Ownership Considerations for Health Systems Developing or Buying ASCs
The ACS industry has been a high-growth industry since the early 2000s, but the growth rate has started to flatten in the last few years. The number of physicians investing in ASCs has also decreased dramatically in the last decade.
"This has been a physician entrepreneur driven industry," Mr. Ellison says, but the current market tides are shifting. New surgery centers are becoming a riskier investment, and increasingly more physicians are seeking hospital employment.
"Hospitals have been a small player historically in the ASC industry, but the industry is consolidating. Hospitals are becoming a bigger part of it," he says.
Hospitals and health systems can reap many benefits by buying surgery centers. These benefits include eliminating a competitor, increasing or regaining market share, gaining operating room capacity for a reasonable cost, improving physician relationships and keeping new competitors out of the market.
Future role of surgery centers
As the fee-for-service environment gives way to accountable care models, ASCs are well-positioned as a low-cost delivery method that provides care with high quality outcomes and high patient and surgeon satisfaction rates.
ASCs can be part of a greater network and create outreach opportunities for surgical services, Mr. Ellison says. They will also retain significant stakeholder value.
"Every market and circumstance is different, but it is important to create value for physicians, patients, payors and hospitals or health systems," he says. "Whatever ownership model a hospital chooses should focus on meeting these stakeholders’ needs in order to differentiate your ASC from others."
Hospitals have several options for surgery center ownership models. The most prevalent options involve physician/hospital joint ventures and physician co-management models. Both models are currently evolving.
Joint ventures are licensed as surgery centers with a limited liability company or limited partner legal structure. When embarking in a JV, owners should take the following areas into consideration:
- Who are the appropriate physician partners?
- How will employed physicians be involved?
- How much ownership do physicians retain?
- How will units be priced?
- How will the new company be capitalized?
For a clinical co-management model, physicians are typically compensated for assisting in the management of a hospital service line. Contracts can be between the hospital and a physician practice, a hospital and multiple practices, or a separate management company formed for the purposed of providing clinical co-management services and are typically relatively short-term in nature. The total compensation opportunity is set through an independent valuation based on the services to be provided. Compensation to physicians is both fixed and variable. Variable compensation is based on achieving defined performance metrics.
In deciding which operational model to adopt, there are several angles to consider. Considerations include:
- Financial impact to the hospital
- Market share gain and loss potential
- Ability to create ASC culture and operational performance
- Physician expectations
- Competitive dynamics
- Physician recruitment and retention
- Business disruption and potential capital costs
If you are buying a surgery center to repurpose, compliance gaps often exist from state building codes and life safety codes. There could be capital costs for converting to a different model or type of ownership.
Strategic fit should be evaluated for each model. For instance, hospital control is typically greater in a hospital-owned ASC, but the level of physician engagement and satisfaction may be less than in a joint venture. Joint ventures also tend to have a greater strength of partnership between owners than hospital-owned structures which will be critical as the fortunes of physicians and hospital become more intertwined in the future.
Key success factors
In order for and hospital-physician partnership structure to be successful, the hospital must show their commitment to the success of the venture but allow for the ASC to be physician led. Physicians also need to be committed to the ASC and willing to lead among their peers. Putting the ASC before individual stakeholder interests creates the greatest opportunity for success.
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