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New physician buy-in: 4 trends for joint venture ASCs

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Phil SpencerA joint venture ambulatory surgery center may be a powerful, effective business, but like any business it will  always need fresh blood — new physician investment.

Phil Spencer, Executive Vice President of Business Development with United Surgical Partners International, outlines the buy-in process at joint venture ASCs and the unique challenges and opportunities these ASCs face in the hunt for new physician investment.

1. Buy-in process. The guidelines of new physician buy-in do not change, despite the presence of a hospital partner, says Mr. Spencer.  The standard rules apply:

•    Establishing fair market value for shares
•    Credentialing
•    Physician approval of potential partners

In a purely physician-owned ASC ownership dilution is relatively simple, but with a hospital and perhaps a management company in the mix, how new investment shifts the ownership dynamic becomes more delicate and complicated. "There really isn't one formula that describes how an ASC joint venture must be split up, nor how dilution will occur," says Mr. Spencer. Possible formulas for dilution include:

•    Physician ownership dilution. A joint venture operating agreement may dictate a hospital's ownership, whether majority or minority, at a set point. This leaves the responsibility of tempering shares to physicians, or a management company partner.  
•    Hospital ownership dilution. Though not overly common, a hospital may set aside a percentage of shares for new physician owners.
•    Split dilution. Frequently, dilution will be shared pro rata amongst all owners, hospital and physician alike.

"However, in most cases, a minimum ownership threshold is required by the hospital in order to maintain a controlling interest to allow for managed care contract negotiations on behalf of the ASC," says Mr. Spencer.  

2. Hospital participation. Regardless of how shares are rationed and portioned out, hospitals can lend a hand in the recruitment process. "Hospitals participate by identifying new physicians entering the market who might be attractive partners to pursue both for their operation as well as for the joint venture," says Mr. Spencer. "As ASCs continue to represent a way to provide outstanding care at a lower cost, hospitals may also look within their existing physician ranks to help with recruiting as well."
Hospitals may also engage physician partners and a management company, if the ASC has not done so already. The unique market knowledge and expertise these partners have can be critical in attracting and securing new investments.

3. Joint venture appeal. Aside from active participation in recruitment, a joint venture ASC itself can attract investment. Benefits of a joint venture that draw in new investment include:

•    Operational advantage. "Everything from strategic stability of being an important component of a larger healthcare system, to managed care contracting benefits, to achieving purchasing efficiencies and participating in quality initiatives all make a joint venture center a terrific way for physicians and hospitals to work together," says Mr. Spencer.
•    Brand affiliation. "Joining a partnership with an existing hospital gives physicians the chance to affiliate with a known entity, potentially increase their referral base from similarly affiliated surgeons and primary care physicians and often benefit from the overall hospital visibility in the community," he says. Joint ventures are also perfectly positioned to promote provider alignment in the age of clinical integration and accountable care organizations.   

4. Community disruption. There are two sides to every story. "Affiliation with a joint venture center can be a double edged sword," says Mr. Spencer. "It may change perceptions of loyalty — or neutrality." The disruption of traditional referral patterns may deter some physicians from investing. "While this can sometimes be an uncomfortable position to be in for the short term, the many benefits of the buy in at a successful JV center tend to outweigh the challenge of potentially upsetting some of the existing referral base."

More Articles on Transactions and Valuation Issues:

5 Hospitals Planning or Opening ASCs
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58 Ambulatory Surgery Centers Opened of Announced in 2014

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