1. Under-arrangements transactions. Over the last few years, several transactions were developed that were driven by under arrangement structures. These promised that the physicians and hospital that own the infrastructure company would thrive and, at the same time, the hospital would be able to make an extra delta between the amount it was paid as a hospital outpatient department by commercial payors and Medicare, while paying surgery center infrastructure companies a lower amount. Thus, these transactions seemed to be a win-win for hospitals and surgeons investing in the infrastructure company. However, in the past 18 months, CMS has commented extremely negatively on these arrangements. Thus, they are not nearly the panacea that they used to be. Jon O’Sullivan, a senior partner with VMG Health, offers these three observations about under arrangements:
1. "Generally under-arrangement structures do not pass the 'commercially reasonable' test. In order for a venture to have a fair market value, it must also be commercially reasonable. Commercially reasonable is generally defined as a standard of reasonableness applied to ventures conducted in good faith and that the generally accepted commercial practices were followed, which is a subjective test of what a reasonable person would do in the individual circumstance, taking all factors into account. Under this test, in order for an under-arrangement to be commercially reasonable, it should be a structure that a hospital would enter into with a third party regardless of referral relationships. In actuality, most, if not all, hospitals would never enter into an under-arrangement relationship with anyone other than a referring physician, thereby bringing into question whether the structure is a commercially accepted practice of what a reasonable person would do."
2. “Under-arrangements structures generally result in a higher cost of care to the payor (resulting from the higher hospital reimbursement) for a service that is no different that that which is provided in an outpatient setting. As such, under-arrangements are often viewed as a manipulation of the system whereby the hospital uses its higher level of reimbursement to affect a relationship that is designed to preserve or enhance referral relationships."
3. “Finally, in many cases, the amount of ‘reimbursement’ paid to the physicians for services provided to the hospital under the under arrangement relationship is suspect. In most cases these reimbursement structures do not carry the same risk or administrative costs as compared to normal payor billing processes, but are often more lucrative to the physicians. As such, establishing fair market value standards for these relationships can be complicated and problematic.”
2. Leasing equipment from physician-investors is often a bad idea. While it can look attractive, leasing equipment from entities owned by ASC physicians is often a legally risky business. These arrangements can be viewed as thinly veiled disguises to incentivize physicians to use the centers; arrangements generally viewed by the government as illegal. As such, these arrangements, as a rule, should be supported by a fair market value (FMV) analysis, make business sense regardless of referrals and preferably be set as a fixed annual fee and not “per-click.”
But it’s important to note that the use of a fixed fee can create a new set of problems, says Todd Mello, ASA, AVA, MBA, principal of HealthCare Appraisers.
“For example, let’s assume that the fixed fee assumes a particular level of volume/activity (e.g. 100 procedures per year) and the FMV per click fee is determined to be $250, for example,” Mr. Mello says. “Using these numbers would result in a flat fee of $25,000 per year. However, what happens if actual volume is only 50 (i.e., as opposed to 100)? Then assuming a fixed fee of $25,000, the equivalent “per click” fee is now $500, which is greater than FMV. Accordingly, in the context of non-exclusive equipment/tech use arrangements, we favor a per click fee and have performed dozens and dozens of these types of FMV analysis for lithotripsy, green light and holmium laser arrangements throughout the country.
“If, however, the equipment is exclusive use to the ASC and is not moved in and out as needed, then a flat fee reasonably consistent with what the ASC’s annual lease expense would be if it were to lease it directly from a third-party equipment vendor (i.e., as opposed to an MD-owned venture), would be appropriate,” he says.
3. Buying-out non-productive partners is an option. There is no silver bullet for buying out the equity in a center held by a physician who does not produce as expected. There are heavily-weighted legal issues that relate to such issues. Whether or not you can buy out a partner is a critical legal question that must be examined in light of the ASC safe harbor regulations and their “one-third/one-third” rules, amongst other factors. Newly touted strategies like “squeeze out” mergers often carry substantial risk.
“When buying out physicians who are not safe harbor compliant, we generally recommend that all safe harbor tests be applied to all physicians, that the physician be granted the opportunity to cure the default and that, wherever possible, the ASC will offer the person the non-adverse versus the adverse price even if, for contemplated reasons, it has the option to pay the person the adverse price,” says Joe Zasa, CEO of Woodrum/ASD.
Further, “Be sure to give the non-compliant physician notice and a reasonable period to cure the situation,” Mr. Zasa says. “Speak directly to the physician and obtain feedback about the center. Communication is key; try to determine if his or her low census is due to equipment issues, staffing issues or patient preference. These may impact utilization. We believe that open dialogue with the physician and a reasonable period to cure effectively addresses any miscommunication and deflects any ill will going forward.”
4. Bariatrics may have reasonable long-term profit potential. Bariatric procedures are growing rapidly and increasingly being performed in ASCs. Initially, ASCs will earn outsized profits from these procedures. However, as the number of bariatric providers increases and price competition evolves, the prices on these procedures will eventually normalize and become less profitable.
While the addition of bariatric procedures may seem like a good way to boost profits, careful planning is essential, says J. Woodward Hubbard, chief development officer of Bariatric Partners.
“Minimally invasive bariatric surgery, most notably the gastric band procedure, continues to become more attractive to multispecialty surgery centers as the focus toward managing obesity grows nationally,” says Mr. Hubbard. “While many surgery center administrators see bariatric procedures as a boon to their overall revenue, adding a bariatric surgery program requires more than just purchasing new equipment and recruiting a surgeon."
Namely, that the gastric band procedure is both elective and expensive.
“Cost considerations beyond the actual surgery include a $3,200 device plus high patient acquisition costs," he says. "Bariatric patients do not typically come via the normal referral channels, resulting in the need to develop a targeted media campaign using a combination of search engine marketing, print and electronic media. Potential patients typically acquire most of their bariatric surgery education via the internet, support groups and informational seminars. The seminars are a key component of the acquisition process and surgery centers should be prepared to develop this process with the surgeon.”
Another factor to consider before investing in bariatric surgery is that the care of a bariatric patient extends beyond the surgical experience.
“Another challenge for the surgery center is development of an aftercare program to support the post surgical patient,” says Mr. Hubbard. “For the patient to maximize weight loss through use of the gastric band, they must receive regular adjustments and follow strict dietary and nutritional care plans. Otherwise, weight-loss outcomes with the gastric band procedure will not be satisfactory. Weight-loss surgery is a comprehensive program and not just a diagnostic or therapeutic procedure.
“Additionally, while the elective nature of the procedure has created a cash-pay opportunity, the long-term profit potential must be tempered by the fact that the global fees necessary to produce the predicted margins are already under pressure from surgeons willing to trade lower margins for market share.
“Finally, insurers and managed care plans continue to evaluate how to reimburse for gastric banding in a surgery center,” Mr. Hubbard says. “Their preference would be to simply pay for a laparoscopic procedure plus a device. However, with aftercare a critical part of successful patient outcomes, they must be amenable to cover costs associated with these necessary support programs. This will present a challenge in negotiating future contract rates with insurers.”