EXECUTIVE SUMMARY

When considering a joint venture with a health system, know which questions to ask and what type of agreement will work.

  • Study market variables, payer mix, reimbursement trends, and driving forces.
  • Ask how much the hospital will pay to buy in and how much they’ll own.
  • Make sure the ASC’s role is defined clearly.

Sooner or later, some hospital or other organization will inquire about a joint venture with the local ASC. But will the ASC be ready when they do?

Surgery center administrators should know what to ask to ensure their ASC is well positioned in any joint venture agreement, says Luke Lambert, MBA, CFA, CASC, chief executive officer of Hanover, MA-based Ambulatory Surgical Centers of America (ASCOA), which is physician-owned. When considering a joint venture, first examine the market variables, including who the payers are, how predominant the payers are, reimbursement trends and issues, and what are the driving forces and competition, advises Robert Zasa, MSHHA, FACMPE, managing partner with ASD Management.

“Consider physicians’ specialty areas in terms of their ability to control that particular specialty in that market,” Zasa says. “These are the factors that tell you which way to go, who’s going to own majority shares.”

Physicians mostly own the majority interest, and the split is 51 to 49, if the hospital starts the process, Zasa adds.

ASC owners also should determine if there’s enough upside to the joint venture that both parties will gain from it, he adds. These agreements typically are LLCs, for-profit joint ventures in which each partner is compensated based on the negotiated ownership. So, if the ASC owns only 10% of the joint venture, then they receive only 10% of the profits, Zasa explains.

“Sometimes, a hospital has a for-profit entity within a nonprofit that does investment in these organizations,” he explains. “However it’s structured, it’s going to be reportable as profit, and everyone wants it to be profitable.”

When structuring a deal, Lambert says, ask these three important questions:

  1. How much will the hospital pay to buy in, and how much will they own?
  2. How will the relationship affect the center’s access to payers, and could the ASC improve payer rates at all?
  3. Will the ASC see more patients because of the joint venture?

“Those three points are 80 to 90% of what’s important,” Lambert says. “The remaining things are governance types of issues.”

For instance, will the ASC retain the right to govern its own operations? This one is very important, Lambert notes.

“Hospitals are used to dominating things they’re involved with,” he explains. “And, unfortunately, they tend to be dismal at managing outpatient operating rooms efficiently.”

A typical hospital outpatient OR will do about a third of the cases in a given period of time, compared with a well-run ASC, Lambert says.

Lambert’s advice is for ASCs to not let the hospital system be in charge of operations. “Surgery centers have to be more efficient because they get paid half or less what a hospital is paid for the same patients,” he says. “If the hospital brings a hospital’s inefficiency to the center, then they won’t make money anymore.”

When writing the joint venture agreement, ASCs should make sure their role is defined in the agreement, says Tracy Hoeft-Hoffman, MBA, MSN, RN, CASC, administrator of Heartland Surgery Center.

“Clearly identify the roles, and it depends on the hospital’s percent of ownership,” she says. “If they have a 20% ownership, it’s very much a minority ownership. But many own 51%.”

ASC leaders also should pay attention to possible philosophical differences between hospitals and ASCs. For example, surgeons typically start surgery centers to improve care quality and control their work environment, Lambert says.

“The number two benefit is they get two to three times more done in a day’s work in their own facility, compared to the hospital,” he says.

This productivity difference could be a deal changer for surgeons considering a hospital-ASC joint venture.

“It would really crush surgeons’ practice productivity if they were reduced to a hospital-based outpatient department’s type of speed in their surgery center,” Lambert says.

Through more productivity and efficiency, ASC surgeons can complete as many surgeries in one day as a hospital-based surgeon can in two and a half days, and surgeons see the slower output as a waste of their own time, he offers.

“That would crush the throughput of the practice, and physicians would see a 30 to 40% reduction in profitability,” Lambert says.

Hospital leaders might agree when the joint venture begins that the ASC could manage its operations. But ASC leaders should be alert to changes in the hospital’s management. A new administrator could have a different view and change things, he notes.

“There’s a lot of turnover in hospital administration,” Lambert adds.

Some surgery centers will hire management development companies to help them protect the ASC’s interests during and after a joint venture, Lambert says.

“It’s very common for hospital-ASC joint ventures to also have a development management company that’s part of the joint venture,” he adds. “It provides some balance because a hospital can overwhelm what used to be a physician partnership, and physicians are at risk of having their desires ignored.”

ASCs should walk away from a possible hospital joint venture when it appears the hospital’s goal is to run everything their way or to simply buy-out the competition with plans to eventually close the ASC, Zasa and Lambert say.

“The onus is on the proposed joint venture partner to demonstrate why it will benefit an existing center that has heretofore been successful,” Lambert adds.