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Joint Venture ASCs: Are They the Best Strategy Going Forward?

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LambertBrentAmbulatory Surgical Centers of America Co-Founder Brent Lambert, MD, discusses the market for ambulatory surgery center joint ventures with hospitals and best strategies for ASCs going forward.

Potential benefits & drawbacks

When starting a new facility, physicians often benefit from hospital partnerships if they are in a certificate-of-need state. Hospital partners can help facilitate the CON and become an ally to push the ASC's business plan forward. In all markets, hospital partners have the potential to help ASCs with managed care contract negotiations. However, not all ASCs receive a rate bump when they take on hospital partners.

Other ancillary benefits could include:

•    Increased referral network for outpatient surgery
•    Additional case volume as the hospital reserves ORs for inpatient cases
•    Employed physicians performing cases at the center

Unfortunately, not all of these outcomes work perfectly with every joint venture.

"The hospital has many reasons for partnering with the ASC, one of them may being a capacity problem," says Dr. Lambert. "They may want to decant some of the excess cases that don't pay well in the hospital into their partner ASC so they can derive revenue from it. But the hospital sometimes miscalculates and realizes that their sending too many cases to the ASC in effect are cannibalizing cases from the hospital." If the hospital is unable to deliver the higher case volume to the ASC, the ASC will be unhappy and the deal could go sour. "There are not good numbers about joint ventures failing," says Dr. Lambert. "I would guess around half of the joint ventures fail, meaning they don't end up with a profitable ASC where both parties are happy with the arrangement."

How to avoid failure

The worse outcome for ASC physicians is signing on to a joint venture and investing their money, and then six months later realizing the hospital is really still their competitor. Not all ASC joint ventures see a payer rate increase as a result of the joint venture, especially if the hospital is a small facility or community hospital unaffiliated with larger systems.

"The hospital may have thought they could influence managed care rate, but then can't so there isn't improved revenue," says Dr. Lambert. "The sad thing is we can't claw back equity if the hospital disappoints. In some cases, the dreams of the hospital aren't realized with the ASC so they don't do anything to help, and even start doing things to undermine the ASC."

Dr. Lambert has seen instances where hospital administrators insist on having a voice in the ASC operating model and decide to slow down operational processes. Other times, hospital executives form new partnerships that hurt the ASC without realizing it.

"For the hospital, the amount of revenue they get from the ASC is really not a big item on their budget," says Dr. Lambert. "As a result, ASCs don't have much sway with hospital decision-making. If there is ever a disagreement over the obligations of one to the other, the hospital generally prevails."

To avoid a failed ASC joint venture, there are several steps physician owners and operators can take from the beginning:

•    Define policies on hospital-employed physicians performing cases at the ASC.
•    Decide on new referral patterns from hospital physicians.
•    Address how the ASC would fit into ACOs or potential ACOs

Biggest marketplace influencers

The health and viability of joint venture centers largely depends on market factors and could change as healthcare evolves. For example, if a CON state loosens restrictions or drops the CON all together, ASC joint ventures are saddled with a hospital partner that suddenly isn't very helpful from a CON standpoint. ASCs in those communities would also face competition from new independent ASCs sprouting up after the CON is lifted.

Another huge factor is healthcare reform implementation. Providers are incentivized toward population health management and that could mean the spread of accountable care organizations over the next five years. Some affiliation with hospitals may position ASCs for a seat at the table when ACOs are formed, but makes no guarantees.

"We don't know how the whole concept of population healthcare is going to play out," says Dr. Lambert. "Are hospitals going to use ACOs and ambulatory surgical centers to negotiate for large populations of care? We don't know, and because it's a big unknown we can be both positively and adversely affected."

Unaffiliated ASCs may not fair as well in population health environments and many are strongly considering some sort of partnership, if not a full joint venture. Dr. Lambert's advice to those who do strike a deal: "Make sure the interests coincide for the two parties. If they do, this is dynamite and could do very well."

Another factor for ASC owners to consider is the shrinking gap between ASC and HOPD reimbursement rates. While HOPDs are still reimbursed significantly higher than ASCs, this gap could close as CMS and payers focus more on cost-savings.

"The best opinions out there right now say that this gap will be gone in a year or two," says Dr. Lambert. "The HOPDs will have to get by on what payers are paying ASCs. Many of the hospitals we are working with are already factoring that into their long-term plan. They will lose money unless they can make their HOPDs more efficient and process a higher volume of cases."

Dr. Lambert is seeing some hospitals deciding to syndicate their ASCs or privatize their HOPD so independent physicians in the community will partner with them and make it more efficient.

"I do believe there are forces out there that will definitely alter the landscape of the business we are doing right now," says Dr. Lambert. "Low costs will become very important to hospitals. A lot of people who comment on this say there will be a cost saving factor, and ASCs are going to be in demand because they are able to perform cases cheaper than the hospital. We are paid half as much as the hospital and still make profit margins."

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