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7 Thoughts on ASCs Taking Hospital Partners

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The current trend in the healthcare industry leans toward consolidation, but that doesn't necessarily mean ambulatory surgery centers have to give up full independence. If it has become difficult for the ASC to stay fully independent, they have partnership opportunities with hospitals or other investors.

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"We look for physician groups and hospitals that realize partnerships can be beneficial for both groups in the future," says Reed Martin, Chief Operating Officer of Surgical Management Professionals. "If that culture exists, there can be a good relationship."

Here are seven thoughts on ASC partnerships now and for the future.

1. Know the right time to take on a partner.
Understand the right circumstances for your surgery center to take on a hospital partner, so it will be as advantageous as possible.

"If a surgery center is in a position to expand but lacks the capital to do so, a hospital partner may be a good solution," says Rob Carrera, President and CEO of Pinnacle III. "The ASC could be in a position where it has grown as much as it can unless it obtains additional access to patients; the hospital system becomes attractive because it can provide physicians and patients the ASC didn't have access to previously."

Demographics are a further consideration for the ASC. "If the surgeons are looking to retire and exit the business, a hospital partnership may be a good option," says Will Tao of Provident Healthcare Partners. "On the other hand, if the group is "On the other hand, if the group is relatively young surgeons just starting off, they have several different avenues to consider."

ASCs also have access to more negotiating power and better managed care contracting rates with a hospital partner. "If the ASC is declining in terms of patient reimbursements or revenues, it's time to consider a larger partner that has the resources to improve contract rates," says Mr. Tao. "Hospitals have billing infrastructure in place, which can drive efficiencies, and there is often an opportunity for the hospital to shift volumes from inpatient to outpatient depending on the circumstances."

2. Partnerships should be beneficial for both parties.
Physicians could benefit from a hospital partner with access to payor contracts, access to group purchasing for supplies, information technology systems and financial expertise. Hospitals can benefit from the ASC recruiting and keeping specialists in their market and health system, which brings additional inpatient as well as outpatient cases.

"Many hospital CFOs bring strong financial backgrounds for the physician-hospital boards and could help the ASC with banking relationships," says Mr. Martin. "Hospital systems also have experience with cyber security and can improve IT connectivity."

Despite the benefits, ASCs should watch for red flags that could signify trouble in the partnership.

"If we see a hospital system that is mainly focused on the potential loss of the HOPD cases instead of the benefits that a joint venture with physicians brings, then it might not be a good fit for the ASC," says Mr. Martin. "We also need physician partners who want a close relationship with the hospital system and realize the partnership is important to the healthcare community. In the right circumstances with the right partners, we see the benefits of partnership as significant for both parties."

3. Some features make ASCs attractive partners.
There are several aspects of the ASC that are attractive to different types of partners or buyers. Private equity and other institutional investors are interested in a good size platform company that is scalable.

"Typically, they are looking for a company with a growing profile and trajectory in terms of revenue and profitability," says Mr. Tao. "Ideally if they are growing and adding on surgeons, they will be attractive."

Management companies often find ASCs with multiple locations attractive because they want to invest in a company with experience in the ASC market and a model they know can be repeated.

"Replicate the ASC leadership model and have the management and reporting line in place to support growth," says Mr. Tao. "They want to know the billing service could easily expand into additional ASCs they might add from acquisitions or other means in the future."

4. Make sure partnership roles are clear.
Define the terms of any partnership with the hospital in clear terms. "There could be challenges and opportunities related to the culture of the partnership and control over operational activities of the ASC," says Mr. Martin. "These areas should be well-defined in an operating agreement that identifies the role and responsibilities of each partner."

If you aren't careful, the ASC could fall prey to misrepresentations or false promises from the hospital. "That could lead to bad feelings, especially if reimbursement and collection are impacted," says Mr. Tao. "Do due diligence and partner with someone who has experience with ASC transactional issues."

The partnership should start with face-to-face meetings to identify the best opportunities for both parties. Alignments or agreements now can lead to developing a deeper partnership in the future.

"There will always be a place for independent physicians and ASCs," says Mr. Martin. "However, the past few years has seen a trend toward more consolidation with hospital partnerships and physician employment. I do expect that trend to continue somewhat as ACOs continue to develop. If the hospital has a strong position in the market, it's difficult for physicians to be independent and that leads to more working together to develop an ASC."

5. ASCs will lose some autonomy when they gain a partner.
Depending on the arrangement, surgeons could still have varying degrees of independence after partnering with a hospital, but they must be prepared to lose some autonomy.

"There will be non-compete clauses involved and the ASC won't have the autonomy to do things their own way," says Mr. Tao. "They will report to corporate management. There may also be certain changes in terms of cultural integration. If the hospitals are focused on inpatient services and you have a freestanding ASC, there will be a cultural clash during integrate. Seriously consider whether the hospital will be a good fit for the ASC."

Whether partnering with a hospital or ASC management company, the new organization could either plug their management into the system or leverage the existing management team, if the team is effective.

"If the ASC has minimal management, companies will help with that area in marketing and increasing patient volume," says Mr. Tao. "If the ASC is doing well, they aren't going to try to reconfigure everything."

6. There are other opportunities beyond hospital partnership for investors.
Despite economic difficulties over the past few years, there has been a lot of activity for partnering and turning around ambulatory surgery centers. In addition to hospital partnerships, management companies are turning around distressed centers and outside investors see healthcare as a growing market in the future.

"Investors are interested in companies where procedure and patient volume are growing and new surgeons are joining, and the multiples are going to be higher for these ASC companies or freestanding ASCs," says Mr. Tao. "You are seeing distressed and growth-oriented types of deals."

Private equity firms are also becoming interested in the market and could be an alternative for some surgery centers. "There is a little bit of everything out there," says Mr. Tao. "The focus on healthcare reform and cost containment mean ASCs are a good value proposition when comparing it to the inpatient unit at the hospital."

7. Hospital partnership could be advantageous for ACO development.
Accountable care organizations have sprung up in many markets and are around the corner in others. Partnering with a hospital could give ASCs inside access to the ACO and strategic positioning for the future.

"As ACOs take off, there are some upsides for an independent ASC to having a closer relationship with a hospital," says Mr. Carrera. "It takes the ASC time to perform due diligence and ensure they are able to benefit from a relationship with the hospital. It could be beneficial in the future to align with one hospital system or another, but it varies from city to city. Hospital relationships that may have been unattractive to physician-owned ASCs historically may be worth pursuing now if there has been a leadership change in the hospital system."

The hospital partnership could provide access to capital for the IT infrastructure necessary for ACOs. "There is also opportunities for physician partners to access the hospital's expertise," says Mr. Martin. "ASCs are lower cost, higher quality providers and they have excellent satisfaction, so it's beneficial to both partners to have the ASC in the ACO structure providing outpatient cases."

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