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6 Considerations for ASC & Hospital Joint Ventures

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The ownership landscape of ambulatory surgery centers continues to evolve, and many centers may be looking for financial partners to improve or expand business. A hospital joint venture could be advantageous course of action.

Wayne J. Miller, Esq., is a healthcare transaction and regulatory attorney and founding partner of the Los Angeles-based Compliance Law Group. He has extensive experience in hospital-physician ventures and acquisitions. Stephanie Tarry is the senior vice president of business development with Nueterra Healthcare, a national management and development company that pioneered the physician-ownership business model in surgical facilities.

Here are Mr. Miller and Ms. Tarry's six considerations for physician-owned ASCs looking to pursue a hospital joint venture.

1. Align goals of both parties. Having aligned goals and initiatives with a future joint venture partner is crucial for both parties, Ms. Tarry says. Learn the agenda of potential partners before finalizing any plans.

"It is important [for physician ASC owners] to try to ascertain whether the real intentions of the hospital are compatible with the doctors' goals," Mr. Miller says. "Is the desired transaction a true joint venture, where the hospital will manage jointly with the existing surgeons in the ASC? Or, instead, are they looking to try to buy out the existing ASC ownership, take over operations to add to its holdings and essentially marginalize the doctors?"

Both sides should be up-front from the first conversations about each party’s goals of the venture. Under some circumstances, the financial goals of the physician owners may be a hospital acquisition and takeover whereas in other situations they may want to stay involved and just achieve better billing rates and resources. Find a hospital with goals consistent and not at cross purposes with these physician objectives, Mr. Miller says.

"At the same time, the goals should be consistent with fraud and abuse and Stark law principles. For example, the venture should not be established with the intent of achieving a certain level of referrals or utilization between the hospital and physician owners," he says.

The overarching goal, though, will always be for physicians to find a quality and efficient place to provide healthcare, Ms. Tarry says.

2. Agree upon future ownership and management structure. Economic control and governance control of the surgery center are separate considerations. In some cases, both sides may agree that the hospital may attain a significant capital investment in a surgery center but accept a passive management role, allowing greater say in management by the physicians. In other cases it may make more sense for a hospital to have majority management control with a commensurate ownership interest. Again, these decisions need to comport with federal and state law regulatory standards applicable to ASC joint ventures, says Mr. Miller.

ASC should also be aware that as a condition of its investment, a hospital may want its own administration or a third party professional management company to be in control of surgery center operations, Mr. Miller says.

"Doctors need to think about whether that's an acceptable scenario for them," he says. "They should do due diligence of the desired managers or management company, particularly as to whether they have had good relations with physicians for other ASCs. For example, ask physicians in other ASCs whether the proposed management listens to and engages surgeons or if they just treat the physicians solely as statistics, bringing in cases."

The equity interest structure is important as well. Mr. Miller is seeing more joint ventures where an entity comprised of surgeons in turn holds ownership in an ASC joint venture. This kind of structure may be organizationally efficient and may add a level of liability protection. However, it creates an indirect ownership relationship between the individual physicians and the ASC and can dilute an individual's interest in the center itself. Under this structure, physicians becoming part of an ownership group may feel that their individual connection and influence over the ASC is diminished.

"Potentially doctors that now have a 5 or 10 percent individual interest now may end up having a smaller interest in the doctor investment company and even a smaller indirect interest in the ASC as a whole," he says.

Physicians should investigate how any proposed ownership structure changes would impact their total equity interest. A diluted ownership isn't always negative, however; if the ASC becomes more profitable under the joint venture, holding the smaller percent interest may end up being a larger share of profit than before the venture, he says.

3. Understand the financial impact. Surgery centers can no longer assume that hospital ventures will automatically result in better commercial payor reimbursement rates, Mr. Miller says. It may be true in some cases if the hospital successfully transfers its favorable contract rates to ASC services. In other cases, the payors may prefer that the ASC not be saddled with hospital overhead that gets reflected when hospital rates apply, he says.

When approaching a joint venture, first see how a hospital investor would impact existing managed care contract arrangements. For example, ASCs that have thrived on being out-of-network may be forced to go in-network because the hospital's contracts require it, so always get a financial analysis of how the hospital's involvement will impact each contract before sealing a deal. "You can't assume reimbursements will be better because a hospital is involved," he says.

Another potential financial impact is the amount of cash or assets required at the deal's onset. ASC owners should be clear on what each party brings to the table financially.

"When an existing ASC wishes to bring on a hospital partner, the valuation or expectation of the physicians can be worlds apart," Ms. Tarry says. "Usually this situation will require a third party appraiser to assess the fair market value."

Mr. Miller adds that regulatory requirements, at minimum, mandate that asset valuations need to be consistent with fair market value and that each party needs to contribute money or assets in line with their respective ownership interests.

Valuation is the first step in determining what each side brings to the financial equation. Physicians often expect the hospital to front the money but in some cases they will need to contribute a large sum of cash to become an equal partner and meet regulatory requirements.

4. Know whether you need a licensure change. ASCs should consider whether or not a license or classification change would be required following a joint venture with a hospital. Each state has different laws to look into, Mr. Miller says. He adds that the licensing and payment status may be dictated in part by whether the ventured ASC is ultimately under hospital, physician or equal control.

"If your desire is not to change any of the existing licensure or payor certifications, which is typically less costly and time consuming, then be sure that the desired joint venture ownership and management structure does not cause a 'change of ownership' under licensure or recertification requirements," he says. For example, if the hospital attains majority ownership or management control, licensing standards may deem the facility to be licensed as part of the hospital rather than remain independent.

Likewise, a desire to keep the same provider numbers in place may also help dictate how much of a financial stake or management control the hospital will be allowed to have in the ASC.

5. Prepare for changes after management company involvement. If a hospital and ASC agree to use a third party management company, surgery center physicians will need to be prepared for a less personal and more financially disciplined setting. The new manager may establish and enforce operational goals for the ASC to help make the center more economically viable post joint venture, Mr. Miller says.

"The management company may insist on greater consistency in doctors using the facility and discipline those that don't comply," he says. "Can the surgeons accept this level of enforcement? If not, they may ultimately be bought out under venture expulsion provisions."

In addressing this concern with a joint venture partner, physicians can broach the subject by asking how the hospital plans to improve the surgery center's financials. "You need to understand how operational goals are expected be achieved," he says. "Be wary if it appears that projections can only be reached by pressuring doctors to bring more cases."

6. Collaboration v. joint venture. A trend in the market that may be a precursor to a venture is a care collaboration or cooperation agreement between an ASC and a hospital, Mr. Miller says. These contracts are intended to achieve a more integrated or coordinated care system for patient surgeries. ASCs are aware of the increasing consolidation and cooperation of health care providers and seek to reserve their place in coordinated care, attempting to become less episodic and more engaged in a care network.

"Under these contracts, ASCs and hospitals are starting to work together to figure out how to use ASC resources most effectively in conjunction with hospital onsite in- and outpatient surgery resources for a community or region," he says.

A venture or acquisition could evolve from a collaborative partnership. Regardless, with new Medicare and commercial initiatives to tie payments to effective care coordination, such as through accountable care organizations, it could be advantageous and ultimately necessary for ASCs to collaborate with hospital systems to achieve an integrated surgery care system.

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