But experts in the ASC industry point to numerous failures of physician/hospital joint ventures, with numerous landmines at every stage of ASC planning, development and operation. Here are nine tips from veterans of physician/hospital joint ventures to improve the likelihood of a partnership ASC.
1. Pay attention to ownership structure and governance. The doctors, hospital and any third-party manager must be sure the ownership structure is fair to all parties and protects the hospital’s not-for-profit (501c3) status under IRS rules, advises Michael Weaver, vice president of acquisitions and development for Symbion, a national ASC development and management firm that partners with physicians and hospitals.
“But the structure must also be fair to the doctors, who need enough ownership and power to direct the ASC,” he says.
His advice? “One word: listen. The more you listen the better you can affect the documents and accommodate them to meet the parties’ needs,” Mr. Weaver says.
2. Pay attention to profit sharing. Mr. Weaver says many partnerships have dissolved because of misunderstandings or perceived inequities in profit-sharing distributions.
“You have to be fair and once distributions are prepared, they have to be pro rata (in proportion),” he says. “They also must meet fraud and abuse law requirements and laws and can’t be based on performance, volume or referrals. They must be solely on percentage of ownership.”
3. Implement and create short- and long-term strategic plans for exploring ASC new growth opportunities. “Nothing will prevent an ASC from being successful like sitting on your laurels,” says Mr. Weaver. “Every day you have to be working on how to grow it and develop and create a strategic plan everyone buys into.”
4. Plan for adequate funding. Be sure to have enough working capital to keep a reasonable debt-to-equity ratio, he says, a figure that will vary from center to center.
“I’ve seen too many surgery centers in bankruptcy cases dying of too much debt,” Mr. Weaver says. “You should always have enough cash to take care of payroll a few months worth of accounts payable and any anticipated capital expenditures coming down the pike. A brand new surgery center should plan for enough working capital to sustain the ASC for 18 months of operations. A reasonable return should be 20-25 percent annually year in and year out.”
5. Set your standards high. “You should begin with an absolute philosophy of the very highest quality and that should start from the janitor cleaning the place to the surgeons operating there and embody everyone in between,” Mr. Weaver says. “Start with a goal for high efficiency and excellent quality and good supporting protocols, polices and procedures to support that.”
6. Discuss, agree and document the role of the hospital in the joint venture. Robert Carrera, president of Pinnacle III, said early in the planning stages it’s wise to determine what the hospital is bringing to the ASC joint venture.
Mr. Carrera says typical hospital contributions can include access to covered lives, capital, land, buildings and greater purchasing power and volume discounts from suppliers, pharmaceutical companies and medical equipment manufacturers. He says it’s also wise to learn the level of involvement the hospital wants, ranging from the leasing of staff and selling of services to some form of management.
Harrison Solomon, MD, a board-certified orthopedic surgeon, hand specialist and owner/officer of a Maryland physician/hospital joint-venture ASC, suggests asking and exploring the real questions for the hospital’s interest in the ASC.
“Because every operation performed at the ASC is one that otherwise would have been done at the hospital,” observes Dr. Solomon, board vice president of the Surgery Center of Maryland in Silver Springs. “So you have to ask: What is the hospital’s motivation? It should be a better prac tice environment for their doctors and a better environment for patients and b etter prices and quality for insurers — a triple win — but where is the positive for the hospital in that?”
Dr. Solomon says there should be bona fide reasons for the doctors and hospitals to make the deal.
“Just because it’s positive for the hospital doesn’t necessarily mean it will be good for the entity,” he says. “The hospital partner needs to contribute to the business model. If they can’t, they can’t and some hospitals can’t. But if additional capital is the only contribution, is that enough? In the long-term picture, each owner must contribute something valued by all partners. That’s crucial for success.”
7. Do your homework. “Don’t assume the project will work,” Mr. Carrera cautions. He recommends developing a business plan, market analysis, financial pro forma, payor analysis and securing a buy-in from potential investors. Once the partnership is secured, he also advocates crafting an operating agreement and by-laws that need to be communicated and enforced.
8. Seek hospital support in contract negotiations. Suzanne Wienbarg, vice president of operations for Ambulatory Surgical Centers of America, says hospitals can be very useful in managed care contracting.
“They already have contracts with local payors, greater muscle and a stronger negotiating position than most ASCs. But that needs to be resolved on the front end of the joint-venture formation,” Ms. Wienbarg says. “I’ve seen physicians who’ve gotten into contractual agreements with hospitals that seemed too good to be true and were. Be sure to have clearly defined expectations of what the hospitals are bringing to the joint venture.”
Symbion’s Mr. Weaver says knowing your business is critical to securing the best contracts.
“Don’t want to go into a knife fight with rocks,” he says. Compile all the necessary information on equipment and supply costs, net revenue per procedure and costs for all CPT costs, especially dominant CPT codes.
“And don’t forget implant costs in particular, because that can sink your per procedure margins,” Mr. Weaver says. “If hospitals already have strong relationships with payors, try to leverage those in your contracts.”
Dr. Solomon agrees that hospitals have the potential to improve managed care contracts.
“Hospitals have bigger seats at the table with the private insurers you’re negotiating with and having hospitals can help you in those negotiations,” he says. “But frankly, it didn’t work out that way for us. It was more of a theoretical benefit. Clearing this early on can resolve later misunderstandings.”
9. Think ahead. Dr Solomon advises ASC physician owners to look beyond the present and ask themselves: “One year from now, if we’re profitable, what kind of support do we want from our hospital investors and what do we expect?”
He says it’s difficult to think long term initially.
“But you have to because your goals may change,” he says. “You need to think about not just the initial investments, but what you may need to remain successful and the role that you want the doctors and your hospital partners to play.”
He says the key is actively involved physician ownership.
“The more passive investors you have, the worse it is,” he says. “It could be a low volume or inactive physician, a hospital that isn’t contributing very much or a third party. Only when everyone is on the same page working on the same goals can you rely on each other to make it a successful investment.”
Contact Mark Taylor at mark@beckersasc.com.
