Professional Services Agreements Versus Employment

As affiliation options have continued to mature, especially between hospitals/health systems and physician practices, the overarching models of choice are either professional services agreements (PSAs) or employment. In this chapter, our discussion of PSAs pertains to “full” affiliation, often referenced as “employment lite.” Employment is often connected with W-2s while PSAs are connected with 1099s.

As discussed earlier, PSAs have become a legitimate and compliant option. They always were options, but their application and popularity have necessitated greater attention to ensure compliance with the parameters. Employment has existed for decades, as hospitals have provided staff-model structures for their physician enterprises. This “W-2” employment scenario addresses many concerns, albeit obstacles for physicians, especially those recently out of training. These physicians do not have to worry about day-to-day operations, infrastructure, management, or, to some extent, financial performance.

Thus, the options of PSAs versus employment are clear and often addressed by the physician groups and hospitals/health systems as fundamental when a practice expresses a desire to align fully.

As a result, we submit the following overarching assumptions relating to the discussion of PSAs versus employment:

1. We assume that PSAs are legal and can be established and administered in compliance.

2. Not only are PSAs within compliance boundaries, but they also entail similar forms of compensation and performance requirements as employment.

3. PSAs are part of the hospital/physician enterprise and can be used as a full form of affiliation, with no other limits on the length of the agreement.

4. Employment remains the preferred model, especially for hospitals and health systems. And while it is not required that PSAs convert to employment, they are a legitimate and often applied segue.

5. Fair market value (FMV) and commercially reasonable (CR) compensation are no different under a PSA than under employment. Both require careful scrutiny and validation within fiscally sound and regulatory requirements.

6. PSAs and employment can therefore have similar compensation incentive structures.

7. While there are some inherent differences between PSAs and employment, there are more similarities than differences.

8. PSAs provide a structure for practice physicians who want to be independent and “private.” As a result, the physician practices engaged with and affiliated with hospitals through PSAs can participate in other activities, such as providing services such as ambulatory surgery centers, unless contractually prohibited.

9. Employment entails inherent restrictions: Once a physician or APP is employed, it is difficult, if not impossible, to engage in other outside activities and/or contracts with independent provider entities. Thus, employment is more confining.

10. PSAs have the capability to include carve-outs and hospital-based contracts (e.g., for anesthesiology, radiology, inpatient services, etc.).

11. The differences between PSAs and employment are based on the type of PSA (i.e., traditional versus global versus practice management arrangement).

With these overarching factoids under consideration, let’s explore in much more depth these two forms of full affiliation and how they are best applied in today’s hospital, health system, and private physician medical practice services.

Excerpted from The Physician Leader’s Guide to Affiliation Options: Economics, Tactics, and Real-World Implementation , American Association for Physician Leadership, 2026.