Hospital minority vs. majority partner: Which makes more sense for your ASC?

No two ASCs are quite alike, nor should any partnership be. For ASC leaders that decide a hospital joint venture is the strategic route for their center, they must first consider the ramifications of each ownership structure option.

Minority ownership
Minority hospital interest, 49 percent or less, is less common than majority interest, but it is still a viable partnership structure.

Potential benefits

1. Physician control. Most ASCs were opened by physicians and have long been considered vehicles for physician independence. Selling majority control to a hospital can be a difficult decision for physician owners; it can feel like selling that hard-earned autonomy. Minority hospital ownership can lend an ASC many of the benefits of a joint venture without impacting the level of physician control at the center. With majority ownership, physicians will retain the ability to hire and fire staff as they see fit, make all clinical decisions and shape the center's overall future.

2. More room for physician investment. Minority hospital ownership allows physicians a larger share of the center, which in turn engenders commitment. "If you have 30 surgeons and only 49 percent of the company available, that limits the skin the game they have," says Vivek Taparia, director of operations with Regent Surgical Health. Additionally, future physician investment is vital to an ASC's survival. The less a hospital owns the more shares available for new physicians, without extreme dilution of existing physician stakes.

3. Improved hospital relations and market position. Hospitals interested in minority ownership may want to dip a toe into the ASC industry waters, but are not prepared invest a large amount. "There could be a situation in which a hospital wants to minimize its capital investment," says John Newman, senior vice president and general counsel of Constitution Surgery Centers. "They may make a small investment in a freestanding facility, so that ASC won't align with a competitor. It's a defensive play by the hospital, but that is an exception, rather than the rule." This being said, such a hospital could still leverage its community standing to benefit the center and outplay its competitors. The ASC could also see more cases and benefit from affiliation with a well-recognized and respected hospital.
 
ASCs in different life cycle stages have different reasons for looking to hospitals. A hospital partner, even a minority partner, is a great benefit to a de novo ASC. "If it is a new ASC, sometimes it needs that hospital partner because of the certificate of need process," says Mr. Taparia. "Hospital sponsorship in a CON meeting makes a big difference." The ASC has an improved market position simply through public hospital backing.

Potential disadvantages

1. Lack of managed care contracting clout. Access to hospital negotiated reimbursement rates is one of the more attractive possibilities a joint venture has to offer, but this boon is no guarantee, especially when a hospital has less than majority ownership. "A hospital and its counsel may be uncomfortable with managed care contracting on an ASC's behalf if they have too small of an investment," says Mr. Newman.

Though managed care contracting aid is not a given, minority hospital does not preclude the possibility. "A hospital with 49 percent ownership and certain majority rights could represent itself to payers as a controlling stakeholder," says Mr. Taparia. What exactly a hospital will bring to the table in terms of reimbursement negotiation will be a key point of discussion before moving forward with a joint venture.

2. Hospital disinterest. While a minority hospital owner can be active and helpful, it can be the case that the resources follow the money; a hospital with minimal investment may feel little need to spend time and resources on the center. "Hospitals are only as committed as much as the skin they have in the game," says Mr. Taparia.

Majority ownership
Hospitals and health systems are increasingly looking to the ASC industry as inpatient utilization declines. Outpatient healthcare is becoming a cornerstone strategy, rather than an afterthought. Majority ownership in an ASC partner is one of the ways a hospital can, and often prefers, to expand its footprint in the outpatient arena.

Potential benefits

1. Managed care contracting support. "At the end of the day, it should be a question of math. You could be getting the same or better distributions because of hospital managed care," says Mr. Taparia. While less elusive than the mythical Holy Grail, managed care contract improvement is not a given. ASC leaders need to carefully vet potential hospital partners and their positions in the marketplace. Do they have enough leverage to deliver on the hospital leverage with payers and the ensuing bump in reimbursement is the holy grail of the joint promise of improved reimbursement?

If a hospital does have the power to negotiate improved rates on an ASC partner's behalf, it is much more likely to do so when it has a majority stake.

2. Access to additional hospital resources and branding. While payer relations are a significant consideration, it is not the only door hospitals can open for ASC partners. "Hospitals have relationships with physician networks and access to community partnerships. These can all help an ASC into the limelight through hospital marketing and branding," says Mr. Taparia. ASC may even find improved contracts with vendors, housekeeping, biomedical and more.

Branding can be a noteworthy perk of a joint venture, particularly if a hospital or health system has an excellent reputation. A hospital's majority ownership lends an ASC to identifying with the brand, while it may be more difficult to do so if the hospital only has a nominal stake.

3. Large capital event. How much equity ASC owners want to take off the table is often the first consideration when exploring a joint venture. If physician partners are looking for a large, one-time payoff, a majority sale is the logical choice. "A minority investment is a smaller multiple of earnings. The equity would be valued a bit more for a majority stake sale," says Mr. Taparia.

Potential disadvantages

1. Loss of autonomy. How invested a hospital majority partner will be in its ASC partner's day-to-day operations varies, but hospitals will have the power to influence how the center runs.  "The problem, at a minimum, is you will need to explain all operations to a partner that by definition isn't really focused on ASC activity," says Mr. Newman. "It's two different cultural worlds coming together. You need a health dialogue about strategic vision before you close or the partners will continually trip over one another."

A hospital may take a hands-off approach and allow an ASC to run unimpeded, as it did prior to the joint venture, while others may take on an active role. Majority hospital partners can demand to use a particular anesthesia services, switch employees to its health plan or even on-board its own staff. Physicians' clinical operations and the center's staff can be greatly affected. Ensure each of these issues is addressed, agreed upon and included in the operating agreement before inking a deal that is not lightly undone.

2. Limited investment options. Hospital majority ownership affords existing owners a greater initial capital event, but it can have a negative impact on the center's future prospects. "There is a defined equity pool for each facility. The more the hospital takes, the less of the pie there is to grow through additional physician investment," says Mr. Newman. Rather than accept the fate of dwindling investment and potential legacy struggles, work with the hospital.

"Point out to the hospital they will be working against their own interests if they hold too large a majority share in a facility," says Mr. Newman. "The hospital is coming to the table because they are interested in working with physicians, and there is a rich history of hospitals being receptive to reformulated deals if they are presented with a well-prepared message." A hospital can still be a majority stakeholder without completely stifling the opportunity for future physician investment.

More articles on transactions and valuation issues:
49 hospitals & health systems opening, announcing ASCs in 2014
4 recent ASC joint ventures
4 new ASC acquisitions

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