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Developing an ASC Joint Venture Strategy That Works: Balancing Ownership and Governance to Align Hospital and Physician Interests for Long Term Success

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In a June 7 webinar titled, "Developing an ASC Joint Venture Strategy That Works: Balancing Ownership and Governance to Align Hospital and Physician Interests for Long Term Success," Jeffrey Simmons, CDO, and Nap Gary, COO of Regent Surgical Health, discussed strategies for building an effective partnership between a physician group and a hospital.

Mr. Gary started the presentation by giving an overview of the ambulatory surgery center industry. There are approximately 5,300 ASCs in the United States, 90 percent of which have some degree of physician ownership. "The ASC market is essentially a mature market at this point," he said. While some ASC specialties are receiving increased reimbursement from Medicare, many others are not — and more importantly, ASCs without hospital partnerships are paid less than 60 percent of hospital outpatient department reimbursement.

He emphasized that many markets in the U.S. are saturated with surgery centers. "The growth of ASCs year-over-year has pretty much hit zero," he says. While there used to be significant opportunity for enhanced reimbursement through out-of-network, pressure from payors has driven many centers in-network and negatively affected reimbursement.

Driving forces behind hospital/physician joint ventures
Mr. Gary said many physician-owners and surgery centers are looking for partnerships to address declining reimbursements.  He said while surgery centers with physician-owners that bring in hospital partners cannot be licensed as HOPDs and cannot realize an advantage with respect to Medicare cases, they will see increased reimbursement in their commercial payor contracts. If the average surgery center has a Medicare component of 25-30 percent, that leaves 70-75 percent of cases paid by a payor other than Medicare. "That's the spot where this opportunity really exists," Mr. Gary said.

He said the average reimbursement per case for freestanding ASCs is $1,200 to $1,700, compared to $2,200 to $3,000 for hospital-affiliated surgery centers. Mr. Gary said Regent Surgical Health evaluates hospital/physician ASC joint ventures by comparing the surgery center's case and payor mix with the hospital's reimbursement rates. The goal is to determine how a hospital partnership would affect the surgery center's reimbursement rates.

He said a hospital can be a good partner if they have higher contracted rates than the ASC and do not require control of clinical operations. He said historically, physicians have hesitated to partner with hospitals because of hospitals' insistence on controlling operations. "For many physician groups we work with in surgery centers, it's crucial to them that they maintain control over clinical operations and administrative matters," he said.  

Mr. Gary concluded that a hospital partnership can benefit a surgery center by increasing ASC reimbursement rates, giving the ASC a competitive advantage over non-partnered surgery centers, and preparing the ASC for changes through healthcare reform.

Which partnership model is best?
Mr. Simmons said Regent Surgical Health uses a hospital contracting model, which drives payments per case to at least 30 percent higher than in an independent ASC. He said the model allows for a strategic alliance between the hospital and surgeons while minimizing investor risk.

He said in the hospital contracting model, a first holdco, made up of the hospital (80 percent) and the management company (20 percent), would own 51 percent of the surgery center, while a second hold co made up of physicians (100 percent) would own 49 percent of the hospital. "Under holdco one, the hospital must own a larger share of holdco one than the management company," Mr. Simmons said.

Mr. Simmons said Regent's model gives the hospital two seats at the board level, the physician group four seats and the management company one seat. He recommended a list of ASC functions that could remain under physician control at the board level:

•    Daily operations decisions that require board approval
•    Approval of physician members into partnership
•    Clinically-related operating policies and procedures
•    Medical executive committee recommendations
•    Selection of anesthesia providers
•    Approval of equipment purchases and capital budget

When is the hospital contracting model best?
Mr. Simmons said the hospital contracting model is best in several situations. The physicians should trust the local hospital, and the hospital should have a good track record with physician partnership. He said it works best in an over-saturated surgery center market because it gives the surgery center better rates over their competitors in the market. He said the model is effective in a community that has reduced out-of-network payments or where payors have ratcheted down surgery center payments significantly. "Payors don't mind paying more [to a hospital-partnered ASC], because often times the hospital's outpatient business is directed to the surgery center, and the ultimate result for the payor is budget-neutral," he said.

Mr. Simmons said many physicians groups are wary of the word "acquisition." He described that fear: "It's where physicians are worried you're not longer a big fish in a small pond, or even a small fish in a big pond, but a small fish in a big fish."

Case study: Knightsbridge Surgery Center in Columbus, Ohio
Mr. Gary discussed a Regent Surgical Health case study featuring Knightsbridge Surgery Center, a facility founded in 2001 between a physician group and management company. The original management company was unsuccessful at managing the surgery center, and Regent was engaged in 2004 to turn around the facility. The ASC quickly became highly profitable through canceling contracts and re-negotiating with payors. "It was a success story for us at that stage because it turned around fairly dramatically, and it was a center that was very solid and did reasonably well," he said.
Mr. Gary said over time, the payor strategy began to lose momentum due to reimbursement issues in Ohio at the time. The surgery center's ability to gain negotiating leverage with major payors was limited. Regent had discussed a possible partnership with OhioHealth, but the health system declined — until a few years later, when the management company renewed the conversation and both parties decided to pursue partnership.

Under the partnership, the hospital acquired a 49 percent stake in the surgery center but had a 50 percent vote and tiebreaker rights on key management decisions. Regent Surgical Health worked with the hospital to re-negotiate major contracts and meet performance benchmarks for the surgery center. "It was a substantial victory for everyone concerned," Mr. Gary said. "The physicians who had been involved from the outset had the opportunity to sell roughly half of what they owned and get a magnificent, many-multiple return on their initial investment." He said going forward, OhioHealth and Regent renegotiated rates for the surgery center that maintained the original distributions to the physician owners despite the decreased percentage of ownership. 

Access the audio file to the webinar here.

Learn more about Regent Surgical Health.

Related Articles on Regent Surgical Health:
10 Areas of Focus for Maintaining a Sterile Field in an ASC
Surgery Center of Mount Dora to Become Joint Venture With Leesburg Regional Medical Center, Regent Surgical Health
When a Physician/Hospital ASC Joint Venture Is Right

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