Thinking of linking? Make sure the fit is good

Joint ventures are fine, as long as you are wary

For the last several years, many hospital executives and practice administrators have felt that vertical integration between physician practices and hospitals was not only possible but beneficial. There was a constant stream of such joint ventures reported in both the medical and business press. But in the last year, such links have become less prominent — and less successful.

What happened? According to Jerry Royer, MD, MBA, chief medical officer and senior vice president, Mercy Health Care Sacramento, and vice president of clinical effectiveness, Catholic Healthcare West, also of Sacramento, the parties involved approached joint ventures without making sure there was a good fit.

Royer says there are two "musts" for a successful joint venture. "This is true in any industry," he says. "You have to have a congruence of values, and you have to make sure you have financial integration and agreement before you have operational integration."

The first provision ensures management styles are the same, says Royer. "If you don’t have a hospital that has moved from a hospital-centric view of selling beds to a physician-centric scenario of providing medical services, it won’t work."

Financial specifics help ensure one party is not getting all the benefits. "Maybe there will be an initial capital investment by the hospital," he says. "But the physician group has to be viable on its own. There has to be a business plan in place that will ensure that."

Be cautious

The Burns Clinic in Petosky, MI, has been part of successful joint ventures as part of the Phycor Group. But its executive director, David Thomas, M. Admin. Sci., CMPE, says he is unsure whether such ventures will continue at the same pace as in the past, particularly between nonprofit hospitals and profit-based physician practices. "It is hard to marry a nonprofit hospital with a profit-based practice," he says. "There are so many regulations with nonprofits, and doctors never want to abdicate control."

Part of the damper on joint ventures may come from the Ethics and Patient Referral Act commonly called the Stark law after its sponsor, U.S. Rep. Pete Stark (D-CA). This federal legislation was designed to prevent physicians from referring patients to hospitals, laboratories, or other medical facilities in which they held a financial stake. Since the law was passed in 1989, there have been some "carve outs" that have given more leeway for practices to join with hospitals or even parts of hospitals.

Bob Lundy, a partner in the Los Angeles law firm Hooper, Lundy, & Bookman, has been involved with many successful joint venture negotiations. He says the recent slow-down in joint venture negotiations is temporary.

As the courts clarify what entities can legally link without being accused of a kickback scheme, joint venture activity will increase, he says. "We are seeing it just since the latest cases have been resolved," Lundy says.

That doesn’t mean a practice should leap into negotiations. "Hospitals are a good source of capital, but that doesn’t mean a doctor should agree to a joint venture," says Lundy. He says you should encourage your physicians to consider these four main factors if they are contemplating a joint venture:

1. Determine how power is apportioned.

"You have to consider who will be on the board and how will major decisions be made," Lundy says. If the board is split 50/50 between the practice and the hospital, there is potential for a stalemate. Either choose a mutually acceptable neutral tie-breaker or leave clinical decisions to physicians and administrative or capital decisions to the hospital.

2. Consider management styles.

Lundy says it’s necessary to find out whether the proposed management of the joint venture will come from the hospital side or the practice side. "Hospital-trained people are not as good at running out patient services," he says. "They sometimes have less focus on cost containment, especially if they come from a nonprofit background."

Physicians also may be lacking the management experience necessary to make business decisions, Royer says. If a natural physician manager lacks the training, however, Royer advises giving that person that education. "It’s easier to give a doctor business training than to give a business manager medical training."

3. Know where the money comes from.

Whatever the joint venture operation your doctors are planning to set up — a lab facility, a surgicenter, or an outpatient operation — they should know in advance where they will get the money. "Will you get it from the hospital?" Lundy asks. "Will it come from the doctors, from a bank, or from venture capitalists?"

4. Plan for the future.

Whatever the proposed linkage, your doctors need to think through their plans, says Lundy. "If you plan on setting up a string of surgicenters and eventually go public, you have to ask yourself if that will be consistent with the nonprofit hospital’s goal of providing care to all."

"It all comes down to having similar values and having the financial integration in place from the start," Royer says. "If you have those two things, you will find everything else falls under it, and a joint venture can work."