24 things to know about joint ventures: Examining partnerships, risk and results in 2017

As reimbursement practices continue to tighten, joint venture ASCs have become commonplace in the industry with physicians and hospitals partnering to reap the benefits.

Physician owners and hospital partners have to ask a number of questions and make a series of complicated decisions as they seek to enter into the joint venture. From valuation to negotiations to long-term growth strategies, entering into a joint venture is a complicated but beneficial undertaking.

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Becker's ASC Review conducted several interviews with top industry experts. Here are 24 things to know about joint ventures.

The benefits of joint ventures

1. At Becker's 23rd Annual Meeting in 2016 panelists dove into joint ventures, touching on how to create a joint venture and several governance issues involved with the process. Robert Zasa, a managing partner with ASD Management, and Harel Deutsch, MD, of Rush, said joint ventures are good for the bottom line, and good for both hospital and physicians to expand their respective brands.

2. There are many reasons why hospitals and surgery centers decide to joint venture. A hospital partner can help the ASC negotiate better payer contracting rates in some instances and lend leverage for negotiating with other vendors. A hospital partner in some situations will also help grow ASC case volume, if the hospital is committed to the center's success. The ASC provides hospitals an efficient and cost-effective setting for low-acuity cases, opening up hospital ORs for the more complex cases. Some hospitals also use the ASC as a bargaining chip when signing new surgeon contracts, allowing surgeons to perform cases there.

Management companies

3. There are several management companies — like Tenet/United Surgical Partners International, ASD Management and Regent Surgical Health —with programs to advise surgeons and hospitals through joint ventures, and in some cases become a third partner. Advisory companies can bring expertise from previous joint venture deals and guide each party through the process, especially if it's the hospital's first joint ventured ASC.

4. Mr. Zasa recommends the use of a third party management company to not only help develop the venture, but to act as a balancing force. He said, in a Becker's ASC Review article, "The most successful centers have third party management or experienced advisers. You have to have somebody stand in to balance the needs [of each party]."

5. Health systems look at several characteristics when looking to partner. Those include:

  • Notability of the physician or physician group
  • Whether the ASC is an established brand
  • Clinic location—whether it's in a market the hospital wants to target
  • Extra capacity to accommodate new cases

6. Hospitals value when ASCs have underutilized space because it could allow them to migrate some of their services to the center, freeing up operating rooms for higher acuity and higher reimbursing cases.

7. ASCs can use analytics when entering into a negotiation. Having concrete analytical data concerning elements like clinical quality, patient satisfaction, workflow and cost can be an especially powerful tool to show a health system why a center would make a good partner.

8. During negotiations, hospitals and physician owners must make decisions around division of equity, control over ASC operations and the types of cases performed at the center. 

9. Physicians should research the likeability of a hospital in a partnership, and understand elements of the hospital's physician and payer strategies, Michael Stroup, senior vice president of acquisitions at United Surgical Partners International, said in a Becker's ASC Review article. He said, "If these strategies don't align with the ASC's overall philosophy, there could be complications down the line."

10. Tom Mallon, co-founder and chairman of the board of Westchester, Ill.-based Regent Surgical Health, a developer, manager and owner of 24 ambulatory surgery centers, echoed Mr. Stroup aforementioned point, saying both the hospital and the physician group need to put the joint venture first. Both physicians and hospital partners have to put their own interests to the side and value the health of the center to ensure success.

11. Mr. Zasa stressed trust when entering into a joint venture. When both sides of the joint venture go into the partnership and give it their all, planning the center around a concrete understanding of each other's expectation the center has a better chance to survive.

Governing board

12. When beginning to negotiate board structure an experienced legal counsel should be on hand to advise both parties on the ASC's governance requirements.

13. The board often includes physician partners, hospital administrators and a member from the center's management company. The exact make-up of the board varies from center to center; a majority owner may request the majority representation on the board. In other cases, an equal number of representatives from the hospital and ASC will sit on the board and the management company member will cast the deciding vote in the event of a tie.

14. There are regulations governing the board structure when an ASC partners with a not-for-profit hospital or health system. Be sure to follow state and federal regulations to remain compliant.

15. The ASC and hospitals should each have their own attorneys and/or legal counsel to represent their best interest.

16. Serving on the ASC board is a huge commitment. With millions of dollars hinging on board decisions, board members have to be dedicated to executing with precision.

17. When it comes time for the actual board meetings, these ideas from a Becker's ASC Review story help ensure ASC board meetings are productive.

  • Communicate the agenda and prior minutes in advance. The board should send out the agenda and prior meeting minutes at least one to three days before the meeting, so the current board can review what was previously discussed. Hospital partners expect advanced notice of agenda items to properly prepare for their ensuring discussion. The article also suggests meetings should be on the same day and at the same time to allow for consistent planning.
  • Focus on data. Information at board meetings should be concise and data driven with plenty of benchmarks referencing past performance. ASC partners should liberally use infographics to ensure poignant information is conveyed.
  • Share data with physicians as new briefs. When including physicians in any sort of data driven decision, include only the most relevant data. When administrators include synthesized reports, it shows that the center is actively including the physician and seeking input of the center's day-to-day employees.
  • Avoid meetings within meetings. Relevant committees should meet before the board meeting, and not at the board meeting. The board meeting should be used to finalize any measures discussed at a committee meeting, and nothing else. With a limited amount of time in a board meeting, its quintessential the meeting stays on topic and progresses accordingly.

Valuations
18. Ensuring a physician-owned practice gets top dollar can be a complex situation. Mr. Janiga suggests three methods ASCs can employ when valuing their center: the income approach, the market approach and the asset approach.

  • An income approach has both a single-period and multi-period model. A single model could be used to value a center that has relatively stable operations, while a multi-period is used to value a center in the midst of a substantial period of growth.
  • A market approach values an ASC using comparable transactions and publicly traded company valuation methods.
  • An asset approach bases the valuation on book value of assets and liabilities to fair market value. The asset approach is commonly used when valuing de novo surgery centers.

19. Many things can jeopardize a physician-owned surgery center, Mr. Janiga said. Common pitfalls that afflict physician owners include:

  • Failing to normalize revenue
  • Not accounting for appropriate expenses such as management fees
  • Employing the wrong valuation approaches
  • Failing to appropriately assess risk
  • Forgetting to account for secondary discounts such as lack of control
  • Not adjusting for a stock versus an asset deal

20. Surgeons can strengthen the ASC after established by arriving on time for cases, not excessively wasting supplies, respecting all center staff and thoughtfully serving on the center's governing board. When physician owners actively participate in a joint venture, it's noticed by hospital and other physician partners, creating a shared standard of accountability. With a shared interest in making centers as profitable as possible, that accountability goes a long way to accomplishing that goal and ensuring long term success.

Going 'all-in' with ASC joint ventures

21. While hospital executives and ASC physicians have historically been adversarial with each other, joint ventures and other collaborative models of care are breaking the walls down. Specifically, hospital executives are willing to allow employed physicians to own interest in a joint venture ASC, and markets that were traditionally resistant to ASCs are becoming hotbeds of ASC activity, according to a Becker's ASC Review E-Book.

22. Hospitals have a goal to get the best possible care for the lowest possible cost, and ASCs are how they can do that. That reimbursement driven decision drastically increased demand for ASCs which resulted in the latest spurt of joint ventures.

23. Physicians also prefer joint ventures to ASCs for several reasons. One of the biggest is efficiency. With the smaller nature of the center, physicians can see more cases in a reduced amount of time, and have more time to see their patients at the clinic. With a general healthier patient base, ASCs also have reduced infection rates.

24. Hospitals aren't stopping at ASCs either. Some systems have developed ambulatory care campuses with ASCs, imaging centers, physical therapy services and other outpatient centers situated in a central location. The hospitals either develop their own centers, or partner with independent groups in the community ensuring continued success for all entities.

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