Not-For-Profit Hospital & Physician Joint Ventures: Spotlight on Ambulatory Surgery Centers

Here are eight things to know about ASC joint ventures between not-for-profit hospitals and physicians.

1. Approximately 25 percent of ASCs are joint ventured with a hospital. While there are no exact figures, there are an estimated 1,300 to 1,500 surgery centers of the 5,300 to 5,400 Medicare-certified surgery centers that have a hospital partner. This number has increased significantly. In 2011, 17 percent of surgery centers were jointly owned between physicians and hospitals, according to an Ambulatory Surgery Center Association's report.

2. Not-for-profit hospitals want to preserve tax exempt status. The hospital wants to assure that the venture does not endanger its tax exempt status. Moreover, it ideally wants to treat the income received from the venture as exempt income, i.e., non-taxable income.

3. Hospital partners need a certain amount of control. To be able to treat the income as tax exempt income, the hospital has to have enough control over the venture to assure that it serves the community and charitable purposes. In addition to having substantial and sufficient control, it must actually operate in accordance with such concepts as well. This may mean that the center needs to serve a certain amount of indigent patients, as well as Medicare/Medicaid patients.

In 2012, an average of 57.2 percent of patient revenue for not-for-profit hospitals was generated by Medicare and Medicaid patients, according to a Moody's Investors Service report. Though this number is high, surgery centers' payer mix is dominated by commercial insurance at an average of 58 percent, according to VMG Health's ASC Intellimaker 2011 Survey.  

4. Managed care contracting assistance is not guaranteed. The physician partners in the joint venture often want the hospital partner to help it with managed care contracting. Sometimes the physicians also want the hospital partner to help with recruiting. The hospital partner's assistance with managed care contracting varies greatly from system to system. Hospitals have strong incentive to drive surgeries to its own inpatient setting rather than to a surgery center. Hospitals that retain that mind set often offer joint venture surgery centers little aid in managed care contracting.

5. Hospital partner level of support varies. The hospital may be a more helpful partner the more that it has joint ventures as a core part of its strategy. For example, some systems have really embraced joint ventures as a part of their strategy and often are very helpful partners. These hospitals understand what it takes to make a surgery center successful and offer aid as an active partner.

In contrast, other hospitals simply engage in a surgery as a defensive measure. They often join the venture against their desire. Hospitals that feel forced to enter a joint venture, often in an effort to avoid the threat of a purely physician-owned surgery center in the same market, may not be supportive partners.

6. There is no one joint venture formula. There is not a set percentage of the exact extent that the hospital must own in a joint venture. In certain situations the tax exempt hospital owns a minority interest and the physicians own the great majority. In other situations, the hospital owns the majority. For exempt purposes, the hospital's control and its ability to assure the venture serves charitable purposes is more important than the exact ownership stake.

7. Management companies may be involved. There has been an increase in joint ventures where the hospital partner owns a percentage of interest with a management company. For example, ASC management and development company United Surgical Partners International owns or operates 214 facilities, of which 148 are joint partnerships with not-for-profit health systems. In this type of partnership, a management company and hospital typically collectively own a majority of the venture, while the hospital often owns a majority of that share. In these arrangements, 25 percent of management companies find majority hospital ownership to be preferable, according to HealthCare Appraisers ASC Survey 2013.

8. Joint venture frequency is market-dependent. There is growth of joint venture surgery centers in certain markets where hospitals have embraced the strategy. In other markets, hospitals have really focused on employment of physicians and the joint venture surgery center is much less of an effort.

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