The changing tide of same-day surgery

Limited partnerships to limited liability company

By Stephen W. Earnhart, MS

President and CEO

Earnhart and Associates

Dallas

As we talked about in last month’s column and at the annual conference sponsored by Same-Day Surgery in Washington, DC, the nature and scope of ambulatory surgery centers (ASCs) is changing in the United States. Hospitals are now playing an active and significant role in the development of physician joint-ventured ASCs — a role that many thought was long overdue.

The situation becomes interesting for hospitals in a number of areas — one being their traditional role as not-for-profit entities, now playing in the for-profit playground. That creates opportunities. (As you know, we don’t have problems in health care — we have opportunities.)

Taking a hard look

One of the first and greatest issues facing the formation of these entities is the partnership arrangement a hospital structures with its new physician partners. For a not-for-profit hospital to enter into a for-profit relationship takes serious consideration, planning, and legal maneuvering. The established limited partnership status does not address the issues of inurement and taxation issues for a tax-exempt hospital in a satisfactory manner. These are two very serious issues for hospitals to consider.

Limited liability companies are the wave of the future for ambulatory surgery centers and other joint ventures between tax-exempt hospitals and physicians, says John Box, JD, an attorney with Duke, Branch, Box and Huber, a law firm in San Antonio, and an expert in the formation of such partnerships.

Concerns of the IRS

The Internal Revenue Service has always been concerned that when a tax-exempt hospital participates as a general partner in a partnership with physicians, the hospital is placing all of its assets 100% at risk for the partnership liabilities and yet is sharing in the rewards of the partnership at some level much lower than 100%, Box says. This can amount to private inurement or private benefit, he says. However, a properly structured limited liability company avoids this problem because, while it is taxable as a partnership, the hospital and physician investors enjoy the same protections from liability as shareholders of a corporation, Box says.

These types of partnership structures are another reason hospitals have become much more involved in the for-profit side of ambulatory surgery. As we noted in last month’s column, hospitals and physicians working together toward a common goal is a formidable competitor.

The introduction of hospitals back into the ambulatory surgery market has spawned a number of resources to assist them. There are new and much-improved computerized billing systems, companies that specialize in supply chain management (management of supplies and sources of supplies that the facility is purchasing, especially as it relates to cost control from the source), financial modeling, inventory management, supply expense reduction, pharmacy management and formulary development, facility redesign, surgical services re-engineering, transitional management, and strategic development with many major manufactures.

It’s an all-new ball game. Someone at the Same-Day Surgery Conference asked if this meant the freestanding corporate industry was doomed. Hardly, but it will become tougher for them to argue that they are the only option left to physicians; that no one else can match their efficiency or prices.

Avoiding the money trap

While hospital/physician joint-ventured surgery centers have been around for a long time, the move is on to make the practice commonplace. Hospitals, however, have to avoid the money trap caused by creating small hospitals that provide ambulatory surgery. They have to develop centers that provide ambulatory surgery. (There is a difference!) They need to learn that management of an ASC is different than that of a hospital and have to be receptive to the needs of their physician partners and patients. Physicians need to understand that hospitals need their business. Together, they can prevent the hard-earned revenue from the ASC from being shifted to some corporate office in another state and, instead, keep it in the local community.

As we discussed at the conference, if you own a private freestanding ASC, consider your local hospital as a potential venture partner. If you are a hospital interested in the establishment of an ASC, consider your own surgical staff. Often, the most obvious is not always the most obvious.

[Editor’s note: To provide feedback or column ideas, contact Earnhart at Earnhart and Associates, 5905 Tree Shadow Place, Dallas, TX 75252-5101. Telephone: (972) 713-6626. E-mail: surgery @onramp.net. World Wide Web: http://rampages.onramp.net/~surgery.]