At the 11th Annual Spine, Orthopedic & Pain Management-Driven ASC Conference on June 14, two professionals from Regent Surgical Health spoke about joint ventures with hospitals, surgery centers and physicians.
Jeffrey Simmons, chief development officer, and Tom Mallon, CEO and founder, explained the logic behind hospital-physician-surgery center joint ventures. Hospitals control the majority of ownership to negotiate reimbursement rates. Physicians have clinical and operational control over the center to maintain quality and efficiency. And finally, a third party management company can act as the "United Nations," improving efficiency and preserving the peace among all parties.
"Of all the partnerships hospitals can do with doctors, partnerships with surgery centers are relatively easy," especially compared to the work it takes to align primary care physicians, said Mr. Simmons. Hospitals may find surgery center alignment attractive because the partnership can provide lost income or new income immediately, and non-compete agreements are often designed to the hospital's advantage. "One of the key reasons hospitals are willing to pay high prices is for non-competes," said Mr. Simmons.
Also, for hospitals, a clean-cut surgery center acquisition is one of the easiest ways to expand their marketplace. Through surgery center JVs, hospitals can execute more than one alignment model in primary, secondary or emerging markets.
There are also numerous reasons surgery centers may find a joint venture with a hospital attractive. Most ASCs are owned by surgeons, and if surgeons are the sellers to the hospital, the transaction can provide a significant return of investment. Furthermore, Mr. Simmons said surgeons can partner with hospitals without giving up their practice.
As for a governance model, Mr. Simmons said his team "strongly recommends" that when a hospital forms a JV with surgeons, members of the hospital leadership team sit in on the JV's board of directors with physicians. "This is one of the few instances where collaboration can be obtained in a mutually beneficial environment," said Mr. Simmons.
Economically, a surgery center's reimbursement varies widely depending on whether or not it has a relationship with a hospital. Medicare will pay the surgery center the same facility fee whether the hospital owns 1 percent of the surgery center or 99 percent. The hospital has to own 100 percent of the ASC to get HOPD rates. The average reimbursement for independent ASCs ranges from $1,200 to $1,700 per case, whereas the average reimbursement for hospital-affiliated ASCs is in the range of $2,200 to $3,000 per case. This significant increase for hospital-affiliated ASCs is largely to due hospitals leveraging their market power and contracts, said to Mr. Simmons.
Mr. Mallon spoke about the ownership and governance structures behind JVs. One of the more successful contracting models they've seen involves two holding companies. For one holdco, the hospital owns 80 percent while the management company, or Regent, owns 20 percent. For the other holdco, physicians hold 100 percent ownership. These two holdcos then go in on a surgery center together. Holdco one (the management company and hospital) own 51 percent of the surgery center. Holdco two (the physicians) owns 49 percent of the surgery center.
As for governance, physicians are Class A shareholders, while the hospital and the management company represent Class B shareholders. The hospital controls the Class B and majority vote, meaning the hospital votes on the management company's behalf to demonstrate control of key legal and financial issues. Physicians retain voting control on clinical issues even as minority owners, making it attractive to participate in these partnerships. The hospital has two board seats, physicians have four seats and Regent, or the third party management company, has one seat.
Mr. Mallon concluded the presentation by describing when it is best to use the recommended JV model. Opportune markets or scenarios include when physicians trust the hospital; when there is an oversaturated ASC market; when the surgery center and hospital are in a community where payers squeeze independent ASCs on price; when the hospital of choice in the market is accustomed to JVs with physicians; when the hospital of choice has a strong track record of negotiating favorable contract rates; and if the ASC has matured or does not see a significant increase of profits in the future.
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Jeffrey Simmons, chief development officer, and Tom Mallon, CEO and founder, explained the logic behind hospital-physician-surgery center joint ventures. Hospitals control the majority of ownership to negotiate reimbursement rates. Physicians have clinical and operational control over the center to maintain quality and efficiency. And finally, a third party management company can act as the "United Nations," improving efficiency and preserving the peace among all parties.
"Of all the partnerships hospitals can do with doctors, partnerships with surgery centers are relatively easy," especially compared to the work it takes to align primary care physicians, said Mr. Simmons. Hospitals may find surgery center alignment attractive because the partnership can provide lost income or new income immediately, and non-compete agreements are often designed to the hospital's advantage. "One of the key reasons hospitals are willing to pay high prices is for non-competes," said Mr. Simmons.
Also, for hospitals, a clean-cut surgery center acquisition is one of the easiest ways to expand their marketplace. Through surgery center JVs, hospitals can execute more than one alignment model in primary, secondary or emerging markets.
There are also numerous reasons surgery centers may find a joint venture with a hospital attractive. Most ASCs are owned by surgeons, and if surgeons are the sellers to the hospital, the transaction can provide a significant return of investment. Furthermore, Mr. Simmons said surgeons can partner with hospitals without giving up their practice.
As for a governance model, Mr. Simmons said his team "strongly recommends" that when a hospital forms a JV with surgeons, members of the hospital leadership team sit in on the JV's board of directors with physicians. "This is one of the few instances where collaboration can be obtained in a mutually beneficial environment," said Mr. Simmons.
Economically, a surgery center's reimbursement varies widely depending on whether or not it has a relationship with a hospital. Medicare will pay the surgery center the same facility fee whether the hospital owns 1 percent of the surgery center or 99 percent. The hospital has to own 100 percent of the ASC to get HOPD rates. The average reimbursement for independent ASCs ranges from $1,200 to $1,700 per case, whereas the average reimbursement for hospital-affiliated ASCs is in the range of $2,200 to $3,000 per case. This significant increase for hospital-affiliated ASCs is largely to due hospitals leveraging their market power and contracts, said to Mr. Simmons.
Mr. Mallon spoke about the ownership and governance structures behind JVs. One of the more successful contracting models they've seen involves two holding companies. For one holdco, the hospital owns 80 percent while the management company, or Regent, owns 20 percent. For the other holdco, physicians hold 100 percent ownership. These two holdcos then go in on a surgery center together. Holdco one (the management company and hospital) own 51 percent of the surgery center. Holdco two (the physicians) owns 49 percent of the surgery center.
As for governance, physicians are Class A shareholders, while the hospital and the management company represent Class B shareholders. The hospital controls the Class B and majority vote, meaning the hospital votes on the management company's behalf to demonstrate control of key legal and financial issues. Physicians retain voting control on clinical issues even as minority owners, making it attractive to participate in these partnerships. The hospital has two board seats, physicians have four seats and Regent, or the third party management company, has one seat.
Mr. Mallon concluded the presentation by describing when it is best to use the recommended JV model. Opportune markets or scenarios include when physicians trust the hospital; when there is an oversaturated ASC market; when the surgery center and hospital are in a community where payers squeeze independent ASCs on price; when the hospital of choice in the market is accustomed to JVs with physicians; when the hospital of choice has a strong track record of negotiating favorable contract rates; and if the ASC has matured or does not see a significant increase of profits in the future.
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