3 Pros and 3 Cons of Surgery Centers Taking on a Hospital Partner

Jon Vick, president of ASCs Inc., discusses some of the pros and cons of an ambulatory surgery center partnering with a hospital.

Pros

1. Stronger market strategy. According to Mr. Vick, one of the most important pro’s of taking on a hospital partner is the development of a market strategy. "Market strategies are becoming more and more important, because as there is more competition, it's important to have a broader presence in the market than just the physicians that own the center," he says. "Having a hospital partner broadens the market exposure and gives the center a more important position in the market."

2. Better reimbursement levels. Hospital contracts are generally better than surgery center contracts, meaning your surgery center could experience increased reimbursements with a hospital partner. "When the hospital contracts for inpatient services, they usually also negotiate higher reimbursement for outpatient services," Mr. Vick says. Reimbursements are the primary factor in determining ASC profitability, and a hospital can contribute valuable market clout to the negotiating process.

3. Increased referrals. Mr. Vick says a hospital partner could result in increased referrals, as hospitals tend to have more control over primary care physicians. If primary care physicians are owned or employed, the hospital can direct physician referrals to your center. "The hospital can influence referral patterns when it has an interest in a particular venture," he says. "So if the hospital has an interest in the surgery center, they will influence referrals to that center." The opposite is also true: If your center is not partnered with a hospital, the hospital can direct referrals away from your center by exercising control over its primary care physician base.

Cons


1. Decreased profitability. Surprisingly, higher reimbursement and increased referrals does not necessarily mean increased profitability. Mr. Vick says hospital-partnered ASCs are generally less profitable than their freestanding or company-managed counterparts. "Hospitals tend to want a majority interest in a surgery center, and tend to run [the center] like a hospital," he says. "Hospitals have more overhead and lower profit expectations, and they tend to diminish the profitability of the center through less efficient and less economical operation." He says while hospitals have high overhead and profit margins of less than 10 percent, ASCs have low overhead and profit margins of more than 30 percent. This means that when a hospital introduces management to run your ASC, you may see decreased efficiency and higher costs simply because of the change in perspective.

Obviously, decreased profitability is a problem for the center's investors. "As profitability goes down, distributions tend to also decrease," he says. "Doctors want to enjoy the cash flow from the center, and the merger is dis-advantageous if profitability drops and they receive less cash flow after the merger than they did before."

2. Uncertain future.
Most physicians invest in an ASC to gain control over their time and surgical environment. Physician investors can have direct input on the future of the center, and generous distributions are common. However, an ASC with a hospital partner reduces or eliminates physician control over the center. Mr. Vick says he has seen hospitals reduce ASC profitability and eventually convert their ASC to a hospital outpatient department, a move contrary to the goals of the original physician-investors. "It's not any of the doctors' original motivation or goal," he says. "It just happened because that's the way hospitals manage things."

3. Culture change.
For a hospital partner, 51 percent ownership of a surgery center often means the hospital is in control of management and strategic decisions. Even if your original leadership is left intact, ASC leaders may find it difficult to agree with hospital leaders on the ASC's direction and day-to-day operations. When an ASC takes on a hospital partner, Mr. Vick says the hospital generally installs another layer of management that takes power away from the ASC administrator and physician-owners. Efficiency, cost-control and flexible scheduling may not be as highly valued by a hospital.


The solution: Mr. Vick says hospital partners can be incredibly useful for ASCs if the ASC first partners with a management company. "The management company comes in first and forms a partnership with the physicians, and after that partnership is formed, the company goes out and recruits a hospital partner," he says. "That way, you continue to enjoy the economies and efficiencies of being a surgery center and also have access to better contracts and relationships through the hospital." He says the difference is all about culture: ASC management companies are managed by people who have worked in the ASC industry for a long time and understand the importance of efficiency and profits.


Learn more about ASCs Inc.

Read more about transaction and valuation:

-4 Factors Influencing the Success of an ASC Merger

-Sell Your Surgery Center For Its Maximum Value: 11 Things to Consider

-Rebuilding the Physician-Hospital Relationship: The Joint Venture Opportunity







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