In a webinar titled "The Future of Hospital/Physician ASC Joint Ventures: New Reasons to Partner, New Ownership Models That Work," Jeffrey Simmons, chief development officer, and Michael McKevitt, SVP of business development, discussed current trends impacting hospital/physician surgery center joint ventures and highlighted prevailing partnership models. They also presented their recommended model, which allows the hospital to control the majority interest and influence reimbursement rates, while giving physicians 49 percent interest and clinical and operational control of the facility.
Trends impacting hospital/physician ASC joint ventures
According to Mr. McKevitt, the ASC industry has seen "double digit growth" over the several decades, resulting in a U.S. healthcare market that boasts more surgery centers than hospitals. This level of growth means that many U.S. regional markets are saturated with surgery centers, and growth has dwindled to less than 1 percent growth of new surgery centers. "You have a mature market, by which I mean the market is saturated by surgery centers to begin with," Mr. McKevitt says. "We're also finding that the number of physicians available in a market to do deals and surgery center projects are fewer and fewer." When Regent Surgical Health started developing ambulatory surgery centers, the company generally saw a pool of 40-60 physician investors per surgery center. Today, that number has dropped to an average of 12-20 physician investors.
While many ASC industry leaders are concerned over the lack of ASC growth, Regent has taken "the direct opposite approach," Mr. McKevitt says. "[This market] creates ample opportunity for hospitals, physicians and management companies to work in a collaborative fashion to create partnerships that meet a number of market needs," Mr. McKevitt says.
According to Mr. McKevitt, 20 percent of surgery centers are now involved in hospital partnership, and the number is only growing. Decreasing reimbursement levels for surgery centers is spurring growth of multi-specialty centers as the presence of single-specialty ASCs declines.
Why should a hospital partner with an ASC?
Hospitals can reap several advantages from a joint venture with a surgery center, Mr. McKevitt says. The comfortable setting and efficient nature of a surgery center can improve the patient experience and enhance surgeon productivity, while relationships with physicians can increase inpatient and outpatient volume and grow the hospital's service area. The added capacity of the surgery center can free up hospital operating rooms and allow the hospital to bring in more higher-acuity cases.
Mr. McKevitt mentioned a hospital in Chicago where the ORs are operating at 117 percent capacity, and the physicians on the medical staff are forced to use two hospitals to gain access to OR time. The hospital realized that 50 percent of their physicians were "splitters," meaning they were forced to share their workload between two hospitals rather than choosing one hospital as the "provider of choice." The presence of a surgery center partner can free up OR time or give those physicians a place to perform their cases.
Mr. McKevitt also pointed out that hospitals recruiting new talent may struggle to provide competitive salaries to new surgeons. However, if physicians can take part ownership of the ASC and benefit from the ancillary revenue stream, the extra income may work as the "deciding point" in favor of the hospital.
He added that a shift in OR dynamics means that inpatient cases are increasingly shifting to the outpatient setting. As the population ages and technological advances make certain procedures appropriate for the ASC, surgery centers will be necessary to accommodate hospital volumes. Surgery centers are particularly appropriate for this role because they provide quality care at a low cost.
The role of a management company
As hospital-physician ASC joint ventures increase in popularity, Mr. Simmons says many hospitals are realizing that they cannot operate surgery centers alone. Hospitals are inherently more inefficient than ASCs and may transfer policies and processes that damage ASC turnover times and increase costs unnecessarily. Hospital administration may also struggle to keep good relationships with ASC physicians if the two parties are butting heads over ASC operational issues. For these reasons, a management company is important to a joint venture partnership because it can work as a liaison between surgeons and the hospital and preserve the ASC's natural strengths.
Potential joint venture models
Mr. Simmons said there are several ways to structure a joint venture. The surgery center cannot receive higher reimbursement rates from Medicare unless the hospital owns 100 percent of the ASC, so joint ventures usually focus on improving surgery center reimbursement rates from private payors. Mr. Simmons said nationwide, surgery centers that are not 100 percent hospital-owned receive an average reimbursement of $1,200-$1,700 per case. The average reimbursement for only hospital-affiliated surgery centers where the hospital has a majority ownership is almost double.
Mr. Simmons outlined several ownership models for joint ventures:
• Classic hospital-controlled ASC. In this model, the hospital controls 51 percent, the surgeons control 39 percent and the management company controls 10 pecent. This structure can provide a compelling negotiating position for payor contracts, and physicians can specify which operational decisions they would prefer to control within the center.
• Hospital contracting model. In this model, the hospital and management company form one holdco, while the physicians form a separate holdco. The hospital owns 80 percent of the first holdco, while the management company owns 20 percent; the physicians own 100 percent of the second holdco. This means the first holdco holds a majority interest in the center, but the hospital does not. The hospital still controls the majority vote, but physicians retain voting control on clinical issues.
Recommended model: Regent Surgical Health recommends the hospital contracting model when the ASC is located in a saturated market and the hospital has experience with physician joint ventures. This model is also appropriate when the hospital is pursuing an accountable care organization and would be inclined to partner with physicians on such a project.
• Minority interest model. In this model, the physicians own a majority interest in the center and the hospital and management company split a minority interest. The physicians hold four board seats, while the management company and hospital each hold one. This model gives physicians control over operational and clinical decisions.
• HOPD model. In this model, the hospital owns 100 percent of the surgery center, enabling the ASC to receive HOPD reimbursement rates. The surgeons and the management company are used to provide operational and clinical oversight.
Related Articles on ASC Transactions and Valuation Issues:
7 Reasons Hospitals Struggle to Align With Physicians
Virginia Surgery Center Seeks to Relocate, Expand
State Rejects New North Carolina Surgery Center Proposal
Trends impacting hospital/physician ASC joint ventures
According to Mr. McKevitt, the ASC industry has seen "double digit growth" over the several decades, resulting in a U.S. healthcare market that boasts more surgery centers than hospitals. This level of growth means that many U.S. regional markets are saturated with surgery centers, and growth has dwindled to less than 1 percent growth of new surgery centers. "You have a mature market, by which I mean the market is saturated by surgery centers to begin with," Mr. McKevitt says. "We're also finding that the number of physicians available in a market to do deals and surgery center projects are fewer and fewer." When Regent Surgical Health started developing ambulatory surgery centers, the company generally saw a pool of 40-60 physician investors per surgery center. Today, that number has dropped to an average of 12-20 physician investors.
While many ASC industry leaders are concerned over the lack of ASC growth, Regent has taken "the direct opposite approach," Mr. McKevitt says. "[This market] creates ample opportunity for hospitals, physicians and management companies to work in a collaborative fashion to create partnerships that meet a number of market needs," Mr. McKevitt says.
According to Mr. McKevitt, 20 percent of surgery centers are now involved in hospital partnership, and the number is only growing. Decreasing reimbursement levels for surgery centers is spurring growth of multi-specialty centers as the presence of single-specialty ASCs declines.
Why should a hospital partner with an ASC?
Hospitals can reap several advantages from a joint venture with a surgery center, Mr. McKevitt says. The comfortable setting and efficient nature of a surgery center can improve the patient experience and enhance surgeon productivity, while relationships with physicians can increase inpatient and outpatient volume and grow the hospital's service area. The added capacity of the surgery center can free up hospital operating rooms and allow the hospital to bring in more higher-acuity cases.
Mr. McKevitt mentioned a hospital in Chicago where the ORs are operating at 117 percent capacity, and the physicians on the medical staff are forced to use two hospitals to gain access to OR time. The hospital realized that 50 percent of their physicians were "splitters," meaning they were forced to share their workload between two hospitals rather than choosing one hospital as the "provider of choice." The presence of a surgery center partner can free up OR time or give those physicians a place to perform their cases.
Mr. McKevitt also pointed out that hospitals recruiting new talent may struggle to provide competitive salaries to new surgeons. However, if physicians can take part ownership of the ASC and benefit from the ancillary revenue stream, the extra income may work as the "deciding point" in favor of the hospital.
He added that a shift in OR dynamics means that inpatient cases are increasingly shifting to the outpatient setting. As the population ages and technological advances make certain procedures appropriate for the ASC, surgery centers will be necessary to accommodate hospital volumes. Surgery centers are particularly appropriate for this role because they provide quality care at a low cost.
The role of a management company
As hospital-physician ASC joint ventures increase in popularity, Mr. Simmons says many hospitals are realizing that they cannot operate surgery centers alone. Hospitals are inherently more inefficient than ASCs and may transfer policies and processes that damage ASC turnover times and increase costs unnecessarily. Hospital administration may also struggle to keep good relationships with ASC physicians if the two parties are butting heads over ASC operational issues. For these reasons, a management company is important to a joint venture partnership because it can work as a liaison between surgeons and the hospital and preserve the ASC's natural strengths.
Potential joint venture models
Mr. Simmons said there are several ways to structure a joint venture. The surgery center cannot receive higher reimbursement rates from Medicare unless the hospital owns 100 percent of the ASC, so joint ventures usually focus on improving surgery center reimbursement rates from private payors. Mr. Simmons said nationwide, surgery centers that are not 100 percent hospital-owned receive an average reimbursement of $1,200-$1,700 per case. The average reimbursement for only hospital-affiliated surgery centers where the hospital has a majority ownership is almost double.
Mr. Simmons outlined several ownership models for joint ventures:
• Classic hospital-controlled ASC. In this model, the hospital controls 51 percent, the surgeons control 39 percent and the management company controls 10 pecent. This structure can provide a compelling negotiating position for payor contracts, and physicians can specify which operational decisions they would prefer to control within the center.
• Hospital contracting model. In this model, the hospital and management company form one holdco, while the physicians form a separate holdco. The hospital owns 80 percent of the first holdco, while the management company owns 20 percent; the physicians own 100 percent of the second holdco. This means the first holdco holds a majority interest in the center, but the hospital does not. The hospital still controls the majority vote, but physicians retain voting control on clinical issues.
Recommended model: Regent Surgical Health recommends the hospital contracting model when the ASC is located in a saturated market and the hospital has experience with physician joint ventures. This model is also appropriate when the hospital is pursuing an accountable care organization and would be inclined to partner with physicians on such a project.
• Minority interest model. In this model, the physicians own a majority interest in the center and the hospital and management company split a minority interest. The physicians hold four board seats, while the management company and hospital each hold one. This model gives physicians control over operational and clinical decisions.
• HOPD model. In this model, the hospital owns 100 percent of the surgery center, enabling the ASC to receive HOPD reimbursement rates. The surgeons and the management company are used to provide operational and clinical oversight.
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Related Articles on ASC Transactions and Valuation Issues:
7 Reasons Hospitals Struggle to Align With Physicians
Virginia Surgery Center Seeks to Relocate, Expand
State Rejects New North Carolina Surgery Center Proposal