ASC Ownership Division: Structuring a 3-Way Joint Venture That Works

Three-way joint ventures are becoming a popular strategy in the ASC industry, but for a market that has been primarily physician-driven the ownership division can be a difficult process.

George Goodwin, president of Symbion's American Group division, Michael McKevitt, senior vice president of business development with Regent Surgical Health and Michael Stroup, senior vice president of acquisitions with United Surgical Partners International describe how physicians can negotiate a favorable ownership structure amongst themselves, a management company and hospital.

Define the goals of the partnership
Every ASC and partnership is unique. Some physicians choose to enter a joint venture for the managed care contracting muscle or case volume a hospital can offer, while others simply seek a strong partner as an ally in the changing healthcare environment.

George Goodwin"Once what the physicians hope to achieve is clearly defined, they then need to make the decision that they are willing to sacrifice control and ownership to achieve these goals," says Mr. Goodwin.

Negotiate the division
Ownership structure in three-way joint ventures varies by center. Hospitals typically push for majority ownership. Nearly half of management and development companies have sold a controlling interest in a center to a hospital within the past year, according to the HealthCare Appraisers 2014 ASC Valuation Survey.

Physicians are often willing to concede majority ownership to gain access to a hospital's managed care contracting clout, provided that hospitals can deliver on favorable reimbursement rates. "Use a newly formed entity 'NewCo' and have 'NewCo' own 51 percent of the surgery center. The hospital and management company determine how much each of them will own of 'NewCo' with the hospital owning the majority," says Mr. Goodwin. "This structure protects the physician levels of ownership and, in most cases, will allow the three-way venture to receive the benefits from the hospital and not sacrifice the potential benefits from the new partners."

When determining percentage to sell physicians often consider how bringing on a new physician partner will impact their ownership share. Which partner's stake will be diluted? "In most Michael Stroupcases, the JV will want to retain 51 percent for managed care contracting reasons. The JV will likely be willing to dilute pro rata down to 51 percent to bring in new surgeons, but once the 51 percent is hit, future dilutions will come from physicians. But keep in mind the physicians must approve of any new sales, so they preserve the control to only dilute when it makes sense to their interests," says Mr. Stroup.   

Mike McKevitt"Ownership formulas vary by the strategic needs of the partnership. There is no one formula for the division of ownership. The key here is to give each partner enough financial stake in the game, so they care about the business," says Mr. McKevitt. "Then they'll want to find ways to be more efficient, lower the cost of care and better serve both the patient and physician."

Finalize the structure
The operating agreement will spell out how a joint venture will function and how its partners will interact with one another. "Through the operating agreement, specifically the protective rights negotiated and included in this document, the physicians can protect issues that are most important to them while being a minority owner," says Mr. Goodwin.

A well-crafted operating agreement defines how decisions will be made. "Day-to-day decisions should be governed by simple majority, while macro decisions such as a change in the business plan, taking on a new partner or shouldering debt should be subject to supermajority," says Mr. Stroup. A supermajority issue would require 51 percent of a board's votes and at least half of the surgeons' agreement. Some operating agreements could require more than 50 percent of the surgeons for supermajority, but this has the potential to cause a standstill in decision making.

Balance the scale between ownership and control
Physicians' greatest concern in a joint venture is an overbearing hospital partner, but ownership percentages do not have to translate directly to how a center is operated. An ASC's governing board gives voice to physicians and their concerns. "We like to have a board with four physicians, two hospital partners and one management company representative," says Mr. McKevitt.

A management company's role in a three-way joint venture is an impartial third party. This partner has the ability to understand and merge the other two partners' interests, while keeping in mind the ASC's success as a central goal. "Typically, physicians and hospitals have a long, complicated history," says Mr. Stroup. "We manage that and turn into a relationship of trust."

"ASCs are one of the few remaining vehicles to create a partnership between hospitals and physicians," says Mr. McKevitt. "The successful joint venture is an excellent example of how physician and hospitals can collaborate on the delivery of care system associated with change related to Accountable Care initiatives."

More Articles on Transactions and Valuation Issues:
5 Hospitals & Health Systems Opening, Building or Planning Ambulatory Surgery Centers
The Value of Ambulatory Surgery Center Design: An Inside Look at the Architectural Process
ASC Ownership Sales: 4 Things to Consider Beforehand

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