Ambulatory surgery center and hospital joint ventures can provide perks for both parties. Hospitals can provide ASCs with financial stability and more purchasing power; surgery centers can stem hospital case losses and increase their market share. However, broken joint ventures can result in lost revenue and confidence for both sides.
Two management company executives — Robert Carrera, president and CEO of Pinnacle III, and Jeff Leland, CEO of Blue Chip Surgical Partners — frequently consult for such joint ventures. The problems with hospital/physician ASC joint ventures are rarely clinical, Mr. Carrera said. More often, business incentives get misaligned and revenue is improperly managed.
Here Mr. Carrera and Mr. Leland give their seven tips for transforming physician/hospital ASC joint ventures and returning them to productive relationships.
1. Restructure finances. Hospital systems, with their greater capital and larger number of patients, tend to overbuild surgery centers or have unrealistic projections for the center's growth, Mr. Leland says.
He worked with a center that ordered equipment for anticipated specialties, such as ophthalmology and urology, before their case volume had grown enough to warrant expanding.
"It wasn't foolish," he said. "It was just an issue of timing. In time, they would have those specialties, but for the present, we delayed or canceled the equipment to cut down on capital costs."
Mr. Carrera worked with a center that had built four operating rooms but barely had enough cases to fill two. The center was paying twice as much rent as necessary. While overbuilding cannot be reversed, managers can find ways to curb debt.
"It you have a lot of debt on the books, try to secure new financing," Mr. Carrera says. "Restructure debt to get on better financial footing. Come up with a plan to refinance the center, either with a lending institution or through the hospital. Convince the hospital they are not going to lose on that investment."
Mr. Leland also suggests rearranging the surgery center lease with the health system. By back-loading a lease, the bulk of expenses are shifted to the future, when the established ASC can handle the cost, rather than burdening the new center.
2. Get all physicians involved. Only when hospital administrators and surgery center physicians are sitting on a governing board do they stay informed of what's going on in the business. Mr. Leland suggests making every owner a board member and expecting board members to attend one meeting each month.
"Hold monthly meetings that last one hour, and don't go beyond that," he says. "By being disciplined and establishing expectations, we are able to get doctors engaged, and engaged doctors make good business decisions."
Open lines of communication are crucial for successful joint ventures. Discuss problems when they first arise instead of waiting for larger issues to develop, Mr. Carrera says.
"If the board of managers of a joint venture can communicate well and address what's going on in the marketplace, if issues are brought to the board to keep their eyes and ears open before there's a problem, then you're going to have trust," he says. "Trying to rebuild communication and trust is always more difficult once it’s been broken."
Surgery center physicians are also more likely to take pride and ownership in the facility if they feel involved and engaged, rather than viewing the center as belonging to the hospital.
"Running a surgery center is something physicians understand," Mr. Leland says. "When they act and believe it's their surgery center than the hospital's surgery center, they come up with ideas that make a lot of sense and improve productivity."
3. Recruit more physicians or cases. Hospitals should take an active role in recruiting additional surgery center physicians, Mr. Carrera says. Working together to bring in new partners will be more efficient than the ASC or the hospital going it alone.
"I worked with a JV where the hospital board members and physician board members from the surgery center hosted recruiting dinners," he says. "Both parties were represented. They were very lucky to have partners that stepped up and, when that true partnership environment was visible to attendees, those physicians wanted to participate as well."
Encourage physicians from the hospital and the surgery center to motivate and challenge one another. Mr. Leland has seen physician owners who aren't even bringing all of their cases to the center. Encourage each physician to feel responsible for the success of the center.
"It's important to get engaged doctors who put pressure on other doctors to bring all their cases," he says. "Create some peer pressure. Remind the doctors that we bring every possible case we can, and that allows us to do more work with fixed costs."
4. Keep surgery center finances self-contained. Frequently in a joint venture, a hospital administrator or accountant will also manage the surgery center's accounts receivable and billing, but that's "an absolute mistake," Mr. Leland says.
In consulting centers, he insists the surgery center be tasked with looking after its own billing and collections. Someone in the hospital who was not involved in the surgery center procedure may not have enough information to properly bill patients.
"The administrator and the business manager of the surgery center are in a much better position to judge whether or not an account should be written off, or if the payment was appropriate for the work done," Mr. Leland says. "Or they may be too quick to collect payment when we know we were paid properly."
"When you aren't where the rubber hits the road, it's difficult to understand what's going on," he says of hospital billing managers.
He recommends operating the surgery center as a self-contained business and clinical unit. ASC physicians should also be aware of the center's finances. If they are engaged, they will dictate notes promptly, finish paperwork for cases the same day and follow up more aggressively than a hospital administrator might.
5. Schedule like a surgery center, not like a hospital. With such tight revenue margins, surgery centers need to schedule as many cases as possible every day to eliminate waste. However, hospitals are accustomed to block time schedules and often implement their scheduling techniques in the surgery center. Schedule like a surgery center — eliminating time between cases — to boost revenue.
"If we consolidate the doctors to do seven cases on one day even though they are normally done Tuesday and Thursday, we can get to the point of full day schedules," Mr. Leland says.
Bring the surgery center mentality to the joint venture, he says.
"Try to compress as much as possible, and when you can compress to the point [that you] don't have to be open Fridays, we will do that and substantially reduce the cost of operating," he says.
Closing the center one day a week also reduces staffing costs and put pressure on the staff to reduce time between cases to 10 minutes, as opposed to a 30-minute turnover time in a hospital.
6. Revisit contracts often. If left without oversight, hospital and physician groups tend to negotiate ASC commercial payor contracts once and not revisit them, Mr. Leland says.
He recommends JV ASC administrators look over their contracts at least three times per year. Frequent contract check-ups also confirm the payors are properly fulfilling their agreement with the center. ASC administrators should not leave contract renegotiations up to the hospital, because hospitals are not always as effective at negotiating ASC payor contracts.
"When the hospitals negotiate contracts, the ASC is a relatively small dot in the grand scheme of things," Mr. Leland says. "By having somebody from both parties involved and getting the doctors engaged, we can often get better contracts than by solely relying on the hospital."
7. Make it work. Dissolving a joint venture shouldn't be an option unless all others have been exhausted. Mr. Carrera describes dissolution as a business divorce, only to be used as a last resort. Ending a joint venture can take up to three years.
"It's a very painful, drawn-out and expensive," he says. "You seldom have a successful center go through that process."
Keep this in mind while going through the initial planning phases, and do as much work as possible at the beginning to set up the joint venture for success. Mr. Carrera recommends forming clear expectations as to what each party brings to the arrangement. If you take proper precautions initially, you will have a better chance of making the joint venture thrive.
"Your operating agreement and due diligence are the prenuptial agreement," he says. "It's never going to be as good in the long term as during the planning phase, when everyone has the best intentions and is putting on their best faces."
More Articles on Transactions and Valuations:
10 Surgery Centers Recently Acquired, Opened, Approved or Planned
Covenant Surgical Partners Raises $3M in New Equity
Cleveland Clinic Purchases Marymount Ambulatory Surgery Center in Garfield Heights
Two management company executives — Robert Carrera, president and CEO of Pinnacle III, and Jeff Leland, CEO of Blue Chip Surgical Partners — frequently consult for such joint ventures. The problems with hospital/physician ASC joint ventures are rarely clinical, Mr. Carrera said. More often, business incentives get misaligned and revenue is improperly managed.
Here Mr. Carrera and Mr. Leland give their seven tips for transforming physician/hospital ASC joint ventures and returning them to productive relationships.
1. Restructure finances. Hospital systems, with their greater capital and larger number of patients, tend to overbuild surgery centers or have unrealistic projections for the center's growth, Mr. Leland says.
He worked with a center that ordered equipment for anticipated specialties, such as ophthalmology and urology, before their case volume had grown enough to warrant expanding.
"It wasn't foolish," he said. "It was just an issue of timing. In time, they would have those specialties, but for the present, we delayed or canceled the equipment to cut down on capital costs."
Mr. Carrera worked with a center that had built four operating rooms but barely had enough cases to fill two. The center was paying twice as much rent as necessary. While overbuilding cannot be reversed, managers can find ways to curb debt.
"It you have a lot of debt on the books, try to secure new financing," Mr. Carrera says. "Restructure debt to get on better financial footing. Come up with a plan to refinance the center, either with a lending institution or through the hospital. Convince the hospital they are not going to lose on that investment."
Mr. Leland also suggests rearranging the surgery center lease with the health system. By back-loading a lease, the bulk of expenses are shifted to the future, when the established ASC can handle the cost, rather than burdening the new center.
2. Get all physicians involved. Only when hospital administrators and surgery center physicians are sitting on a governing board do they stay informed of what's going on in the business. Mr. Leland suggests making every owner a board member and expecting board members to attend one meeting each month.
"Hold monthly meetings that last one hour, and don't go beyond that," he says. "By being disciplined and establishing expectations, we are able to get doctors engaged, and engaged doctors make good business decisions."
Open lines of communication are crucial for successful joint ventures. Discuss problems when they first arise instead of waiting for larger issues to develop, Mr. Carrera says.
"If the board of managers of a joint venture can communicate well and address what's going on in the marketplace, if issues are brought to the board to keep their eyes and ears open before there's a problem, then you're going to have trust," he says. "Trying to rebuild communication and trust is always more difficult once it’s been broken."
Surgery center physicians are also more likely to take pride and ownership in the facility if they feel involved and engaged, rather than viewing the center as belonging to the hospital.
"Running a surgery center is something physicians understand," Mr. Leland says. "When they act and believe it's their surgery center than the hospital's surgery center, they come up with ideas that make a lot of sense and improve productivity."
3. Recruit more physicians or cases. Hospitals should take an active role in recruiting additional surgery center physicians, Mr. Carrera says. Working together to bring in new partners will be more efficient than the ASC or the hospital going it alone.
"I worked with a JV where the hospital board members and physician board members from the surgery center hosted recruiting dinners," he says. "Both parties were represented. They were very lucky to have partners that stepped up and, when that true partnership environment was visible to attendees, those physicians wanted to participate as well."
Encourage physicians from the hospital and the surgery center to motivate and challenge one another. Mr. Leland has seen physician owners who aren't even bringing all of their cases to the center. Encourage each physician to feel responsible for the success of the center.
"It's important to get engaged doctors who put pressure on other doctors to bring all their cases," he says. "Create some peer pressure. Remind the doctors that we bring every possible case we can, and that allows us to do more work with fixed costs."
4. Keep surgery center finances self-contained. Frequently in a joint venture, a hospital administrator or accountant will also manage the surgery center's accounts receivable and billing, but that's "an absolute mistake," Mr. Leland says.
In consulting centers, he insists the surgery center be tasked with looking after its own billing and collections. Someone in the hospital who was not involved in the surgery center procedure may not have enough information to properly bill patients.
"The administrator and the business manager of the surgery center are in a much better position to judge whether or not an account should be written off, or if the payment was appropriate for the work done," Mr. Leland says. "Or they may be too quick to collect payment when we know we were paid properly."
"When you aren't where the rubber hits the road, it's difficult to understand what's going on," he says of hospital billing managers.
He recommends operating the surgery center as a self-contained business and clinical unit. ASC physicians should also be aware of the center's finances. If they are engaged, they will dictate notes promptly, finish paperwork for cases the same day and follow up more aggressively than a hospital administrator might.
5. Schedule like a surgery center, not like a hospital. With such tight revenue margins, surgery centers need to schedule as many cases as possible every day to eliminate waste. However, hospitals are accustomed to block time schedules and often implement their scheduling techniques in the surgery center. Schedule like a surgery center — eliminating time between cases — to boost revenue.
"If we consolidate the doctors to do seven cases on one day even though they are normally done Tuesday and Thursday, we can get to the point of full day schedules," Mr. Leland says.
Bring the surgery center mentality to the joint venture, he says.
"Try to compress as much as possible, and when you can compress to the point [that you] don't have to be open Fridays, we will do that and substantially reduce the cost of operating," he says.
Closing the center one day a week also reduces staffing costs and put pressure on the staff to reduce time between cases to 10 minutes, as opposed to a 30-minute turnover time in a hospital.
6. Revisit contracts often. If left without oversight, hospital and physician groups tend to negotiate ASC commercial payor contracts once and not revisit them, Mr. Leland says.
He recommends JV ASC administrators look over their contracts at least three times per year. Frequent contract check-ups also confirm the payors are properly fulfilling their agreement with the center. ASC administrators should not leave contract renegotiations up to the hospital, because hospitals are not always as effective at negotiating ASC payor contracts.
"When the hospitals negotiate contracts, the ASC is a relatively small dot in the grand scheme of things," Mr. Leland says. "By having somebody from both parties involved and getting the doctors engaged, we can often get better contracts than by solely relying on the hospital."
7. Make it work. Dissolving a joint venture shouldn't be an option unless all others have been exhausted. Mr. Carrera describes dissolution as a business divorce, only to be used as a last resort. Ending a joint venture can take up to three years.
"It's a very painful, drawn-out and expensive," he says. "You seldom have a successful center go through that process."
Keep this in mind while going through the initial planning phases, and do as much work as possible at the beginning to set up the joint venture for success. Mr. Carrera recommends forming clear expectations as to what each party brings to the arrangement. If you take proper precautions initially, you will have a better chance of making the joint venture thrive.
"Your operating agreement and due diligence are the prenuptial agreement," he says. "It's never going to be as good in the long term as during the planning phase, when everyone has the best intentions and is putting on their best faces."
More Articles on Transactions and Valuations:
10 Surgery Centers Recently Acquired, Opened, Approved or Planned
Covenant Surgical Partners Raises $3M in New Equity
Cleveland Clinic Purchases Marymount Ambulatory Surgery Center in Garfield Heights