Thinking of linking?

Joint ventures are fine, as long as you are wary

For the last several years, many hospital executives and practice administrators have said vertical integration between physician practices and hospitals — commonly in the form of physician-hospital organizations (PHOs) — was not only possible, but also 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 became less prominent — and less successful when they occurred.

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

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."

The Burns Clinic in Petosky, MI, has been part of successful joint ventures in the past as part of the PhyCor Group. But its executive director, David Thomas, CMPE, says he is unsure whether such ventures will continue at the same pace they did 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 have 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 keep 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, there will be an increase in joint venture activity. "We are seeing it just since the latest cases have been resolved," Lundy says.

Four elements to consider

That doesn’t mean a practice should leap into negotiations without due consideration. "Hospitals are a good source of capital, but that doesn’t mean a doctor should agree to a joint venture," says Lundy. He says physicians contemplating joint ventures should consider four main factors:

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 a potential for a stalemate. Either choose a mutually acceptable neutral tie-breaker, or let clinical decisions go to physicians, and administrative or capital decisions be made by the hospital.

2. Consider management styles.

This echoes Royer’s concerns. Lundy says you have 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, Royer says. They may not have the management experience necessary to make business decisions. If a natural physician manager lacks the training, however, Royer advocates giving the 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 joint venture operation you are planning to set up — a lab facility, a surgicenter, or an outpatient operation — know in advance where you are getting 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.

If you are linking with a nonprofit hospital, think through your 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."