The "Co-Managed" Hospital-Owned ASC: An Alternative Partnership Model

Over the past few years, there has been a growing trends of ASCs being operated as HOPDs. As we move through 2010, this trend toward HOPD ASCs continues.


For new ASC projects, the recent economic downturn has added deal structure complexity and an increased risk aversion on the part of many physicians when it comes to traditional equity-based ASC models. For existing equity-based ASCs, there appears to be a growing desire by physician-investors to recoup their initial investments. At the same time, more hospitals are aggressively "joining the fray" as potential ASC purchasers. As a result, we at Healthcare Venture Professionals (HVP) have become involved with a number of projects dealing with new hospital-owned ASCs or "conversion" of existing freestanding ASCs into HOPD ASCs.

For the past several years, HVP has had the good fortune to work with the West Hartford (Conn.) Surgery Center (WHSC), a hospital-owned ASC. We see WHSC as an prime example of a facility demonstrating the opportunities that exist to take the HOPD model and make it an exciting, creative and effective alternative partnership model between hospital and physician through the concept of "co-management" for the ASC.

WHSC history
Due to a longstanding positive relationship and strong desire to collaborate, WHSC was initially planned as a 50-50 equity-based joint venture (a for-profit LLC) between Hartford Hospital (HH), a prominent tertiary care/teaching facility and the Connecticut Surgical Group (CSG), a prestigious 40-plus surgeon multispecialty organization. WHSC would be located in the "Blue Back Square" section of West Hartford, a rapidly growing commercial development about 10 miles from the hospital and main CSG offices. HVP was engaged in 2005 to provide development and long-term management Services for the joint-venture ASC.

While the ASC was still under development, HH and CSG decided (for a variety of business reasons) to look at alternative approaches to the ownership and operation of WHSC. After much discussion and research, the decision was made to convert WHSC to an HOPD ASC. At the same time, both HH and CSG clearly wanted to retain a collaborative approach to WHSC operations.

To support this goal of collaboration under an HOPD approach, a simple set of "partnership guiding principles" were developed for WHSC. These included:

  • WHSC would be operated like a freestanding ASC vs. a hospital department.
  • Emphasis would be placed on providing patients and physicians with a high quality "five-star" experience.
  • HH and CSG leadership would work to minimize the bureaucracy and "red tape" inherent to a large, tertiary care facility such as HH.
  • Recruitment activities would be expanded to include surgical specialties and physicians not represented within CSG.
  • Key ASC functions (e.g., scheduling, pre-certification, registration and billing, medical supply and instrumentation standards, etc.) would be controlled by WHSC rather than HH.
  • HH resources and relationships (e.g., group purchasing, biomedical engineering, anesthesia, laboratory, etc.) would be used to the extent possible but WHSC would also be free to pursue outside sources if justified to obtain required clinical or support services in an improved, more efficient or cost-effective fashion.

These guiding principles, together with the shared vision and ongoing commitment by HH and CSG to a collaborative relationship, resulted in the creation of a unique "co-management" approach to the future operations of WHSC.

Co-management model
The co-management model combines two approaches typically (but usually separately) seen in transactions where a hospital acquires a physician-owned clinical service and converts it to an HOPD: 1) The hospital enters into a management or professional services agreement with the previous physician-owners in order to maintain their involvement and interest in the service; or 2) The hospital engages a professional management company to provide day-to-day management in order to ensure the service in question is operated in an efficient or "freestanding" fashion.

This co-management model was implemented in the following manner:
  • HH purchased the CSG equity interest in WHSC at a formally determined fair market value.
  • HH entered into a management services agreement with CSG at a negotiated and externally validated FMV rate.
  • CSG entered into a "management services subcontract agreement" with HVP for defined operational and support services.

The end result of this process is a scenario wherein WHSC is effectively co-managed by CSG and HVP.

At several points in this process, the services of an external valuation company were employed to validate that all financial arrangements were consistent with a documentable FMV approach. Experienced legal counsel was also an integral part of all transactions and agreements. Finally, incentives contained in the management agreement between HH and CSG were based on defined quality, patient satisfaction and operational benchmarks vs. volume or revenue-related criteria.

The conversion of WHSC from an equity-based joint venture to an HOPD ASC also entailed the successful accomplishment of several other tasks dealing with:
  • CT certificate of need
  • Medicare HOPD requirements
  • State licensure requirements
  • Other state and federal requirements

Co-management roles and responsibilities
Under the management services agreement with HH, CSG assumed a number of responsibilities to include:
  • Provision of the ASC medical director
  • Provision of key leadership to the WHSC operations committee (see additional discussion to follow)
  • Oversight of the management services subcontractor (HVP)
  • Designation of a formal contact person to work with HH
  • Establishment and maintenance of quality assurance standards
  • Recommendations as to approved surgical procedures, capital equipment needs and ASC staffing and personnel
  • Implementation of clinical education and training programs
  • Recommendations and implementation of all quality improvement and utilization review programs
  • Development of community education and outreach programs
  • Other clinical and administrative responsibilities as defined in the management services agreement

Under the "management services subcontract agreement" with CSG, the major responsibilities of HVP include:
  • Provision of the on-site ASC administrator
  • Management of day-to-day ASC operations
  • Provision of defined consultative and support resources
  • Routine involvement of HVP principal and regional director of operations as an advisory and support resource to the administrator and to CSG
  • Coordination of and attendance at monthly operations committee meetings
  • Monitoring and benchmarking of operational performance
  • Support for WHSC strategic planning efforts
  • Provision of information and education related to industry trends, regulatory and safety issues
  • Annual budgeting
  • Monthly financial reporting
  • Business analysis of proposed equipment purchases, new surgical procedures and other matters affecting future WHSC performance
  • Development of operating policies and procedures
  • Administrative coordination with HH on behalf of CSG (a "buffer" role)
  • Other administrative responsibilities as defined in the management services subcontract agreement

Operations committee
One of the important ingredients to the success of the co-management model is the role and function of the WHSC operations committee. From the outset of the decision to convert from the equity-based joint venture model to the HOPD ASC co-management codel, this committee was envisioned as a de facto "board" for WHSC. In essence, the operations committee assumes many of the same responsibilities that would have been fulfilled by the LLC board had the joint-venture model remained in place. Key among these is serving as ongoing formal vehicle for direct physician input and involvement with all aspects of WHSC operations.

The operations committee meets monthly and is comprised of three senior leaders from both HH and CSG. The WHSC medical director, administrator and an HVP corporate representative are ex-officio members of the committee. The primary responsibilities of the committee include:
  • Advisor to HH on all WHSC clinical, management and operational issues
  • Review of all quality, financial and operational results
  • Dealing with all licensure, accreditation, health and safety matters for WHSC
  • Review of patient, physician and employee satisfaction results
  • Oversight of performance of the medical director, administrator, HVP and all other professional or support subcontractors and agreements
  • Establishment of performance objectives for WHSC
  • Strategic planning, marketing and physician recruitment efforts
  • Other key clinical and administrative matters

Hospital/surgery center integration issues
As noted earlier, one of the guiding principles for HH and CSG under the HOPD ASC approach was that WHSC would be operated like a freestanding ASC rather than a hospital department to the extent possible. The following operational areas merited special attention related to the integration of WHSC into the HH organization:
  • Information systems
  • Patient scheduling, registration, PAT, insurance pre-certifications, billing and collections
  • Hospital support services
  • Policies and procedures
  • Forms/medical records
  • Drug control procedures
  • HR/staffing/recruitment
  • Materials management
  • Finance/budgeting

For each of these above areas (and others to a lesser extent), the challenge was to achieve an appropriate balance which supported the goal of having WHSC function in a "freestanding" fashion while at the same time recognizing that it must be an integral part of the HH organization in order to meet a variety of intra-organizational and external requirements (e.g., "provider-based" regulations, Joint Commission standards, etc.).

Admittedly, HH-WHSC integration is (and, to some extent, will always be) a work in progress as new questions, challenges or "turf issues" inevitably arise. Ongoing sensitivity to this potential, together with effective communication between all involved parties as issues occur has helped to minimize or prevent any long-term problems from an integration perspective. The operations committee and its members have certainly played a key role in this regard.

Benefits to physicians
There are numerous benefits to involved CSG (and other) physicians under the co-management model. Primary among these benefits are:

  • Direct involvement and control of the ambulatory surgery process (especially through the operations committee)
  • Ability to perform surgery and to offer a high quality ambulatory surgery experience in a non-hospital environment
  • Participation in an innovative alternative form of hospital-physician collaboration
  • Physician recruitment tool
  • Growth of outpatient surgery market share and related revenue base
  • Recouping of original investment in freestanding ASC joint venture (with conversion to HOPD)
  • An additional ongoing source of revenue without the risk of a capital investment
  • Professional ASC management (with HVP as co-manager)

Benefits to hospital
There are a number of similar benefits to Hartford Hospital due to the conversion of WHSC to an HOPD using the co-management model. These benefits include:
  • 100 percent ownership of a dedicated ambulatory surgery setting
  • Participation in an innovative alternative form of hospital-physician collaboration
  • Ability to offer a high quality ambulatory surgery experience in a non-hospital environment
  • Freeing up of the hospital's OR space
  • Physician recruitment tool
  • Growth of outpatient surgery market share
  • Enhanced profitability from ambulatory surgery (vs. shared profits under ASC joint-venture model)
  • Professional management (with HVP as co-manager)

WHSC today
Since its formal opening in Sept. 2007, operating results for WHSC are supportive of the benefits to physicians and hospital as discussed above and are consistent with the original partnership guiding principles developed by Hartford Hospital and the Connecticut Surgical Group with HVP's assistance. A few examples would be:
  • New surgical specialties have been added to include orthopedics, GYN and pain management.
  • 34 new physicians (beyond the original CSG contingent) are now performing surgery at WHSC
  • Surgical volume at WHSC increased by 36 percent in 2009 over 2008
  • Discussions are underway about future WHSC expansion
  • WHSC recently received national recognition for excellence in patient satisfaction

Summary
The ultimate success of the HOPD ASC approach in general and the co-management model specifically hinges on a number of factors discussed in this column. To reiterate just a few, we would stress the following key ingredients to success:
  • Hospital and physician commitment to a collaborative approach
  • Appropriate "balance" between hospital integration vs. operational freedom for the ASC
  • Meaningful physician participation
  • Involvement of experienced legal counsel and professional ASC management expertise

A properly designed and professionally implemented HOPD ASC approach, together with use of the co-management model, presents a unique opportunity for hospitals and physicians to collaborate in the provision of state-of-the-art ambulatory surgery. This has certainly been the case at WHSC.

Hartford Hospital and the Connecticut Surgical Group (as well as non-CSG physicians) are integrally involved in providing an enhanced outpatient surgery delivery model hand-in-hand with an innovative form of hospital-physician collaboration. Physicians and the hospital are working together to their mutual benefit and, more importantly, to the benefit of the patients and communities served by West Hartford Surgery Center.

John A. Smalley (jsmalley@hvpros.com) is a principal and co-founder of Healthcare Venture Professionals, a full-service ASC management, development and consulting company with special emphasis on physician-hospital collaborative ventures.

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