Physician Alignment through the Joint Venture Outpatient Model

By Robert Zasa, MSHHA, FACMPE

In the trend to develop more integrated networks between physicians and hospitals, surgery center development has become one of the most common areas of joint ventures. Some of these include hospitals and physicians coming together to develop new centers, as well as hospitals reaching out to physicians to make them partners in existing surgery centers. Even physician-owned centers are recognizing the benefits of integrating their practices. Competition between hospitals has resulted in trying to lure physicians away from other hospitals to their hospital or outpatient facility. One way to avoid this losing physician to another hospital is to include physicians legally and monetarily in outpatient centers through the joint venture model.

This form of physician alignment is extremely effective at keeping doctors focused through a sense of ownership and financial incentives based on the success of the center. Surgery centers lend themselves extremely well to joint ventures, given the fact they are typically separate, limited liability companies (LLC) and allowed by the federal government to be jointly owned by physicians and hospitals. In fact, surgery centers are one of the few types of services that physicians can continue to own.

There are compelling reasons for hospitals and physicians to work together. Hospitals typically contribute several essential factors to a surgery center’s success. The first is market presence. Often, hospitals have great presence in the catchment area and are able to negotiate higher rates of reimbursement from payers.

For example, in New Jersey one of the hospitals has negotiated with all the local payers, achieving reimbursement rates close to the hospital outpatient department rates. If the hospital contract applies, the center receives significantly higher reimbursement. In this case, the hospital has negotiated with payers to get approximately 90% of that rate vs. the typically lower rate for freestanding surgery centers. For this reason, a joint venture with the hospital would significantly increase the net revenue per case to the surgery center for the surgeon owners. The key issue is that the hospital must own 51%. The key negotiations to implement this joint venture centered on the control issues and the hospital having majority share.

More and more, hospitals understand that success for a surgery center depends on the physicians being very active in the operations of the center with outside third party management. Many hospitals admittedly don’t manage surgery centers efficiently. The physicians often feel more comfortable with an outside management firm acting as buffer between the two parties.

The second benefit of hospital/physician joint venture is that the hospital can bring much better financing to the table. The hospital usually can support a significant share in a surgery center and can affect much lower interest rates and typically better terms than a freestanding surgery center. On a local level, a bank that has a relationship with a local hospital, and has a significant amount of their physicians and other employees as bank customers, may offer even lower rates with better terms. Better terms may include guarantees that burn off after two years of cash flow, or a non-recourse loan for the equipment part of the loan. Also, covenants related to debt service might be lowered to 1 vs. 1.25 to 1.3 debt ratios.

Joint ventures can pose challenges when the goals of the partners differ. Physicians are individual practitioners and naturally do what is best financially for their practice. The hospital’s goals are often in conflict with the physicians since hospital must satisfy multiple competing practices. Hospitals must have a goal of keeping all the physicians happy while working with them to move the organization along as a whole. While it is typical for hospitals and physicians to maintain opposite perspectives, the more successful model has been to align goals to win together.”

A concept taken out of the seminal textbook Hospital Administration states, “physicians have patients, and hospitals do not.” This is the basic premise of physician alignment with health care facilities. Health care facilities get to service the physicians’ patients (clients) maybe 2 to 3 times in the patient’s life, for an average length of stay, or in surgery centers 3-4 hours. In addition to an obligation to their patients, the public trusts physicians and the facility to provide quality care in a cost effective manner. If they can accomplish this effectively, it makes the physicians and the hospitals more attractive to both the payers and the self-insured.

A joint venture ASC is a true partnership and it must be handled as such. It cannot be driven solely by the hospital’s needs or recommendations or a physician’s particular practice goals. There must be emphasis on the word “joint.” It’s critical when entering into a joint venture to have this discussion with both parties at the beginning, throughout the process of development, and to maintain that focus during the life of the partnership.

In an outpatient center, maintaining the delicate balance between the goals of the hospital and the goals of the individual practices can be difficult. Utilizing the third party services of a management group specializing in joint venture development can alleviate this issue effectively while improving the overall efficiencies and profitability of the center.

A third party management group adds value a number of ways, with expertise first and foremost. An effective third party management group specializes in development and managing a certain sector of outpatient health care, such as ASCs. Because they have developed a number of locations and worked with different hospital and physician partners in a variety of scenarios, they have procured an abundance of skill and firsthand experience critical to decision making in the early planning stages, through development and ongoing through the operation of the center.

Similar to a hospital or system, they have economies of scale that bring great value in the procurement of equipment, disposables and other supplies needed for a center. Their purchases are far less broad than a hospital, focusing only on those items specific to that sector of outpatient care, which often results in pricing even lower than the GPO’s. IN addition to the pricing, unlike a hospital or system, a third party management group has experience in purchasing the right equipment for an outpatient setting serving a unique mix of specialties (equipment that can be co-utilized like a C-Arm for orthopedic, spine, pain, and podiatry programs).

A third party management group is acutely focused on issues relative to the outpatient setting from legislative matters and reimbursement, to staff management, policies and procedures. They are able to share resources and intelligence across their network of centers, all steering the center toward a more efficient delivery of care and profitability.

Joint ventures between hospitals and physicians continue to be a very good model. They can be a positive solution to many of the challenges experienced in today’s economy and competitive marketplace. Although there are difficulties in achieving a successful union, it can be done if all parties align their goals, leveraging the skills and strengths of each involved and utilizing a solid, coordinated management approach. Retaining physician relationships and aligning the interests of the hospital and physicians is another critical element to the successful future of our health care system.

Robert Zasa is President and founder of Ambulatory Systems Development.
Contact: RZasa@asd-asc.com or 626.840.4248.