Why hospitals try joint venture ASCs with doctors

By Stephen W. Earnhart, MS

President and CEO

Earnhart & Associates

Dallas

"Why would the hospital want to joint venture their outpatient surgery business with their physicians?" I hear this question at least once or twice a week. I am accustomed to the question and therefore sensitized to it. But I hear it so often, I thought many Same-Day Surgery readers could also be confused.

Typically, when a hospital organization’s leaders decide that they are interested in doing a surgery center, especially with physician groups, the hardest sell is often the board of the hospital. Most hospital board members understand the core business of their hospital and help guide and direct it through the changing regulatory course and obstacles. It is not an easy task for the board or the administration of the hospital to explain and justify the many issues they deal with on a monthly basis.

Try to explain to the board that you are going to share one of your more lucrative business lines, outpatient surgery, with a group of your surgeons. Not only are you going to share the revenue, but you are going to duplicate most of the environment of the hospital’s operating room to accomplish that goal! This is a hard pill to swallow for anyone charged with fiscal responsibility or cost containment.

I’m going to share some of our secret tactics we use when called in to explain to hospital boards the reasoning behind the "craziness" of joint ventures. First, few hospitals proactively spin off their outpatient surgery in a new business line. Many will build new departments and add upscale waiting areas with easy access and brightly colored pictures, but that is not going to achieve the result most are looking for — cost control. When you use the same standards, personnel, operating rooms, etc., you are duplicating or reshuffling existing business and not reducing cost. Usually, you are only increasing your cost to pay for the renovated space. Few hospitals see the opportunities involved in developing a freestanding surgery center with their physicians. Let’s look at those opportunities:

It’s better to have a piece of it than lose it all. There is extremely aggressive activity with physicians developing their own surgery centers in the market place. They are looking for efficiencies that hospitals typically cannot offer them. Many hospitals are aware of this activity and decide to join the physicians rather than fight them. This allows the hospital to retain a significant portion of the revenue of this joint venture.

The biggest line item expense in surgery is supply cost and personnel. It is difficult to achieve reduced supply cost unless the surgeon feels he or she is part of the team. Often when the surgical staff are tied to the bottom line of the operations, they are more cognizant of the cost of materials. This typically allows for standardization — active physician participation in controlling supply costs.

A properly developed surgery center is designed for efficiency in staffing. Every time you put up a wall, you need someone working behind it. That costs money. More physical plant construction helps alleviate that ongoing expense. Incentives to staff to keep their numbers down by sharing the workload further reduces staffing levels.

The "learn the business" philology is a major attraction for hospitals. Hospital leaders understand the efficiencies that most surgery centers have. They want to use their own joint ventured surgery center as a beta site for their inpatient surgery. They want to apply the cost-control measures from the surgery center to the hospital setting. The physician partners are usually more than eager to help in that process.

Hospitals need to have a lower-cost provider. With the upcoming ambulatory patient classifications (APCs) and their reimbursement hit, hospitals need a lower cost provider of surgical services to handle their outpatient surgery. Without significant cost control, hospitals will continue to lose money on outpatient surgery procedures being performed in the hospital operating rooms.

Joint venturing with surgeons removes the threat of them doing something on their own. The ability to joint venture together often results in noncompeting agreements between the hospital and the new venture partner. These agreements allow both parties to sleep better at night because they’re not waiting for the other shoe to drop to see who else is going to be a threat to the surgical volume of the organization.

Thus, there are some of the reasons hospitals want — maybe "want" is not the right word, perhaps "agree" is better — a separate surgery center. Regulatory issues always cloud the issue, but being receptive to the changing marketplace in outpatient surgery is just good business.

(Earnhart can be reached at Earnhart and Associates, 5905 Tree Shadow Place, Suite 1200, Dallas, TX 75252. E-mail: searnhart@earnhart.com. Web: www.earnhart.com.)