3 questions answered on hospital-ASC joint ventures

ASC growth rates have stagnated and de novo development has flattened out. Now acquisition development is trending in the ASC space.

"Most transactions are acquisitions due to the saturation in the market. Hospitals are also seeking relationships that they might not have before because they are now interested in acquiring practices to make their level of care more seamless," Paul Eiseman, vice president of business development at Westchester, Ill.-based Regent Surgical Health, said in a presentation at Becker's Healthcare's 13th Annual Spine, Orthopedic and Pain Management-Driven ASC Conference in Chicago.

Currently, there are approximately 5,000 ASCs across the country, primarily owned by physicians, and about 20 percent have some ownership by a hospital partner, according to Mr. Eiseman. However, independent ASCs are paid about 60 percent of what a hospital is paid for the same surgeries, meaning they are much more vulnerable.

Regent Surgical, an ASC partnership development and management firm, has observed trends toward hospital-ASC alignment and joint ventures. About 80 percent of Regent Surgical's ASCs are in a joint venture with physicians and hospitals, according to Mr. Eiseman. These partnerships are required for ASCs to be competitive, to be outcome oriented and to lower costs.

"ASCs are no longer a big fish in a small pond, or even a small fish in a big pond. They are a small fish inside of a big fish," Mr. Eiseman said.

1. Why partner with hospital?
Hospitals are beginning to buy physician practices again and accrue and develop ancillary services, which makes ASCs a primary target. However, from an ASC standpoint, partnering with a hospital may not seem like a great deal at first.

"In the past physicians have not trusted hospitals," Mr. Eiseman said. "Hospitals not only wanted majority ownership, but also control of operations in ASC partnerships. This has changed over the last few years."

ASCs that are partnered with hospitals stand to receive higher payments for cases and can form strategic alliances with healthcare reform goals. For surgeons, even employed surgeons, establishing a joint venture with a hospital is a great hedge against shrinking reimbursements, Mr. Eiseman said.

2. What should the partnership look like?
Regent Surgical recommends a hybrid partnership model. In these models, average payment rates are less than HOPD rates, but generally 30 to 50 percent higher compared to independent ASCs. The hybrid model also allows for physicians to remain in control, which is a big motivator, according to Mr. Eiseman. In a typical hybrid structure, the ASC is 49 percent owned by the surgery center physicians, 41 percent owned by the hospital and 10 percent owned by Regent Surgical.

Physicians keep four out of seven seats on the board, the hospital has two and Regent Surgical has one. The hospital will control the budget and big picture decisions, but hospital leaders are still in control of selecting anesthesia providers, daily operations and other clinically related policies and procedures.

According to Regent Surgical's chief development officer, Jeffrey Simmons, the best time to use this model is "when doctors have a good relationship with or trust the local hospital."

"If that trust is poor, it will be tough to do a transaction on either side," Mr. Simmons said. "It is best to implement this model in an oversaturated, competitive ASC market."

3. When is a good time to sell or merge a facility?
"Think about selling when you can look into the future, and the future doesn't look as bright as the past," Mr. Simmons said. "You should always sell before you think you should sell. It's a science and an art, but it does work if you have your eye on the ball."

He did warn, however, that it will be difficult to consummate a transaction if it's the first a hospital has ever done. "Expect quadruple the legal fees," Mr. Simmons warned, "The hospital will tend to have conditions that will be unusual and difficult to get the job done."

The best environment for a hospital-ASC joint venture is in a market where the hospital has a strong track record of negotiating favorable contract rates and has contracting power. ASCs should seek alliances with the local hospital of choice, according to Mr. Simmons. Critical factors to look for, he said, are a hospital that has good rates in the marketplace, is part of a system of three or more hospitals and that delivers a lot of patients and cases to the center.

"Everything has to be aligned perfectly," Mr. Simmons said. "The more stars you align the better rates you will get."

 

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