5 Problems That Hurt a Hospital-Physician ASC Joint Venture — and How to Avoid Them

Physicians and hospitals can both benefit significantly from a hospital-physician ASC joint venture: The hospital benefits from transferring its brand to the surgery center and building a strong relationship with community physicians, and the physicians benefit from greater leverage in payer contract negotiations, access to better supplier agreements and decreased competition.

However, joint ventures can run into problems when hospital and physician interests are misaligned or ASC efficiencies are not maintained. Luke Lambert, CEO of ASCOA, and Brandon Frazier, vice president of acquisitions and development of ASCOA, discuss five issues that cause joint ventures to fail — and how to avoid them.

1. Lack of physician control. Physicians and hospitals can both benefit significantly from a hospital-physician ASC joint venture, Mr. Frazier says. The hospital benefits from transferring its brand to the surgery center and building a strong relationship with community physicians, and the physicians benefit from greater leverage in payer contract negotiations, access to better supplier agreements and decreased competition. However, Mr. Frazier says he has seen hospital-physician joint ventures run into problems when the hospital usurps all physician control and attempts to run the surgery center like a hospital.

"I think the key is setting the joint venture up so that the physicians feel like it's their center," says Mr. Frazier. He says ASCOA has found success in setting up hospital-physician joint ventures that maintain a sizeable percentage of physician ownership and divide the rest of the ownership between the hospital and the management company. Mr. Lambert says ASCOA's joint venture model is based on a concept pioneered by other ASC leaders. In this model, the hospital owns 51 percent of the joint venture between the hospital and the management company, which in turn owns 51 percent of the surgery center. This level of ownership allows the hospital to leverage strong contracts with payors for the surgery center and allows the management company to assist in improving ASC efficiency and operations.

Mr. Frazier adds that ASCOA is unique in its approach to physician involvement in ASC leadership. All the physicians in ASCOA joint venture surgery centers sit on the board of managers and attend the monthly board meetings.  In addition, all officer positions are held by physicians.

2. Poor payor contracts.
Mr. Frazier says he has seen issues with hospital-physician ASC joint ventures when the hospital participates in the joint venture as a defensive mechanism and then fails to help negotiate strong payor contracts. "The hospital isn't proactively seeking a surgery center, but they get word that a group of surgeons is leaving to build one on their own," he says. "The hospital participates, but their heart isn't in it, and as a result, they don't use their leverage to assist with contracting." He says ASCOA has seen many ASC joint ventures fail due to  poor contracts. When the same people who negotiate the hospital contracts are in charge of negotiating the ASC contracts, they are tempted to prioritize hospital contracting because the majority of the hospital's revenue is based on that reimbursement.

Hospitals and physicians can build successful joint ventures by establishing trust and expectations before any plans are finalized, says Mr. Frazier. It may be difficult to lay out in a contract exactly how the hospital will assist with payor contracts, so hospital administration and surgery center physicians must spend time with each other to assess their level of commitment. A management company can assist in this process by acting as the "middle man" between the two parties — if the physicians have a concern about the hospital or vice versa, the management company can act as the go-between without hurting the partnership.

3. Dissatisfied surgeons. Dissatisfied surgeons can kill a hospital-physician joint venture, as a steady stream of cases contributes significantly to ASC profitability. "When we come into centers that are failing, many times surgeons are very disgruntled," says Mr. Frazier. "As a result, they're not bringing all of their cases to the center and have lost hope that the center is going to be profitable." Once physicians reduce their case volume, the ASC goes into a "death spiral" where cases continue to decline and profitability and moral worsen, he says. This dissatisfaction may be caused by several factors, including lack of expected efficiency, issues with hospital management or several physicians burdened with bringing the majority of cases.

Mr. Frazier says fortunately, a poor surgeon attitude toward an ASC joint venture is "almost never a fatal flaw." The presence of a professional management company, which can provide years of ASC experience, can re-build a fractured relationship between the hospital and the surgery center and increase the level of surgeon commitment.

4. Too many physicians splitting ownership. Hospital-physician ASC joint ventures can fail because the hospital offers ownership to a large number of its medical staff. "That potentially dilutes down any one physicians' participation to such a small level that you start to lose the inherent benefits of having physicians feel like owners," says Mr. Lambert. "If they own a quarter of a percent each, they don't care if they use expensive supplies or not." He says physicians with a greater level of ownership are more likely to care about the effect of cost-cutting efforts on their distributions, meaning they will make an effort to increase efficiency, standardize supplies and involve themselves in money-saving initiatives.

5. Surgery center inefficiencies. Many physicians get involved in ASC ownership because of the increased efficiencies in performing cases at a surgery center. If a hospital-physician ASC joint venture loses sight of the importance of efficiency, Mr. Lambert and Mr. Frazier agree that physicians will become disheartened and profitability will diminish. Mr. Lambert says a management company is helpful in this circumstance because the company is fully committed to the financial profitability of the center, meaning efficiency is a priority. "From the hospital perspective, we encourage hospitals to be supportive of the center and physicians, rather than trying to roll out policies from the hospital that may not ultimately be supportive of the aims of the center," he says.

For example, if the ASC has a lot of empty time or poor scheduling, the ASC is likely wasting money by staffing employees while physicians aren't performing cases — a significant problem at an ASC, but commonplace at a hospital. "What we do is compress the schedule and assign blocks of time where we're doing all the cases in a certain period of time," Mr. Frazier says. "If we're done at 3:00, we turn the lights out and go home. That's very different from the hospital mentality."

Learn more about ASCOA.

Related Articles on Surgery Center Joint Ventures:
Moving From Hospital-Based Department to ASC: 5 Challenges and Solutions
5 Key Legal Issues Affecting Surgery Center Joint Ventures
10 Recent Surgery Center Joint Ventures

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