Hospitals and ASC management companies are increasingly interested in forming joint ventures with physician-owned endoscopy centers. This interest is because physician-owned and operated endoscopy centers have proven to be very:
• Economical with costs substantially below hospital costs
• Efficiently operated with high patient throughput
• Patient- and physician-friendly
• Profitable with EBITDA margins of 40 percent or higher
With the legislated changes in facility fee reimbursements for GI procedures performed in physician-owned ASCs, a joint venture with a hospital and/or an ASC management company may look attractive. In this article, we shall explore the pros and cons of a joint venture with a hospital versus an ASC management company, and will suggest a model that includes the best of both worlds.
Why a joint venture: A joint venture can lower your risk, provide access to capital, better contracts and professional management expertise, improve center performance and boost distributions to the partners. Many physicians with successful centers are contemplating a joint venture to diversify their investments and to take some money off the table as a primary goal, but there are almost always other important goals. These goals typically include improved payor contracts, recruiting new partners, attracting new cases and perhaps other specialties, improved efficiency, higher facility utilization and new growth strategies that will ensure that distributions to the partners continue to increase.
Why a joint venture with a hospital: While hospitals have historically buried their head in the sand when it comes to participating with physician-owned GI centers, hospital executives are now sitting up and taking notice. Most GI centers are far more profitable than their hospital counterparts and now the hospitals want a piece of this action. The upside: A joint venture with a hospital may give the GI center access to lucrative hospital contracts and reimbursements that can boost center revenues by 35 percent or more for a significant segment of your patients. The downside: Hospitals often want control, say they need to own at least 51 percent, often demand a below-market "income approach" valuation and want to manage the center — just what you thought you had gotten away from. Often it is difficult for physicians and hospitals to sit down together and craft a mutually acceptable business plan: hospitals are notoriously difficult to negotiate with and they take forever to close a deal.
Why a joint venture with an ASC management company: Your center is your creation and you like the way it is operated and managed. Yes, there may be some inefficiencies and your contracts may not be the best, but you are making good profits and everyone is happy. However, you know of other centers that have sold a minority (10-40 percent) or majority (51-60 percent) interest to an ASC management company, and the physician-owners banked some attractive capital gains. Their center is now professionally managed and their distributions have increased, all with less involvement by the physicians, which means more family time and fewer headaches. The management company has worked out a way for retiring partners to sell their shares at a fair price and has recruited younger physician-partners whose cases more than offset the loss of the retiring partner's cases. Also, the management company has recruited a pain group to use the center when it is not being used for GI. Best of all, the center is still being run the way you want it run: efficiently, economically, patient- and physician-friendly, and profitably, just what you wanted when you created it. Sound too good to be true — it isn't. This is a typical scenario for a joint venture with a good ASC management company that actively manages the center.
The best of both worlds: Which is the best hospital joint venture partner for you: a hospital partner with better contractual reimbursements or an ASC management company that will focus on increasing profitability and will manage the center the way you want it managed? A three-way joint venture that combines the best of both worlds is possible and becoming a popular model. Each of the three parties (physicians, ASC management company and hospital) has ownership, each has a vested interest in seeing the center become more successful, and the center has joint venture partners whose combined contributions result in higher profitability.
How to structure a three-way joint venture: First and foremost, know your goals and engage a consultant with expertise in structuring three-way deals to advise you. Second, negotiate first with the ASC management company. They will typically offer a higher price than the hospital, and an offer from an ASC management company establishes the fair market value for the center. The management company will typically offer to purchase a 10-40 percent interest at a fair market value. Third, the ASC management company will bring the hospital in as a minority (or occasionally a majority partner, depending on the local circumstances) partner.
Utilizing a management partner that is unbiased and totally focused on the success of the facility will provide professional business expertise and guidance to ensure that the deal is successfully accomplished. The physicians will retain a 30-50 percent interest. Your ASC management company will ensure that your center will continue to be run the way you want it to run. With a hospital partner, the center will now qualify for the hospital's contracted rates and hospital outpatient department reimbursements that are typically 35 percent higher than ASC reimbursements. Your distributions will be significantly higher from your current patient base.
How to value your center for a joint venture: Assuming that your initial joint venture partner is the ASC management company buying a minority interest, you should anticipate selling a 10-40 percent interest at approximately five times EBITDA. This might seem low compared to the six or six-and-a-half times EBITDA that you would receive for selling a 51 percent majority interest, but if one of your goals is to maximize ongoing distributions to the physician partners, remember that in a three-way deal, your distributions going forward will be substantially higher than when you operated independently.
Which is most important to you and your partners: More cash in a lump sum now and lower distributions in the future, or less cash now and higher distributions in the future? Both choices are possible. Two and three-way joint venture deals can be structured to meet different goals for different partners. The older physicians can take more off the table now and receive smaller future distributions, and the younger partners can retain more ownership interest and continue to enjoy larger distributions into the future.
Conclusion: Three-way endoscopy center joint ventures can be very beneficial for the physician-owners if structured so that the physicians continue to control all medical decisions, the ASC management company manages the business the way the physicians want it managed and the hospital-partner provides access to higher reimbursements.
Learn more about ASCs Inc.
• Economical with costs substantially below hospital costs
• Efficiently operated with high patient throughput
• Patient- and physician-friendly
• Profitable with EBITDA margins of 40 percent or higher
With the legislated changes in facility fee reimbursements for GI procedures performed in physician-owned ASCs, a joint venture with a hospital and/or an ASC management company may look attractive. In this article, we shall explore the pros and cons of a joint venture with a hospital versus an ASC management company, and will suggest a model that includes the best of both worlds.
Why a joint venture: A joint venture can lower your risk, provide access to capital, better contracts and professional management expertise, improve center performance and boost distributions to the partners. Many physicians with successful centers are contemplating a joint venture to diversify their investments and to take some money off the table as a primary goal, but there are almost always other important goals. These goals typically include improved payor contracts, recruiting new partners, attracting new cases and perhaps other specialties, improved efficiency, higher facility utilization and new growth strategies that will ensure that distributions to the partners continue to increase.
Why a joint venture with a hospital: While hospitals have historically buried their head in the sand when it comes to participating with physician-owned GI centers, hospital executives are now sitting up and taking notice. Most GI centers are far more profitable than their hospital counterparts and now the hospitals want a piece of this action. The upside: A joint venture with a hospital may give the GI center access to lucrative hospital contracts and reimbursements that can boost center revenues by 35 percent or more for a significant segment of your patients. The downside: Hospitals often want control, say they need to own at least 51 percent, often demand a below-market "income approach" valuation and want to manage the center — just what you thought you had gotten away from. Often it is difficult for physicians and hospitals to sit down together and craft a mutually acceptable business plan: hospitals are notoriously difficult to negotiate with and they take forever to close a deal.
Why a joint venture with an ASC management company: Your center is your creation and you like the way it is operated and managed. Yes, there may be some inefficiencies and your contracts may not be the best, but you are making good profits and everyone is happy. However, you know of other centers that have sold a minority (10-40 percent) or majority (51-60 percent) interest to an ASC management company, and the physician-owners banked some attractive capital gains. Their center is now professionally managed and their distributions have increased, all with less involvement by the physicians, which means more family time and fewer headaches. The management company has worked out a way for retiring partners to sell their shares at a fair price and has recruited younger physician-partners whose cases more than offset the loss of the retiring partner's cases. Also, the management company has recruited a pain group to use the center when it is not being used for GI. Best of all, the center is still being run the way you want it run: efficiently, economically, patient- and physician-friendly, and profitably, just what you wanted when you created it. Sound too good to be true — it isn't. This is a typical scenario for a joint venture with a good ASC management company that actively manages the center.
The best of both worlds: Which is the best hospital joint venture partner for you: a hospital partner with better contractual reimbursements or an ASC management company that will focus on increasing profitability and will manage the center the way you want it managed? A three-way joint venture that combines the best of both worlds is possible and becoming a popular model. Each of the three parties (physicians, ASC management company and hospital) has ownership, each has a vested interest in seeing the center become more successful, and the center has joint venture partners whose combined contributions result in higher profitability.
How to structure a three-way joint venture: First and foremost, know your goals and engage a consultant with expertise in structuring three-way deals to advise you. Second, negotiate first with the ASC management company. They will typically offer a higher price than the hospital, and an offer from an ASC management company establishes the fair market value for the center. The management company will typically offer to purchase a 10-40 percent interest at a fair market value. Third, the ASC management company will bring the hospital in as a minority (or occasionally a majority partner, depending on the local circumstances) partner.
Utilizing a management partner that is unbiased and totally focused on the success of the facility will provide professional business expertise and guidance to ensure that the deal is successfully accomplished. The physicians will retain a 30-50 percent interest. Your ASC management company will ensure that your center will continue to be run the way you want it to run. With a hospital partner, the center will now qualify for the hospital's contracted rates and hospital outpatient department reimbursements that are typically 35 percent higher than ASC reimbursements. Your distributions will be significantly higher from your current patient base.
How to value your center for a joint venture: Assuming that your initial joint venture partner is the ASC management company buying a minority interest, you should anticipate selling a 10-40 percent interest at approximately five times EBITDA. This might seem low compared to the six or six-and-a-half times EBITDA that you would receive for selling a 51 percent majority interest, but if one of your goals is to maximize ongoing distributions to the physician partners, remember that in a three-way deal, your distributions going forward will be substantially higher than when you operated independently.
Which is most important to you and your partners: More cash in a lump sum now and lower distributions in the future, or less cash now and higher distributions in the future? Both choices are possible. Two and three-way joint venture deals can be structured to meet different goals for different partners. The older physicians can take more off the table now and receive smaller future distributions, and the younger partners can retain more ownership interest and continue to enjoy larger distributions into the future.
Conclusion: Three-way endoscopy center joint ventures can be very beneficial for the physician-owners if structured so that the physicians continue to control all medical decisions, the ASC management company manages the business the way the physicians want it managed and the hospital-partner provides access to higher reimbursements.
Learn more about ASCs Inc.