5 Operating Agreement Considerations for ASCs Pursuing Joint Ventures With Hospitals
1. Pick partners wisely. In a joint venture, each partner needs to recognize that the goal is to satisfy objectives of all involved. Selecting a hospital partner that fits your surgery center's goals and philosophies helps ensure you will work well together in the long run.
"Often it's not that difficult to agree you want to have assurance of high quality of clinical care and be successful financially," Mr. Gary says. Rather, choosing business partners come down to more specific details. "It's a delicate thing to gauge," he says, "but it’s crucial to pick a hospital partner that is genuinely committed to the success of the center."
He encourages physician groups to make sure the hospital is supportive of making the joint venture successful in its own right.
"You can write all the provisions you want," he says, but it often comes down to the hospital's motivation for pursuing the venture. "Ask yourself," he says, "'Does this hospital have demonstrated willingness to work with physicians in this regard?"
He also recommends using non-compete clauses to keep both partners interested in the venture. If the physicians are barred from working with a competing hospital or medical group, then hospitals can be held to the same standards. "Broad non-compete clauses may need to be tailored more carefully to restrict of hospitals from investing in other surgery centers," Mr. Gary says.
2. Allow hospitals to have majority ownership. Though it may seem counterintuitive to an ASC looking for the joint venture to be a partnership, allowing the hospital involved to have a majority ownership stake can be helpful in several ways.
Hospitals can often negotiate lower rates with payors because of their size and broader presence in the local healthcare market. If the hospital has majority ownership of the surgery center, payers may treat the center as an affiliate of the hospital, and may be willing to increase reimbursement to the center as a result.
Non-profit hospitals also often conclude that majority ownership is necessary if they are to demonstrate the ability to assure that their charitable objectives can be accomplished.
"One thing we want to do is make sure the operating agreement contains provisions that give the hospital the right to do what's necessary to maintain its mission and not jeopardize tax-exempt status," Mr. Gary says. "That typically involves including some reserve powers in the operating agreement.
3. Maintain a majority board vote. If you choose to sell the hospital majority ownership, you can keep physicians from being overruled in day-to-day operational decisions by giving them a majority board voting power with respect to that category of decisions..
Set up different classes of membership for the hospital, physician or management group. The operating agreement could create a five-member board in which the hospital gets to appoint one board member. This allows physicians to control daily operations, with reserve powers written in so physicians cannot unilaterally authorize actions that might threaten the hospital's charitable mission..
"Typically what we also do," Mr. Gary says, "is to specify in the operating agreement certain actions that can only be authorized pursuant to a supermajority vote. That approach can benefit both the majority-owner hospital and the physicians by assuring that certain important decisions will require broad support among all owners.
Mr. Gary also suggests physicians form a separate corporate entity rather than owning separate individual stakes in the venture. "It's a bigger hassle, but they are able to put their voices together and speak collectively," he says.
4. Get specific with the agreement. Physicians should make sure to thoroughly review the operating agreement prior to signing because there tends to be little recourse if a deal goes sour. One option to protect a physician's interest would be to add a clause that unwinds the agreement if certain objectives aren't met within a specific amount of time.
For instance, if a surgery center affiliates with a hospital to obtain better reimbursement rates from payors, then the surgeons could demand a certain percent improvement in payments within the first 12 months or else the contract would be terminated.
However, Mr. Gary says, "We haven't done it, and I don't know how prevalent these clauses are. You get a lot of push-back from hospitals. Ultimately, there’s no substitute for doing due diligence on the hospital in advance of entering into any joint venture, and being as confident that it shares the center’s philosophy about how the facility is to be run.”
5. Make it about more than money. While many surgery centers pursue joint ventures with hospitals to obtain better rates from commercial payors, a substantial reimbursement increase is not always guaranteed. ASCs cannot assume that payors will raise reimbursement rates dramatically just because of a hospital affiliation.
"It's realistic to expect insurers are going to limit the upside to this as time goes on," Mr. Gary says. "We've encountered some of those efforts already. Some insurers are trying to add language to contracts that gives them the option, in the event that the surgery center adds a new majority partner, of retaining the old agreement instead of entering into a new one. It’s not clear how effective those provisions are likely to be, but they nevertheless reflect efforts pay insurance companies to limit rate increases.”
It’s best if there are reasons beyond reimbursement increases to pursue a joint venture, he advises.
“For example, partnering with a hospital that is highly respected in the community can greatly enhance the surgery center’s own reputation,” Mr. Gary says. “It can also facilitate better communication among physicians and hospitals, which may lead to other opportunities to coordinate care more effectively and efficiently. Those efforts, of course, are consistent with the direction of healthcare statutes and regulations.”
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6 Ways to Boost ASC Business by Saying 'Yes' to Surgeons
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