medicare standards. Residents will be expected to provide such staffing at various departments of Hospital (subject to and in accordance with applicable Hospital and Medical Staff policies and applicable ACGME standards) as mutually agreed between the parties, which shall be appropriately coordinated with their assignments to Clinical Rotation Sites. 5. Hospital Compliance with ACGME Standards. Hospital agrees to use its best efforts to

conduct all of its activities related to the Program in accordance with any applicable standards of the ACGME necessary to maintain compliance by Family Medicine with the requirements applicable to the institutional sponsors of such a Program as more particularly described in Schedule ___ hereto

Chapter 2 6. Maintenance of the Hospital Program. Family Medicine agrees that it will use its best efforts to maintain the Program at all times with the number of full time residents agreed to by the parties from time to time and to assure that all such positions remain filled throughout the term of this Agreement. The number of such residents initially committed for specific calendar periods, including a projected interim operational period prior to January 1, 2003, is set forth in Schedule _ hereto. All such residents shall be shall be employed by Medical Group and/or SOM, who shall:

Chapter 2 (a) Enter into written employment contracts with the residents. Family Medicine shall provide Hospital with copies of such contracts and/or any other information related thereto as Hospital shall reasonably request to (1) properly prepare and file its cost reports related to payments made to Family Medicine as


compensation for the provision of such residents, (2) perform Hospital’s other obligations hereunder, or (3) determine whether Family Medicine is in compliance with its obligations hereunder. Such resident employment contracts shall require the residents to complete all training and related activities included in the Residency Program, as required and scheduled by Family Medicine in accordance with the relevant provisions hereof, and to perform the scope of practice at the various sites in which the Residency Program is conducted that is required of their training level.

Chapter 2 (b) Maintain required workers’ compensation and other mandated employment related insurance and provide medical malpractice insurance coverage, including tail coverage (if the relevant coverage was provided using a claims-made coverage form), for the residents at levels no less than $1 million per claim and $3 million aggregate per year for each resident.

Chapter 2 (c) As the employer(s) and unless otherwise specifically agreed by the parties, Family Medicine shall, as between the parties hereto, be solely responsible to pay the salaries, FICA and other withholding taxes applicable thereto, and benefits of the residents.

Chapter 2 7. Resident Qualifications. Each of the residents shall meet such qualifications as are agreed to by the parties in accordance with ACGME requirements. A statement of such requirements shall be provided to Hospital upon request.

Chapter 2 8. Start-Up Resident Staffing Levels. Subject to any other agreements that may be reached by the parties with respect to any interim operations that are necessary prior to receiving necessary ACGME approval for the Program as a New Program, the parties shall use their best commercially reasonable efforts to maximize the enrollment of residents during the start-up period.

Chapter 2 9. Faculty. The paid faculty for the Program will consist of full-time faculty physicians and physician assistants all of whom (to the extent they will have responsibility for the supervision of residents practicing at Hospital facilities) shall be required to qualify for and be appointed to the Medical Staff of Hospital with appropriate credentials that must be maintained at all times during which they shall exercise such responsibility The initial members of such faculty complement (including their projected monthly total of hours of participation in the Program) to be so assigned shall be listed in Exhibit __ to this Agreement and Hospital shall be given reasonable advance notice of any changes in such staffing. Medical Group agrees that its staffing of the Program will meet the requirements of the ACGME.

Chapter 2 10. Hospital Obligations re: Medicare Documentation. Hospital shall develop and maintain (with such assistance from Family Medicine as it may reasonably require) all documentation required by the Medicare program for timely and complete reporting under the Intern and Resident Information System (IRIS) of the Hospital’s resident FTE count for each cost reporting period as well as all documentation necessary to establish the “Per Resident Amount” to be reimbursed by Medicare pursuant to 42 USC §1395ww(h) and, in connection therewith, to accurately report all items required to be included in the cost report.


Chapter 2 11. Maintenance of Accreditation for Program. In addition to the other specific obligations in such regard identified in the other provisions of this Agreement, each party shall take all reasonably necessary steps (including the payment of requisite fees) to maintain accreditation of the Program by the ACGME). SOM, in its capacity as the institutional sponsor of the Program will take all reasonable steps to comply with the applicable Institutional and Program Requirements of the ACGME, including such amendments (if any) as may be made to such requirements governing their responsibilities as institutional sponsors during the time this Agreement shall be in effect. In support of such commitment and in addition to their other duties and obligations hereunder, the parties shall cooperate, including (i) the identification by each party of a responsible liaison officer who shall have primary responsibility for and adequate authority to represent such party with respect to day to day operational issues and (ii) establishing and implementing provisions for the timely and cost-efficient exchange of information with respect to:

(a) Compliance with applicable ACGME standards, including professional qualifications of participating physicians and other staff as may be provided by [University] FM, SOM, and/or Hospital with respect thereto.

(b) Procedures for the review, and any appropriate disciplinary actions regarding residents participating in the Residency Program who may have practice rights at Hospital facilities and with respect to any personnel decisions respecting such residents as may be related thereto.

(c) Production, maintenance, and access to medical and other records regarding patients receiving services at Hospital or in any of the Clinical Rotation Sites which may impact on Hospital’s reimbursement for its costs incurred in the Residency Program or for which Hospital or Family Medicine may have any direct or indirect responsibility under the Joint Commission on Accreditation of Healthcare Organizations (“JCAHO”), Medicare or Medi-Cal regulations or with respect to any material liability risk exposure.

(d) Billing, cost, and other records as may be reasonably required by either party to comply with applicable regulatory and reimbursement requirements. In this regard, each party shall be independently responsible for its compliance with relevant reimbursement and related regulatory or similar requirements imposed by private third party payment organizations, however, each shall also cooperate with reasonable requests from the other to assist all parties in maintaining compliance with such requirements and, subject to the limitations imposed by such programs and regulations, to work in cooperation to efficiently and expeditiously effect the collection of legally authorized payments for their respective services.

(e) Coordination of resident rotations at other facilities and collection of any appropriate payment therefore and with respect to the participation of residents in providing inpatient or other services at Hospital. Hospital agrees to take all commercially reasonable steps, consistent with applicable government program and JCAHO and licensing rules and regulations, to ensure that resident time at Clinical Rotation Sites is included in the FTE count for GME reimbursement.


Any and all exchanges of information provided for hereunder shall be conducted consistent with the privacy and other rules applicable thereunder under The Health Insurance Portability and Accountability Act of 1996 (“HIPAA”) and/or any other applicable federal and state requirements, and consistent with applicable ethical and professional standards related thereto.

Chapter 2 12. Residency Training Program Directorship. In conjunction with the Residency Program described in this Agreement and consistent with ACGME standards, the Chairman of the Department of Family Medicine of SOM shall designate an individual on its faculty (the “Program Director”) who will provide clinical and administrative supervision of residents and teaching staff. The Program Director shall act as coordinator between Hospital and Medical Group in implementing a duly accredited residency training program, including designing the program, determining its scope of training, selecting teaching staff, recruiting and appointing residents, and evaluating residents and faculty. 13. Payments to Medical Group by Hospital. Hospital agrees to pay to Medical Group an annual

educational stipend (the “Annual Program Amount”) determined on the basis of an annual agreed cost (including all of the employment costs incurred by Family Medicine in the employment of the Residents, plus additional appropriate Program-related costs) per resident participating in the Residency Program.

(a) The Annual Program Amount shall be developed in accordance with the parties’ commitments to an agreed level of staffing to be developed by the parties as hereinabove provided for, and shall include, upon approval by the parties of a legally and operationally appropriate methodology for determining and allocating such amount, a payment component which will provide appropriate recognition of the efficiency of the Program’s utilization of other hospital resources. The parties shall use commercially reasonable best efforts to negotiate and agree upon the Annual Program Amount (assuming that projected resident staffing levels are maintained) prior to the end of each calendar year for the contract year beginning on the following July 1.

(b) The methodologies used to determine the payments due to Medical Group hereunder shall be in compliance at all times with the relevant Medicare payment guidelines and shall not exceed the amount of GME reimbursement (including both direct and indirect medical education payments) which Hospital will be entitled to receive from the Medicare Program.

(i) Accordingly, such payments shall be subject to appropriate reduction at any time that the FTE staffing commitment set forth above is not met and results in any diminution in the total GME reimbursements available to Hospital for its Program-related costs.

(ii) Any such reduction so made shall be adjusted at such later time as (A) there is an increase in actual staffing provided, (B) Hospital is once again able to collect the full GME reimbursement for the actual staffing level then in effect in accordance with the formula that was the basis for the determination of the payments


to be made to Medical Group prior to such reduction, and (C) Hospital has recouped any net reimbursement loss (i.e., the net amount of Hospital’s loss of GME reimbursement less the reduction in payments made by Hospital to Medical Group) resulting from the reduction.

(iii) Such payment shall also be subject to automatic adjustment at any time that there is an increase in the number of Residents participating in the Program, subject to timely submission of adequate documentation to support the collection of Medicare reimbursement for the costs associated with any increase in such payment and conditioned on the Hospital’s ability to qualify for such increased payments.

(c) Subject to compliance with the limitations set forth in (b) above on the payments for which Hospital will be responsible hereunder, the payments to be made to Medical Group by Hospital hereunder shall be determined in a manner which will ensure that the payments by Hospital cover substantially all of the costs of the Residency Program, including compensation to Medical Group for the cost of teaching the Residents and providing administrative services for the Residency Program.

(d) Medical Group shall provide Hospital with time-logs and other documentation regarding the Program reasonably required by Hospital to support Hospital’s request for cost reimbursement from Medicare for direct medical education and indirect medical education (“DME and IME Reimbursement”) for its costs incurred in connection therewith. A copy of the form on which such reports shall be submitted is attached as Schedule __ to this Agreement. Unless otherwise agreed by the parties, or required by Medicare, such time logs/documentation shall be prepared on a per rotation basis but not less often than every four (4) weeks.

(e). The parties acknowledge, in addition to the other provisions hereof relating to limitations on the Hospital’s payment obligation hereunder that such payment obligation is premised on Hospital receiving and retaining from Medicare certain DME and IME Reimbursement for the training of the residents. In the event that there is a change in the Medicare rules and methodology or the interpretation thereof used in computing the DME and IME Reimbursement resulting in a material change in the DME and IME Reimbursement that Hospital receives, the parties hereto agree to negotiate in good faith any amendment to this Agreement as may be necessary, from time to time, in order to make the parties’ obligations under this Agreement consistent with any changes in the Medicare rules or the interpretations thereof. Nothing in this paragraph, however, is intended or shall be construed to affect or limit the ceiling on Hospital’s payment obligations hereunder set forth in paragraph (b) above.

(f) Payments due to Medical Group hereunder shall be made on or before the ___ day of each month in which this Agreement shall be in effect. Payments which are more than fifteen (15) days in arrears will be subject to a 1% per month late payment fee.


(g) Except for the specific payments to be made by [medical corporation] identified and provided for herein, as between the parties hereto, Family Medicine shall be responsible for all expenses they may incur in or related to or arising from their participation and in and operation of the Residency Program.

(h) In the event the parties are unable to agree upon an Annual Program Amount because of a material change in the Medicare payment formula which results in a material reduction in projected Medicare DME and IME reimbursement, and if as a result either party elects to terminate the Agreement pursuant to Section 16(a), then for the remainder of the term of the Agreement beginning the July 1 following the notice to terminate (or such later date as the change in Medicare reimbursement becomes effective), the Annual Program Amount shall equal the lesser of 100% of the total GME payment which Hospital will be entitled to collect from Medicare during such year or the same payment per FTE resident which it received in the prior year.

(i) Except as otherwise set forth in subsection 13(h) above, the parties are unable to agree upon an Annual Program Amount, and if as a result either party elects to terminate the Agreement pursuant to Section 16(a), then for the remainder of the term of the Agreement beginning the July 1 following the notice to terminate, the Annual Program Amount shall equal the same fraction of the total Medicare GME payment for the year in question as the Annual Program Amount represented for the academic year just ended (e.g., if the total payment to Medical Group for the Program year ending [date] is equal to 85% of the total GME payments that Hospital received during such year with respect to the Program, then if the Agreement is terminated pursuant to section 16(a) and the parties have been unable to agree on an Annual Program Amount for the period starting [date], Medical Group will receive a payment for the Program year ending [date] that is equal to 85% of the total GME Medicare payment that Hospital receives with respect to the Program for such Program year.)

14. Additional Cost Review and Payment Adjustment Mechanisms. As soon as practicable following the execution of this Agreement, the parties shall use their best efforts to develop specific focused procedures under which they can cooperatively monitor the appropriate utilization of Hospital resources by Program residents and supervising Medical Group physicians to assure that such residents and physicians are using reasonable discretion, consistent with relevant community standards, in the use of such resources. Such procedures shall include specific mechanism and, where appropriate, standards and criteria for the following actions; provided, however, that Hospital’s right to take the actions specified hereunder shall be effective as of the implementation date of this Agreement, regardless of whether the procedures contemplated by this paragraph have been mutually agreed or implemented:

(a) A means whereby Hospital may provide appropriate and timely notification to Medical Group of identified problems in the use of such Hospital resources, including, to the extent feasible, proposed cures or other requested actions by Medical Group to respond to such problems.


(b) If Hospital reasonably determines that the identified problem has immediate and substantial financial implications and/or is not being promptly and effectively addressed by Medical Group , Hospital may request, by notice given to Medical Group that, unless the problem is cured within such period, that at the end of a thirty (30) day period following the giving as such notice, Medical Group shall reassign or take other appropriate disciplinary or other action with respect to such resident or Medical Group physician such that the physician will no longer have responsibility for the provision of Hospital-based services to patients receiving services provided under the auspices of the Program, or in the case of a resident, that the resident’s ability to order hospital services (if not already effectively controlled by applicable co-signature requirements) will be appropriately limited; and provision whereby Hospital may require Medical Group to take immediate action to suspend or otherwise limit a Medical Group physician’s or a resident’s participation in the delivery or ordering of such services during the notice period in circumstances where Hospital shall make a reasonable determination that such immediate action is necessary to maintain the fiscal integrity of its participation in the Program.

(c) As part of any action taken pursuant to the procedures described in this provision Hospital shall provide Medical Group with adequate documentation of identified problems and, to the extent reasonably feasible under the circumstances, of possible remedial actions which Hospital believes will result in a timely and effective resolution of the situation which resulted in the request or notice. Either the original or a copy of any such notice given by Hospital shall be delivered directly to the Program Director and the Chair of the Department of Family Medicine. It is the intention of the parties that the more detailed procedures that are to be developed hereunder shall also include provision for consultation and collaboration among the parties during the notice period with the goal of working with the responsible Medical Group physician and/or the resident with respect to whom a notice and/or other request has been initiated by Hospital to try to effect remediation of the conduct of their hospital based practice that will satisfy Hospital concerns which gave rise to a notice or request under such procedures. The failure or refusal by Medical Group to timely and effectively respond to any notice and/or request given pursuant to clause (a) or (b) hereof shall be deemed a material breach of this Agreement by Medical Group for purposes of the “for cause” provisions thereof.15. No Hospital Obligation for Other Medical Group or SOM Expenses or Obligations. Nothing contained herein is intended nor shall it be construed to create any obligation on the part of Hospital to pay for any Medical Group or SOM expense or obligation not expressly assumed by Hospital under the provisions of Section 13 of this Agreement.

16. Term. The term of this Agreement shall be for five (5) years, subject to earlier termination or modification in accordance with the provisions set forth below.

(a) Without Cause: Each party shall have the right to request termination without cause on or after [date] by giving prior written notice to the other party, if such notice is given on or before [date] of a calendar year it shall be effective as of June 30 of the next calendar year. If given thereafter, it shall be effective as of June 30 of the second following calendar year. If the parties do not reach agreement on an extension of the then


current term on or before July 1 of the year prior to the year in which such is scheduled to expire, the Agreement shall be presumed to expire and terminate as of the following June 30.

(b) By Mutual Agreement: The Agreement may be terminated at any time by mutual agreement of the parties upon such terms as they may mutually agree and in accordance with any applicable legal or regulatory requirements. In the event of such agreed termination, or under any other termination, no replacement agreement may be entered into except as permitted under applicable Medicare and other legal and regulatory requirements.

(c) For Cause: Either party may also terminate for cause in the event of a material breach by the other party of any of the standards set forth under subparagraph (iii) hereunder or any other breach which the party giving such notice shall reasonably determine is likely to have a material adverse effect on such party and that is not cured to the other party’s reasonable satisfaction within a notice period of ninety (90) days.

(i) When such notice is given by either party, a concurrent notice shall also be given to the appropriate legal service department, person, or officer for each party which or who has been delegated the responsibility for the coordination of legal services related to the operations of such party (“Legal Notice Addressees”); specifically including, with respect to Hospital, the giving of such notice to the appropriate department, person, or officer exercising such responsibility within the corporate management of [health system]. The names and addresses of the parties to whom such supplementary notices are to be given are set forth below. Such names and addresses may be modified from time to time in accordance with the general notice provisions of this Agreement.

(ii) In the event of a breach constituting cause hereunder which presents an immediate material threat to the financial or other substantial interests of the party giving notice, such party may also take such other reasonable actions during the notice period, which may include, but are not necessarily limited to a full or partial suspension of its performance hereunder as it shall reasonably determine to be necessary to avoid or limit the adverse impact of such breach.

Chapter 2 Legal Notice Addressees: For Hospital

For Medical Group

For SOM

(iii) Cause shall include the following events and circumstances:


(A) A party shall default in the performance of any material term, condition or representation of this Agreement and such default shall continue for a period of thirty (30) days after written notice by the other party, stating the specific default; or

(B) A party shall apply for or consent to the application of a receiver, trustee or liquidator of such party or all or a substantial part of its assets, file a voluntary petition in bankruptcy, or admit in writing its inability to pay its debts as they become due, make a general assignment for the benefit of creditors, file a petition or an answer seeking reorganization or arrangement with creditors or to take advantage of any insolvency law; or

(C) An order, judgment or decree shall be entered by a court of competent jurisdiction, on the application of a creditor, adjudicating a party as bankrupt or insolvent or approving a petition seeking reorganization of a party or appointing a receiver, trustee or liquidator of the party or of all or a substantial part of its assets and is not withdrawn or dismissed within sixty (60) days; or

(D) Any federal, state or local law, rule or regulation is subsequently interpreted, enacted or adopted which would prohibit the relationship established between the parties thereunder or any material provision herein is determined by a court of competent jurisdiction to be unenforceable; or

(E) Any party subject to such accreditation requirements fails to maintain its accreditation with the Joint Commission on Accreditation of Healthcare Organizations;

(F) The SOM or the Program or its operations in accordance with the terms of this Agreement ceases to be accredited by ACGME;

(G) Any party subject to any state or other licensing requirement fails to maintain any license that is material to its ability to maintain its operations as they were conducted prior to such failure.

(H) Either party violates the other party’s general legal and regulatory compliance program or other compliance policies and such violation, which has a materially adverse effect on the Program or on Hospital, the SOM or Medical Group, shall continue for a period of thirty (30) days after written notice to the breaching party from the other party stating the specific default giving rise to such right to terminate.

(d) Continuing Cooperation. Notwithstanding the giving of any notice hereunder, each party shall continue to be obligated to act in good faith and use all reasonable efforts to work with the other party to assist the other party in coordinating the transfer or termination of the Program in a cost-effective manner that will, to the extent feasible under such circumstances, avoid or limit any disruption in the operation of the Program consistent with the commitments to the residents and the related requirements of the ACGME.


(e) Waiver of Hearing Rights. Each of Medical Group and SOM acknowledges that it is not entitled to and hereby waives any hearing rights (whether under the medical staff bylaws of Hospital or otherwise) with respect to the termination of this Agreement under any of the termination provisions hereof. If requested by Hospital, Medical Group shall provide Hospital with signed acknowledgements of this provision by each of the faculty members who participate in the performance of Medical Group’s duties hereunder.17. Modifications of Program. Each party shall also have the right to implement changes in the Program from time to time that are consistent with applicable accreditation, licensing, and Medicare participation requirements. If any such change would materially adversely affect the interests of the other party with respect to its participation therein, the party intending to make such change shall give the other party at least one (1) year’s prior advance notice thereof unless an earlier date for such implementation is required in order to maintain accreditation, or to comply with licensing or Medicare participation requirements. In all events, the parties shall use their best efforts to avoid or limit any disruption to the Program that might result from such modification. 18. Issues Re: Obligations to Residents. Both parties acknowledge their understanding that they

may individually or collectively be subject to certain obligations to residents enrolled in the Program, which may include but not be limited to the obligation to matriculate or transfer the residents in the Program during a two (2) year winding up period.

(a) Nothing contained herein, however, is intended or shall be construed to waive or affect the limitation on Hospital’s payment obligations under Section 13(b) of this Agreement.

(b) Subject to the limitations referenced in (a) above, in the event of any termination or other material change in the Program as may be effected in accordance with this Agreement, including but not limited to any termination effected under any of the applicable provisions of Section 16 hereof, each of the parties agrees to act in good faith to cooperate with and assist the other to allow for the implementation of such change in a manner that shall minimize, to the extent reasonably feasible, any negative financial or other material adverse effects thereof on the parties and that is consistent, insofar as practicable, with the purposes underlying the operations of the Program.

19. Limitation on 3rd Party Liability. Unless otherwise specifically agreed by the party affected thereby, nothing contained in Section 17 or any other provision of this Agreement with respect to any of the subject matters addressed therein and herein, is intended nor shall it be construed to either relieve any party from any obligation it may have to any third party or parties or to create any such obligation that would not otherwise exist.

Chapter 2 20. Insurance: and Indemnification:

(a) Medical Group shall ensure that professional malpractice liability insurance shall be maintained at all times with respect to the medical practice activities of Medical Group faculty members and residents in and related to its participation in the Program. Such professional malpractice liability insurance shall be maintained with a licensed insurance company admitted to do business in the State of California in a minimum amount of One Million Dollars ($1,000,000.00) per


claim and Three Million Dollars ($3,000,000.00) in the annual aggregate, to cover any loss, liability or damage or the defense of any claim therefore that may arise or be alleged to have arisen by reason of any action or omission by Medical Group, its employees, agents or contractors. In the event such coverage is provided under a “claims made” form, Medical Group shall assure that Medical Group continues to have coverage for any such claims that extends to a period of not less than three (3) years following the last date of upon which any person covered by such insurance participated in Medical Group’s activities hereunder; including, if necessary, the provision of a separate “tail policy” to provide such continuing coverage. The insurance to be provided covering such “tail” exposure shall have the same limits as the primary professional liability policy.

(b) Hospital shall maintain comprehensive, including professional liability, insurance covering its operations throughout the term of this Agreement with a licensed insurance company admitted to do business in the State of California or under any other form of insurance or other program providing for protection of the Hospital for its potential liability for risks then maintained by [health system] on a system-wide basis in the minimum amounts that are then in force generally with respect to [health system’s] operations in California , but in no event less than a minimum amount of One Million Dollars ($1,000,000.00) per claim and Three Million Dollars ($3,000,000.00) in the annual aggregate, to cover any loss, liability or damage or the defense of any claim therefore that may arise or be alleged to have arisen by reason of any action or omission by Hospital, its employees, agents or contractors. Hospital shall notify Family Medicine in the event of any material change in the amount of the coverage that is in place under its insurance program. In the event such coverage is provided under a “claims made” form, Hospital shall assure that Hospital continues to have coverage for any such claims that extends to a period of not less than three (3) years following the last date of upon which any person covered by such insurance participated in Hospital’s activities hereunder; including, if necessary, the provision of a separate “tail policy” to provide such continuing coverage. The insurance to be provided covering such “tail” exposure shall have the same limits as the primary professional liability policy.

(c) Indemnification:

(i). Indemnification by SOM and Medical Group. Each of SOM and Medical Group shall defend, indemnify and hold Hospital harmless from and against any and all liability, loss, expense, reasonable attorneys’ fees, or claims for injury or damages (collectively, “Damages”) arising out of the performance of this Agreement but only in proportion to and to the extent such Damages are caused by or result from the negligent or intentional acts or omissions of either of such party, its officers, agents, employees or subcontractors.

(ii). Indemnification by Hospital. Hospital shall defend, indemnify and hold each of SOM and the Medical Group harmless from and against any and all liability, loss, expense, reasonable attorneys’ fees, or claims for injury or damages (collectively, “Damages”) arising out of the performance of this Agreement but only in proportion to and to the extent such Damages are caused by or result from the


negligent or intentional acts or omissions of Hospital, its officers, agents, employees or subcontractors.

(iii) Limitation; Effect of Insurance. The indemnification obligations of the parties set forth in paragraphs (i) and (ii) above are intended to supplement, and not supersede, supplant or replace, the coverage which may be available under any insurance policies or insurance programs that may be maintained or otherwise be in effect by or for the benefit of any party. In the event any matter subject to indemnification under said paragraphs may be covered by such insurance policies or programs, the parties shall exercise good faith and use their reasonable best efforts to obtain the benefits of and apply the available insurance coverage to the matter subject to indemnification under this Agreement. In the event that an insurer or program provides coverage under an insurance policy on the basis of a “reservation of rights”, the indemnification obligations under this Agreement shall apply to all matters which the insurer finally determines are not covered under the insurance policy or program. In the event that there is a question regarding such insurance coverage that remains unresolved at the time any party entitled to indemnification under paragraph (i) or (ii) above shall incur out–of–pocket costs that would otherwise qualify for such indemnification, it shall be entitled, pending resolution of the applicability of this paragraph (iii), to seek immediate reimbursement of such costs from any party obligated to provide such indemnification.

21. Use of Name.

Chapter 2 22. Other Documents and Actions. Subject to the review of any such document or material action by its respective counsel and obtaining such other institutional review or approvals thereof as may be required by its organizational documents and operating policies, each party hereto agrees to execute such other documents and take such other actions as may be reasonably necessary to effectuate the purposes and objectives of this Agreement, including without limitations, those items identified at Schedule __.

Chapter 2 23. Dispute Resolution.

(a) Special Meeting. Except as set forth in paragraph (f) below, in the event of any dispute or disagreement between the parties with respect to this Agreement, either party may request in writing the convening of a special meeting for the resolution of the dispute (a “Special Meeting”). The Special Meeting shall be held at a mutually agreeable location within ten (10) days of a written request for the meeting, which request shall specify the nature of the dispute to be resolved. The Special Meeting shall be attended by representatives of Hospital and SOM and Medical Group (who may or may not be accompanied by legal counsel, in their respective discretion), who shall attempt in good faith to resolve the dispute and shall have reasonable authority to do so.

(b) Mediation. If a dispute has not been resolved within thirty (30) days after the date of the Special Meeting, any party may initiate mediation by giving written notice thereof to the other parties hereto. The affected parties shall attend and participate in the mediation, which shall be binding upon the parties if a mutually agreeable resolution is achieved. The mediation proceeding shall commence not more than thirty (30) days after the written notice initiating the mediation process is given by one party to the other parties hereto and shall be conducted in the [city], [state],


by an impartial third party mediator in accordance with the procedures of JAMS/Endispute, Inc. The mediator shall be given written statements of the parties and may inspect any applicable documents or instruments. All mediation proceedings shall be attended by representatives of Hospital, Medical Group and SOM with reasonable authority to resolve the dispute. The costs and expenses associated with the mediator and the mediation shall be paid equally by Hospital on the one hand and Medical Group and SOM on the other, regardless of the result of the mediation proceeding. Further, each party shall bear its own attorneys fees and costs in connection with the mediation process.

(c) Settlement through Mediation. If as a result of the mediation, a settlement is reached and the parties agree that such settlement shall be reduced to writing, then (i) the mediator shall be appointed an arbitrator for the sole purpose of signing the settlement agreement reached through the mediation process, (ii) the settlement agreement shall have the same force and effect as an arbitration award, and (iii) judgment may be entered upon the settlement agreement in accordance in any court of competent jurisdiction with applicable law.

(d) Inadmissibility. The Special Meeting and the mediation proceeding shall be subject to California Evidence Code Sections 1152 and 1115 through 1128, inclusive.

(e) Arbitration. If a dispute is not resolved through the mediation process described in paragraph (c) above, then any party may commence arbitration by giving a written notice to the other parties demanding arbitration. There shall be one (1) impartial third party arbitrator. If the parties are unable to agree upon a mutually acceptable arbitrator within thirty (30) days after the demand for arbitration is given, then the parties stipulate to the arbitration before a single impartial third party arbitrator who is a retired judge on the [city] panel of JAMS/Endispute, Inc. and who is selected by the then serving chief administrative officer of JAMS/Endispute, Inc.

(A) The substantive internal law (and not the law of conflicts) of the State of California shall be applied by the arbitrator to the resolution of the dispute. The parties shall have the rights of discovery as provided for in Part 4 of the California Civil Code Procedure and the provisions of Section 1283.05 of the California Code of Civil Procedure are hereby incorporated by reference into this Agreement pursuant to the provisions of Section 1283.1(b) of the California Code of Civil Procedure. In the event that either of said Sections is amended in a manner which limits or reduces the discovery rights contained in said Sections as of the date hereof, said amendment shall not be deemed to apply to this Agreement unless the parties agree in writing that the same shall apply. In the event that either Section 1283.5 or 1283.1(b) is repealed, the provisions of Section 1283.05 shall nevertheless continue to apply and the parties shall have the discovery rights as provided therein as of the date of this Agreement. The California Evidence Code shall apply to all testimony and documents submitted to the arbitrator.

(B) The arbitration shall take place in [city], State of California, unless the parties otherwise agree in writing. As soon as reasonably practicable, a hearing with respect to the dispute or matter to be resolved shall be conducted by the arbitrator. As soon as reasonably practicable, but not later than thirty (30) days after the hearing is


completed, the arbitrator shall arrive at a final decision, which shall be reduced to writing, signed by the arbitrator and mailed to each of the parties and their respective legal counsel.

(C) All decisions of the arbitrator shall be final, binding and conclusive on all parties subject to appeal or being set aside only on the grounds set forth in the California Code of Civil Procedure, and, except as otherwise set forth in Section 23(f). below, shall be the only method of resolving disputes or matters subject to arbitration pursuant to this Agreement. The arbitrator or a court of competent jurisdiction may issue a writ of execution to enforce the arbitrator's decision. Judgment may be entered upon such decision in accordance with applicable law in any court having competent jurisdiction thereof.

(f) Injunctive Relief. Each of the parties hereto shall have the right to apply for and obtain a temporary restraining order or other temporary, interim or permanent injunctive or equitable relief from a court of competent jurisdiction in order to enforce the provisions of any part of this Agreement as may be necessary to protect its rights under those Sections.

(g). Statute of Limitations. This dispute resolution procedure shall not in any manner affect any statutes of limitation relating to any claim, dispute or other matter arising out of this Agreement, provided that the statute of limitations shall be stayed during any period that the mediation or arbitration process is continuing pursuant to this Section 23.

(h) Rights Reserved by Parties. The provisions of this Section 23 shall not limit, require the postponement of, or in any other way preclude the exercise of any right or remedies otherwise enjoyed by any party hereto under the provisions of this Agreement.

Chapter 2 24. General Provisions.

(a). Relationship between the Parties. None of the provisions of this Agreement is intended to create, nor shall any provision be deemed or construed to create, any relationship between Hospital on the one part and SOM and Medical Group on the other part other than that of independent parties contracting with each other thereunder solely for the purpose of effecting the provisions of this Agreement. Neither Hospital on the one part, and SOM and Medical Group on the other part, nor any of their respective contractors, employees, agents or representatives, shall be construed to be employees, agents or representatives of the other.

(b) No Third Party Rights. This Agreement shall not create, or be deemed or construed to create any rights in any third party, including any contractor, employee, agent or representative of any of the foregoing.

(c) Assignment. Neither this Agreement, nor any right or duty thereunder, may be assigned by any party hereto without the written consent of the other; provided, however, that either party may assign its rights and duties arising hereunder or thereunder to any affiliate or successor organization in the event of any reorganization or sale of such party, or, in the case of [health system] of the hospital facility currently operated as the [medical center], if such affiliate or successor shall


demonstrate to the reasonable satisfaction of the other parties its financial and institutional qualifications to adequately perform each and every covenant and obligation of the assigning party and that such assignment would not otherwise have a material adverse impact on the other parties. Provided further, however, that in the event the non-assigning party has such an objection, it shall have the right to terminate its participation upon not less than six (6) months’ notice, provided not more than six (6) months following such reorganization or sale, to the assigning party and in the event such notice is so given (unless otherwise agreed by the objecting party), the assigning party shall continue to be responsible for the full and complete satisfaction of its obligations hereunder.

(d) Waiver. The waiver of any provision or the waiver of the breach of any provision of this Agreement must be set forth specifically in writing and signed by the other party. Any such waiver shall not operate as or be deemed to be a waiver of any prior or future breach of such provision or any other provision.

(f). Survival of Provisions. The following provisions of this Agreement shall survive the termination of this Agreement:

[To Be Completed]

(g). Governing Law. This Agreement shall be governed and construed in accordance with the laws of the State of California.

(h) Amendment. Except as otherwise provided in this Agreement, no amendment to this Agreement shall be valid unless it is in writing and signed by all of the parties.

(i). Notices. Any notice required or permitted to be: given pursuant to this Agreement shall be in writing and shall either be personally delivered or sent postage prepaid, by certified mail, return receipt requested, to the address indicated on the signature page hereto, or to such other address as either party shall designate by like notice to the other party. Such notice shall be effective when actually received or two (2) days after deposit with the U.S. Postal Service whichever occurs first.

(j). Attorneys’ Fees. In any lawsuit or other legal proceeding arising out of this Agreement, the prevailing party shall be entitled to recover its reasonable attorneys’ fees and costs.

(k). Severability. If any provision of this Agreement is held to be invalid, void or unenforceable, the remaining provisions of this Agreement shall nevertheless continue in full force and effect.

(l). Captions and Headings. The captions and headings throughout this Agreement are for convenience and reference only, and shall in no way be held or deemed to define, limit, describe, explain, modify, amplify or add to the interpretation, construction or meaning of any provision of or to the scope or intent of this Agreement.

(m). Audits. Each party hereto agrees, upon reasonable request and notice, to permit the other parties to have access to its books and records relating to the performance of its obligations


hereunder, to perform appropriate audits on such books and records, and to take and retain copies of such books and records at the expense of the requesting party.

(n) Confidentiality; Non-Disclosure: Both parties expect that they will be releasing certain proprietary or other confidential information to the other in connection with implementation of this Agreement and have previously disclosed such information as part of their discussions which led to the development of the LOI. To protect their respective interest in maintaining the confidentiality of such information, the parties agree as follows:

(A) All such information (including information transferred orally, in writing, visually, electronically, or by any other means) furnished (whether before or after the date hereof) by either party, their respective directors, officers, employees, affiliates, representatives, (including, without limitation, financial advisors, attorneys and accountants) or agents (collectively, “Representatives”) to the other party, and all analyses, compilations, forecast, studies or other documents prepared by either party or their respective Representatives in connection with the review or negotiation of or performance after execution of this Agreement which contain or reflect any such information is hereinafter referred to as the “Information.” The term Information will not, however, include information which (i) is or becomes publicly available other than as a result of a disclosure by the receiving party or its Representatives; (ii) is or becomes available to the receiving party on a non-confidential basis from a source (other than the disclosing party or its Representatives) which is not prohibited from disclosing such information to the receiving party by a legal, contractual or fiduciary obligation; (iii) is independently developed by the receiving party as demonstrated by written or documented evidence; or (iv) was known by the receiving party prior to disclosure to the receiving party by the disclosing party, as documented by written or other documented evidence.

(B) Each party and their respective Representatives (i) will keep the Information confidential and will not (except as required by applicable law, regulation or legal process, and only after compliance with paragraph (C) below), without the prior written consent of the other party, disclose any information in any manner whatsoever; and (ii) will not use any Information other than in connection with the subject matter of this Agreement; provided, however, that each party may reveal the Information to its Representatives (a) who need to know the Information for the purpose of the transactions and performance contemplated hereunder; (b) who are informed of the confidential nature of the Information; and (c) who agree to act in accordance with the terms hereof. Each party agrees to use its reasonable best efforts to cause its Representatives to observe the terms of this confidentiality agreement, and each party will be responsible, including liability for any damages suffered by the non-breaching party for any breach hereof this by any of its Representatives.

(C) In the event that either party or any of its Representatives are requested pursuant to, or required by, applicable law, regulation or legal process to disclose any of the Information, such party will notify the other party promptly in writing of such request or requirement and the documents or Information requested,


so that the other party may seek a protective order or other appropriate remedy or, in its sole discretion, waive compliance with the terms of this confidentiality agreement. In the event that no such protective order or other remedy is obtained, or that the other party does not waive compliance with the terms, such party will furnish only that portion of the Information which it is reasonably advised by its counsel is legally required and will exercise all reasonable efforts to obtain reliable assurance that confidential treatment will be accorded the Information to the extent possible.

(D) Each party shall direct its liaison officer (as appointed pursuant to Section 11) to cooperate with and assist the other party in resolving any questions relating to the use of or disclosure to a third party of any information that may be subject to the requirements set forth in the foregoing provisions, which the other party believes is necessary to so use or disclose in order to efficiently and effectively perform its obligations hereunder.

(o) Further Assurances; Cooperation. Each party agrees that it shall use its best efforts to cooperate and coordinate with the other party(ies) regarding the execution of any and all documents and the performance of any other actions as may be reasonably necessary or advisable to consummate the affiliation in accordance with the terms set forth herein, including, without limitation, any assistance as may be required: (1) To obtain any necessary consents from third parties specified herein or otherwise required to fully and effectively implement the purposes and agreements set forth in this Agreement; (2) to maintain accreditation with ACGME, JCAHO or other applicable accreditation programs/standards; (3) to assist in maintaining compliance with peer review and credentialing requirements; and (4) to comply with any and all other applicable laws, rules and regulations, specifically including but not limited to HIPAA and other applicable state and federal regulations and requirements applicable to the protection of the privacy of patient records of which any party or its agents or representatives may have custody or be provided access in connection with its performance of this Agreement.

[EXECUTION PAGES WOULD FOLLOW]


Clinic Affiliation:

GRADUATE MEDICAL EDUCATION PROGRAM

CLINIC PARTICIPATION AGREEMENT

THIS AGREEMENT is executed this [date] to document the educational agreement entered into by the parties that was effective as of [date] (“Effective Date”) by and between [health system], a California non-profit public benefit corporation (“Hospital”) and (“Clinic”) regarding participation in the [residency program name], a Graduate Medical Education Program (the “GME Program”).

RECITALS

WHEREAS, the [sponsoring institution] sponsors the GME Program for its residents;

WHEREAS, Hospital participates in the GME Program, pursuant to an Affiliation Agreement (the “Affiliation Agreement”) with the [sponsoring institution] by facilitating the training of the residents when they are treating inpatients at Hospital and assisting in the coordination of their participation in such training in an ambulatory services setting at Clinic and other similar physician facilities;

WHEREAS, Clinic is a physician office or clinic that desires to participate in the GME Program and in the training of the residents; and

WHEREAS, Hospital and Clinic have determined that, consistent with applicable government program regulatory requirements, it is appropriate and desirable to enter into a formal arrangement setting forth the terms and conditions governing the participation of Clinic in the GME Program and certain related operational, funding and governance issues concerning the GME Program;

AGREEMENTS

NOW THEREFORE, for and in consideration of the premises and the mutual covenants set forth below, the parties agree as follows:

1. RESIDENT ROTATIONS AT CLINIC. As of the effective date of this Agreement, the GME Program shall include the rotation of residents into Clinic. Residents shall be involved in patient care during the time spent at Clinic consistent with applicable GME Program requirements.

a. Assignments: Residents will be assigned to the Clinic in the following manner:_________________ Changes in assignment may be made at the discretion of the GME Program Director with notification of the clinic as soon as the need for change is identified. b. Designated clinic staff will provide an appropriate orientation to the Clinic. c. Clinic [supervising physician] will schedule Resident assignments and provide rotation specific didactics taking into account the educational requirements of the Program and Resident’s responsibility to attend his/her continuity clinic practice, attend conferences and perform other duties at Hospital;

d. Supervising Physician(s) will provide direct supervision of all clinical services rendered by Residents at the Clinic;

e. Supervising Physician(s) will retain full responsibility for the care of patients and maintain administrative and professional supervision of Residents insofar as their


presence affects the operation of the Clinic and/or the direct and indirect care of patients. This includes notification of the GME Program Director of changes or problems with the Resident or the rotation.

f. Clinic/Supervising physician(s) will provide the Resident feedback that is ongoing and informal. Clinic will provide a written evaluation of the Resident’s performance according to the guidelines outlined in the Program’s policies and procedures at the end of the Rotation and within two weeks of the Resident’s completion of his or her rotation at the Clinic;

g. Clinic/Supervising physician(s) will operate the rotations in accordance with ACGME and Program requirements and federal, state and local laws, rules and regulations.

h. Educational Goals and Objectives: Assignment of Resident(s) to Clinic will contribute to their education by achieving the Goals and Objectives attached as Exhibit 1. Clinic agrees to participate with the GME Program in monitoring the educational outcome of the Rotation.

2. FINANCIAL RESPONSIBILITIES REGARDING RESIDENT AND TEACHING PHYSICIAN SERVICES.

(a) Salaries and Benefits of Residents. As between the parties hereto, all of the salaries and fringe benefits payable on account of the residents while the residents are participating in the GME Program while located at the Clinic will be the responsibility of the Hospital and Clinic shall have no obligation for such expenses.

(b) Compensation to Clinic. The parties have agreed and by their execution of this Agreement do hereby confirm that the physicians providing supervisory teaching services at the Clinic do so on a voluntary basis and there is therefore no payment to the Clinic for such supervisory services hereunder because no such costs have been incurred or are expected to be incurred by Clinic.

3. MANAGEMENT OF THE GME PROGRAM. Hospital and the [sponsoring institution] shall be responsible for the management of the GME Program in accordance with the provisions of the Affiliation Agreement. Clinic shall contact the appropriate Hospital and/or [sponsoring institution] contact person for all communications regarding the GME Program. Initially, Hospital’s contact person shall be [insert name]

4. TERM. The initial term of this Agreement is one (1) year commencing on the Effective Date. This Agreement may be terminated earlier as provided in Section 5 of this Agreement. This Agreement may be renewed by written agreement of the parties.

5. TERMINATION.

(a) Termination without Cause. Either party may terminate this Agreement without cause with thirty (30) days written notice to the other party.

(b) Termination for Material Breach. Either party may terminate this Agreement upon the material breach or violation of the terms of this Agreement by the other party, provided the terminating party gives the breaching party written notice specifying the nature of the breach or violation and a period of twenty (20) days in which to cure the breach or violation.

(c) Immediate Termination with Notice. Either party may terminate this Agreement immediately, after notice, if any of the following events occur:


(i) Upon a finding by a court of law that the other party is guilty of fraud, dishonesty or other acts of misconduct in the rendering of professional services or has engaged in conduct punishable as a felony.

(ii) Upon the other party’s loss of eligibility to participate in the Medicare or Medicaid Programs. Clinic shall promptly notify the Hospital of any audit or review respecting its delivery of or billing for services rendered to patients of such programs and of any enforcement actions taken with respect to the right of Clinic or any physician practicing at Clinic to participate in such programs.

(d) Immediate Termination without Notice. This Agreement shall be deemed to have been automatically terminated without the requirement of any formal notice upon the happening of any of the following events.

(i) Upon the insolvency or bankruptcy of either party.

(ii) Upon the loss of either party’s professional or institutional license.

(iii) With respect to any individual physician providing services hereunder, upon the loss of his/her medical staff privileges at Hospital, or any material limitation or restriction of such privileges.

(iv) Upon the termination for any reason of the Affiliation Agreement.

6. ADDITIONAL COVENANTS OF THE PARTIES.

(a) Billing. Each party is responsible for billing for all services it provides and for which the party may lawfully bill. Clinic agrees to maintain copies of all such billing records related to patients for whom residents assigned to Clinic under the GME Program participate in the provision of such services in accordance with all applicable Medicare and California regulatory requirements but in no event for less than a seven (7) year period after the date upon which such services were rendered and to make copies of such records available to Hospital (at Hospital’s expense) upon the request of Hospital and no such request shall be refused or denied without reasonable cause documented in writing by Clinic.

(b) Medical and Other Patient Records. Each party agrees to maintain and administer patient records which it may generate or obtain access to as part of its performance of services under this Agreement in compliance with applicable state and federal legal and regulatory requirements including but not limited to the compliance with the privacy and other applicable requirements of the Health Insurance Portability and Accountability Act of 1996.

(c) Insurance.

(i) Commercial General Liability Insurance. Each party shall, at all times during the term of this Agreement, maintain commercial general liability insurance coverage with limits of at least $1,000,000 for each person and $3,000,000 in the annual aggregate.

(ii) Property Insurance. Each party will be responsible for its own property and for insuring against all losses to that property, regardless of fault, with limits and deductibles as it deems appropriate.

(iii) Malpractice Insurance. Each party shall provide, with respect to any physician it employs or contracts or otherwise retains to provide services hereunder, professional liability insurance coverage with limits of not less than $1,000,000 each occurrence and $3,000,000 annual aggregate, or such higher amounts as may be required by California law from time to time. Each party shall require each physician with whom it contracts to provide it with evidence of such coverage. Each party shall also provide appropriate liability coverage for all


physician extenders employed it. Hospital shall coordinate with the [sponsoring institution] Medicine to assure that any residents who may be assigned to Clinic under the GME Program are covered by such insurance provided by [insert name] in accordance with the obligations assumed by it under the terms of the Affiliation Agreement. It is the understanding and intent of the parties that the provisions set forth below regarding subrogation and each party’s responsibility for its own acts shall also be applicable to such insurance to be provided by and with regard to any other claims by or against [insert name]

(iv) General Insurance Requirements. All insurance policies required in this Section shall be written and maintained by responsible insurance companies, duly authorized and licensed to do business in and to issue policies in the State of California. Such insurers must agree not to cancel their policies without at least ten (10) days’ prior written notice to the other parties. Any party may from time to time request evidence of the insurance required to be maintained by a party pursuant to this Section. Hospital may meet its insurance obligations hereunder under any form of insurance or other program providing for protection of the Hospital for its potential liability for risks which is then maintained by [health system] on a system-wide basis in the minimum amounts that are then in force generally with respect to hospital operations in California.

(v) Mutual Waiver of Subrogation. Neither party to this Agreement is liable to the other party for any loss arising out of damage to or destruction of the other party’s facilities or the improvements thereto, when such loss is caused by any of the perils which are or could be included within or are insured against by the insurance required by this Section. All such claims for any and all loss, however caused, are waived, including any claims for any damage or destruction caused by the negligence of any party or by any of their respective agents, servants or employees. It is the intent and agreement of the parties that the provisions of this Agreement have been drafted in contemplation that each party shall fully provide its own insurance protection at its own expense, and that each party shall look to its respective insurance carriers for reimbursement of any such loss, and further, that the insurance carriers involved shall not be entitled to subrogation under any circumstances against any party to this Agreement. No party shall have any interest or claim in the other’s insurance policy or policies, or the proceeds thereof.

(v) Workers’ Compensation and Other Employment Related Coverages for Residents. In accordance with the terms of the Affiliation Agreement, it is understood and agreed that workers’ compensation and other legally mandated employment related insurance for the Residents will be provided by the [insert name] shall obtain and provide adequate documentation thereof upon written request of Clinic.

(vi) Responsibility for Own Acts. Except as otherwise specifically set forth in this agreement, each party is responsible for all acts and omissions of itself and its employees and no party is contractually obligated hereby to indemnify the other party for those acts or omissions. However, this provision does not constitute a waiver by any party of any right to indemnification, contribution, subrogation – except as limited by the preceding paragraphs of this Paragraph (c), or other remedy available to that party at law or in equity. However, nothing in this Agreement is intended nor shall it be construed to supersede, modify, or otherwise limit or affect the enforcement or application of any contractual rights or obligations of the parties to the Affiliation Agreement pursuant to and in accordance with the terms and provisions thereof.


7. MISCELLANEOUS PROVISIONS.

(a) Benefit and Assignment. This Agreement is binding upon and is for the benefit of Clinic and Hospital and their respective successors and assigns. No third parties are intended to benefit from this Agreement, and no third-party beneficiary rights may be implied from anything contained in this Agreement. Neither party may assign this Agreement or any rights under this Agreement without the prior written consent of the other party (which may be withheld in such party’s sole discretion).

(b) Governing Law. This Agreement is governed by and shall be construed in accordance with the laws of the State of California.

(c) Entire Agreement. This Agreement and other documents delivered in connection with this Agreement represent the entire agreement of the parties with respect to the transactions contemplated by the parties, and supersede all previous agreements and understandings (written or oral) between the parties with respect to the transactions contemplated by this Agreement.

(d) Amendment; Waiver. This Agreement may not be amended except by mutual written agreement of the parties to this Agreement. Any party may waive in writing any term or condition contained in this Agreement and intended to be for its benefit; provided, however, that no waiver by any party in any one or more instances may be deemed or construed as a further or continuing waiver of any term or condition. Each amendment or waiver must be in writing and signed by the party against whom enforcement is sought.

(e) Counterparts. This agreement may be executed simultaneously in two or more counterparts, each of which will be deemed an original, but all of which together constitute one and the same agreement.

(f) Headings. All section headings in this Agreement are inserted for convenience only and do not modify or affect the interpretation of any provision of this Agreement.

(g) Severability. If any court of competent jurisdiction deems the provisions contained in this Agreement to be invalid or inoperative, this Agreement will be construed with the invalid or inoperative provision deleted, and the rights and obligations of the parties will be construed or enforced accordingly.

(h) Notices. Any notice that may be delivered or is required to be delivered must be in writing and must be given by personal delivery, telefax, overnight delivery service, regular mail or registered or certified mail. Notices will be deemed to be delivered on the day personally delivered or telefaxed, the day after the day the notice is given to the overnight delivery service or five business days after being deposited in the regular, registered or certified mail. Notices are to be addressed to the respective parties as follows:

If to Hospital: [Insert Contact information]

With a copy to:

If to Clinic: ________________________________________ ________________________________________ ________________________________________

(i) Expenses. Except as otherwise provided in this Agreement, the parties are each solely responsible for their respective expenses incurred in connection with the negotiation, preparation, execution and performance of this Agreement and the transactions contemplated in this Agreement, including, but not limited to, expenses of legal counsel, agents, accountants and other advisors.


(j) Medicare Access Requirement. As required by law, during the continuation of this Agreement and until four years after its termination, the parties agree to make available, upon written request of the Secretary of the U.S. Department of Health and Human Services, or upon request to the Comptroller General, or any of their duly authorized representatives, this Agreement and any books, documents and records of any party necessary to certify the nature and extent of the costs related to this Agreement, and, if any party carries out any of the duties of this Agreement through a subcontract, with a value of or cost of $10,000 or more over a 12 month period, with a related organization or individual, the subcontract shall contain a clause to the effect that until the expiration of four years after the furnishing of services pursuant to the subcontract, the related organization or individual shall make available, upon written request of the Secretary or authorized representative, the subcontract and any books, documents and records of such organization or individual that are necessary to verify the nature and extent of such costs.

(k) Independent Contractors. Each party expressly acknowledges that it and its employees are independent contractors with respect to the other party and that nothing in this Agreement is intended nor shall be construed to create any employment relationship, agency relationship or partnership or joint venture between the parties.

(l) Publicity; Confidentiality. Any publicity and announcements concerning the transactions contemplated by this Agreement may be made only with the consent of Hospital. Each party will maintain confidential the terms of this Agreement and will not disclose the terms of this Agreement without the prior written consent of the other, except as may be required by law or as necessary to the Medicare program or otherwise for reimbursement, payment, licensure, certification, accreditation or other purposes.

(m) Nondiscrimination. In addition to any other requirements of law, neither of the parties may unlawfully discriminate against any employee or applicant for employment because of race, color, national origin, age, sex, or handicap or any other federal or state protected basis in their performance under this Agreement, including, but not limited to, the following: employment upgrading, demotion or transfer, recruitment or recruitment advertising; layoff or termination; rates of pay or other forms of compensation, and selection for training, including apprenticeships or residencies.. Notices shall be posted in conspicuous places available for employees and applicants for employment setting forth the provisions of this nondiscrimination clause.

EXECUTED on the date set forth in the first paragraph hereof and to be effective in accordance with and on the date set forth therein.


Proforma:


Fiscal Year 2001 Graduate Medical Education Reimbursement:


Appendix D – References: 1 Pugno, P. (2006, June). Board Briefing: AAFP response to notification of distressed family medicine residency or academic department. 2 California HealthCare Foundation. (2007, June). Financial Health of California Hospitals. Accessed June 23, 2007 from www.chcf.org/press/view.cfm?itemid=133331&printFormat=true 3 Accreditation Council on Graduate Medical Education. Reporting Tools: List of Withdrawn Programs (website-based tool). Accessed July 2, 2007 at http://www.acgme.org/adspublic/ 4 Ibid. 5 Gonzalez, E.H., Phillips, R. L. & Pugno, P. A. (2003, November). “A Study of Closure of Family Practice Residency Programs.” Family Medicine; 35:706-10. 6 Pugno, P. (2006, June). Board Briefing: AAFP response to notification of distressed family medicine residency or academic department. 7 Eilrich, F.C., Doeksen, G.A., & St. Clair, C. F. (2007, January). The economic impact of a rural primary care physician and the potential dollars lost to out-migrating health services. National Center for Rural Health Works. Accessed July 17, 2007 from http://www.ruralhealthworks.org/Downloads/RHWLinks/Impact_Rural_Physician.pdf 8 Khaliq, A. A., Walston, S. L., & Thompson, D. M. (2006). The Impact of Hospital CEO Turnover in the US Hospitals: Final Report. Accessed July 2, 2007 from http://www.ache.org/PUBS/research/pdf/hospital_ceo_turnover_06.pdf 9 http://www.graham-center.org/x820.xml 10 http://www.ihqrs.oshpd.ca.gov/report/default.asp 11 http://www.oshpd.ca.gov/HID/hospital/finance/annual/index.htm 12 http://www.calhospitalfinance.net/ 13 http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/3438df1e-c13b-4a8c-8de6-528f575826d3.cfm 14 Federal Register May 11, 2007, p. 26949 – 26977 15 The following Web site, Voice of the Customer, can help you evaluate and meet the needs of your identified customers: http://web2.concordia.ca/Quality/tools/29vocdef.pdf 16 Gonzalez, E.H., Phillips, R. L. & Pugno, P. A. (2003, November). “A Study of Closure of Family Practice Residency Programs.” Family Medicine; 35:706-10. 17 California Healthcare Association. (2004, June) California Hospitals’ Financial Condition: On life support. Accessed June 10, 2007 from http://www.calhealth.org/Download/Specialrpt_June04.pdf 18 State of California’s enacted legislation to ensure that acute care hospitals undertake necessary seismic retrofitting to ensure they can remain intact after a seismic event and are also capable of continued operation and provision of acute care medical services. 19 Title VII refers to programs falling under Title VII of the Public Health Service Act. These programs support physician, dentist and allied health profession training, with most funding dedicated to training in primary care medicine, dentistry and medical student diversity. 20 California Office of Statewide Health Planning and Development. FAQs: Hospitals annual and quarterly financials. [1995 author calculation based on OSHPD data]. Accessed January 19, 2007 from http://www.oshpd.ca.gov/HID/hospital/finance/faqshospfin.htm#Q17 21 Formerly known as a Residency Assistance Program (RAP) 22 Woodcock, E. (1999). “Models for assessing primary care’s contributions to AHC.” MGM Journal March/April 1999: 15-22. 23 Email communication with Perry Pugno, MD (July 3, 2007) 24 Doeksen, G., Johnson, T., Willoughby, C. (1999). Measuring the economic importance of the health sector on a local economy: A brief literature review and procedures to measure local impacts. Mississippi: author.


25 Council on Graduate Medical Education. (2005, January). 16th Report: Physician Workforce Policy Guidelines for the United States, 2000-2020. Washington, DC: U.S. Department of Health & Human Services. 26 Center for Health Workforce Studies. (2004, December). California physician workforce: Supply and demand through 2015. Accessed May 7, 2007 from: http://www.ucop.edu/healthaffairs/reports/Final%20Report%20%20California%20Physician%20Workforce_12_20042.pdf 27 http://www.healthlandscape.org/index.cfm 28 http://www.graham-center.org/PreBuilt/hospitalID.pdf 29 http://www.graham-center.org/PreBuilt/GME2001.pdf 30 The basis for determining what constitutes “substantially all” costs was further refined in 42 C.F.R. §413.78(f), see also 72 Fed.Reg. 26870, 26950-26968 (May 11, 2007). 31 U.S. House of Representatives, Committee on Ways and Means, 1965 32 Rich, E.C., Liebow, M., Srinivasan, M., et al. (2002). “Medicare Financing of Graduate Medical Education. Intractable Problems, Elusive Solutions.” Journal of General Internal Medicine 17(4), 283–292 33 Anderson, G.F. (1996, February). “What Does Not Explain the Variation in the Direct Costs of Graduate Medical Education.” Academic Medicine 71(2):164-9. 34 Davis, P.H. (2000, March). The effects of the Balanced Budget Act of 1997 on graduate medical education (Resource Paper). Rockville, MD: Council on Graduate Medical Education. 35 Ibid. 36 Rosenthal, T.C., McGuigan, M., Osborne, J., et al. (1997). “One-two rural residency tracks in family practice: Are they getting the job done?” Family Medicine (30)90-3. 37 Accreditation Council for Graduate Medical Education. Accessed July 5, 2007 from http://www.acgme.org/acWebsite/newsRoom/newsRm_acGlance.asp 38 Centers for Medicare and Medicaid Services. Accessed July 6, 2007 from http://www.cms.hhs.gov/MissionVisionGoals 39 Council on Graduate Medical Education. Accessed July 5, 2007 from http://www.cogme.gov/ 40 American Association of Medical Colleges. Accessed July 5, 2007 from http://www.aamc.org/advocacy/library/gme/gme0001.htm 41 Centers for Medicare and Medicaid Services. Accessed July 5, 2007 www.cms.hhs.gov/AcuteInpatientPPS/06_GME.asp 42 Centers for Medicare and Medicaid Services. Accessed July 5, 2007 www.cms.hhs.gov/AcuteInpatientPPS/06_dgme.asp 43 Ibid. 44 Accreditation Council for Graduate Medical Education. Accessed July 5, 2007 from http://www.acgme.org/acWebsite/about/ab_ACGMEglossary07_05.pdf 45 Ibid. 46 Ibid. 47 Ibid. 48 Ibid. 49 Ibid. 50 Accreditation Council for Graduate Medical Education. Accessed July 5, 2007 from http://www.acgme.org/acWebsite/newsRoom/newsRm_acGlance.asp 51 American Academy of Family Physicians. Accessed July 6, 2007 from http://www.aafp.org/online/en/home/policy/policies/r/ruralresidencydefinition.html 52 Accreditation Council for Graduate Medical Education. Accessed July 5, 2007 from http://www.acgme.org/acWebsite/about/ab_ACGMEglossary07_05.pdf

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