5 Surgery Center Joint Venture Models

We are increasingly asked about different models for surgery center joint ventures. Here are brief descriptions of five different functional models. This article provides a simple assessment of the different surgery center joint venture models. This is of course not comprehensive.

1. Physician-owned. In this model, a surgery center is owned solely by physicians, though they may or may not outsource management to a third party. The physicians benefit from this model because they end up owning all of the returns from the venture. The downside is the owners don't have access to additional management equity ownership and assistance from one of the more substantial management companies. The physicians also don't have a hospital partner that could be able to step in to help with managed care contracting. A hospital partner may also have the benefit of reducing tension in the community with respect to independent physicians joining the center.

Independent ambulatory surgery center physicians will also have to consider the growing trend of physician-hospital integration, which will undoubtedly affect physician recruitment and cause a shift in referral bases. Within the next three years, 73 percent of surgical specialists and 71 percent of primary care physicians feel that they are likely or very likely to integrate with a hospital, according to Deloitte's Physician Perspectives Survey. Sixty-seven percent of ambulatory surgery centers are being moderately to severely impacted by the increase in hospital-physician employment, according to VMG Health's ASC Intellimaker Survey 2011. As pressures, such as physician-hospital integration increase, other joint venture models may become more attractive.

2. Physicians and management company. In 2011, 22.3 percent of surgery centers were owned or managed by an ASC chain, according to VMG Health's ASC Intellimaker Survey 2011. Traditionally, a management company owns a greater than 50 percent share in a surgery center and tries to consolidate for the purpose of going public or making another type of majority transaction at some point. However, there are a great number of companies that also own minority interest in this model. Fifty percent of management companies prefer a 29 to less than 10 percent ownership stake, while 50 percent prefer a 30 to 75 percent ownership stake, according to HealthCare Appraisers 2013 ASC Valuation Survey.

The added expertise of the management company is an advantage in the physician-management company model. On the downside, physicians relinquish a certain portion of their equity. The majority of management companies, 94 percent, set the fee for their services at 3 to 7 percent of net revenue, according to HealthCare Appraisers 2013 ASC Valuation Survey.

Though management companies have much to offer, areas of expertise vary across the industry. Certain companies have significant proficiency in managed care contracting, while others have no real power of influence in this area. Management companies also by and large cannot help increase the number of cases. However, some are more adept than others in physician recruitment.

3. Physicians and hospitals. In many ventures, physicians share surgery center ownership with a hospital. There are a substantial number of cases in which either physicians or a hospital own a majority share. This model often has the benefit of attracting additional physician investors. "Physicians looking to acquire a share of an ASC are more inclined to seek ASCs whose future is financially secure. In today's environment that usually means investing in a hospital/physician joint venture," says Bo Hjorth, vice president of business development at Regent Surgical Health.

The addition of hospital partners is intended to help with managed care contracting and physician issues. How helpful hospital partners actually are varies widely from market to market.

4. Physicians, management company and hospital. Over the past five years, this three-way joint venture model has become increasingly popular. This year, 50 percent of management companies have reported selling a controlling interest of a surgery center to a hospital or health system, according to HealthCare Appraisers 2013 ASC Valuation Survey. The premise of this model combines the benefits of a management company and hospital partner to help improve management, help gain access to managed care contracts and minimize tension caused by recruiting physicians outside of the venture.

In this model, the management company and hospital often collectively own more than 50 percent of the center. A hospital has a majority share of the holding company that owns interest in the surgery center, while a management company owns the remainder of the holding company. Thus, a typical structure may involve a hospital owning 51 percent of a holding company, while the management company owns 49 percent. As a whole, the holding company will own between 51 percent and 60 percent of the surgery center, while the physicians own the remaining stake. This division of ownership provides some anti-trust insulation for managed care contracting, but the jury remains out on whether or not this is entirely effective. In certain situations, a hospital and management company may own a minority stake in the venture.

In some markets, whether it is just through business or legal prowess, hospitals are very helpful in handling managed care contracting for surgery centers. In others, notwithstanding the same model, hospitals are very unhelpful.

5. Hospital operated outpatient department and contracted physicians for co-management. Due to the reimbursement benefits of hospital ownership, there are a substantial number of models in which a hospital owns 100 percent of a surgery center, in which case it is billed as an outpatient department. Surgery center reimbursement as a percentage of HOPD reimbursement has been steadily declining. In 2003, ASCs were reimbursed at 87 percent of what HOPDs received and by 2011 ASCs received 56 percent of what HOPDs were reimbursed, according to VMG Health's ASC Intellimaker Survey 2011.

In this model, the surgery center physicians have a co-management agreement that may pay several hundred thousand dollars a year, but this co-management arrangement can't take into account the volume or value of referrals from the physicians' practices to the HOPD. Thus, the physicians are compensated on more of a flat fee basis, with the addition of some bonuses. The hospital shoulders all of the owner's risk, the positive and negative side of real ownership.

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