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9 Tactics for Hospitals to Build Effective Surgery Center Joint Ventures

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Building a joint venture with a surgery center can be immensely useful for a hospital. The partnership can expand market share, build relationships with physicians, and create a low-cost, high-quality provider for patients seeking convenience. But the process towards symbiotic partnership can be tricky, and past tensions between hospitals and physicians can get in the way. Robert Carrera, president and CEO of Pinnacle III, discusses nine tactics for hospitals to build strong relationships with physicians as they move toward a joint venture partnership.

1. Present hard data on managed care contracting. One of the biggest challenges in building a joint venture between a hospital and physician group is gaining the trust of the physicians. If there is a history of poor communication or tense interactions between the two parties, the physicians will need a reason to trust the hospital and understand what it  brings to the relationship.

Mr. Carrera says the hospital should present hard data on managed care reimbursement rates to prove the worth of the partnership to the physicians. "The hospital may have some lives they control that the ASC was previously unable to see," Mr. Carrera points out. "If it's a start-up ASC, there may be lives that could be contracted with that ASC." He says the hospital should present concrete data, rather than speaking in generalities about the upside the physicians may experience due to the partnership.

2. Investigate whether the hospital can direct referrals from primary care and occupational medicine physicians. In some cases, the hospital may be able to influence referrals from primary care or occupational medicine physicians who work with the facility.

"There's been some consideration from the OIG on how much influence the hospital can legally undertake," Mr. Carrera notes. "Legal advice varies.  Some attorneys will tell you the hospital can only have so much influence while others will say the hospital is within its rights to exert as much influence as necessary."

He says it's important that the hospital investigate the level of influence it can exert, making sure to seek legal counsel. If the hospital can direct referrals towards the physicians in the surgery center, that flow of cases could boost the ASC's profitability.

3. Consider third-party management. Mr. Carrera asserts third-party management can go a long way toward reducing tension between a hospital and a physician group. "Third-party management is particularly useful if the relationship has been challenging  in the past — or if it's been very good and they want to keep it that way," he says.

A management company functions as a neutral third party whose only concern is the performance of the center.  Both parties can rely on the company to manage the ASC effectively without rehashing old issues. This is particularly helpful for hospitals that don't have prior experience running an ambulatory surgery center.

4. Address bad blood from the past. If the physician group and the hospital have come into conflict in the past, it's best to address those issues head-on, Mr. Carrera advises. "Physicians have long memories; so, good or bad, the hospital needs to be prepared to address any of the old issues upfront, because inevitably they will resurface," he says.

He notes when Pinnacle III goes into a hospital-physician joint venture, one of the  first questions asked is if there are any interpersonal "landmines" to watch out for. The physicians and hospital administration should sit down (with the management company, if applicable) and talk candidly about any past problems and how to resolve them.

5. Involve C-suite executives in physician conversations. While mid-level managers in the hospital may start out the conversation about a joint venture, C-suite executives should be involved quickly, Mr. Carrera says. "From our hospital joint venture perspective, we have COOs, CEOs and CFOs involved in pretty much every one of our projects, and they occupy board positions in the new facilities," he states.

He says C-suite executives need to be present to give a sense of authenticity to discussions. "Physicians know who makes the big decisions, and they want to be dealing with those folks when they're looking at these projects," he says.

6. Determine how non-compete agreements will work. In some cases, hospitals and physicians sign non-compete agreements when they enter into joint ventures, meaning neither party can invest in an outside surgery center. Mr. Carrera says non-compete agreements can work in a number of ways: Either the physician group can have one, or the hospital can have one, or both, or neither.

He underscores it largely depends on the geography of the area and the presence of competing facilities in the market. "I think in most cases, the physicians are looking for equal treatment," he says. "If the doctors are going to be held to a non-compete, they feel the hospital should have an equal non-compete."

7. Decide whether the center will bring on new physician-investors. The hospital may have physicians who want to invest in the surgery center once the joint venture is established. Mr. Carrera says it's important to carefully consider every potential partner, as well as determine which physicians will be eligible for investment.

For example, the hospital may have employed physicians, who it may decide to exempt from possible ownership. "We've seen situations where the employed physicians are not allowed to have ownership, as well as situations where the hospitals say they can invest on their own," he says. In other cases, hospitals will allow some specialties to invest but not others.

8. Decide how cases will move from the hospital outpatient department to the surgery center. If the hospital is creating a joint venture surgery center from scratch, the hospital and physicians will have to move cases from its outpatient department into the ASC . He emphasizes it's important to work with the physicians to determine how cases will "ramp up" at the new facility.

"The hospital doesn't want to suddenly not have any cases," he says. "There's a transition process to be worked through." If the surgery center is planning to grow its case load over time, the hospital should determine the ultimate goal for case volume at the new center and work towards that number. Communication is the key to making this transition smooth.

9. Determine how the hospital's capital contribution will be used. "In a de novo situation, the physicians may want someone to share some of the risk," Mr. Carrera says. "The hospital may have good lending relationships, and they'll probably be looked at as credit-worthy for financing." This can assist the center in securing better financing. These funds will all go into start-up.

If the center is pre-existing and simply bringing on the hospital as a partner, the physicians may want to divest a portion of their ownership in order to experience a liquidity event. In other situations, it may be most prudent for the funds being infused by the hospital to be used for new equipment or to service debt.

Either way, the hospital can present an infusion of capital to the physicians as a reason for partnership.

Learn more about Pinnacle III.

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