Is Partnering with a Hospital a Smart Move for Your ASC?

In the changing healthcare environment, the answer may be yes, but there are caveats.

By Desiree Ifft, Contributing Editor

One of the longest-running story lines in ophthalmology — competition between physician-owned ASCs and hospitals — is throwing in a plot twist. With increasing frequency, general hospitals are seeking ownership stakes in the facilities eye doctors have been independently developing and operating for decades. (See chart, “Ownership of Ophthalmology-focused ASCs, page 10.”) Several dynamics in the healthcare marketplace are pushing hospitals in this direction, bringing to light the potential benefits. Ophthalmologists who own their own ASCs may benefit as well.

Is selling an ownership stake to a hospital the right move for your ASC? Answering this question requires, like any business decision you make, due diligence. To begin, you must understand why hospitals are pursuing this strategy, how the new partnerships between hospitals and ASCs are being structured and how to ensure your interests are protected if you decide to proceed.

What's in it for the Hospitals?

“It used to be that hospitals wanted nothing to do with ASCs because they viewed them as competitors,” says Ira J. Coleman, a partner in the law firm of McDermott Will & Emery and head of its Miami Health Industry Advisory practice. However, pressure from the government and other insurance providers to reduce healthcare costs has been building, so hospitals need to find lower-cost ways to provide services. ASCs offer a very effective way to do that. Ophthalmic ASCs, in particular, have a proven track record of providing safe, efficient, high-volume, high-quality care at a much lower cost than hospitals. Furthermore, eye surgeons and their patients prefer the convenience of ASCs for providing and receiving care when medically appropriate.

Containing costs, improving the quality of care and integrating care delivery are the major goals set forth by the Patient Protection and Affordable Care Act (PPACA). The Act authorizes entities called Accountable Care Organizations (ACOs) to act as vehicles for achieving these goals. Basically, ACOs are organizations that bring together groups of providers who must agree to take responsibility for the quality of care, cost of care and overall experience delivered to the Medicare beneficiaries they cover. “Hospitals participating in ACOs will need to deliver high-quality services at low cost and be able to prove it,” Coleman explains. “They'll have to be capable of covering all the healthcare needs of their patient populations. Because the population is aging, eye care will be an important service, and it's an area in which hospitals have struggled to provide cost-effective care.”

Figure 1. The Eye Surgery Center of Michigan was built from the ground up as a joint venture between the local hospital and physicians. The physician-owners hold a controlling interest in the facility.

ACOs don't eliminate the current Medicare fee-for-service model, but the ACO receives “bonus payments” when it keeps costs below predetermined levels. Coleman says this means the government, as well as private insurers, will be moving more toward an at-risk, rather than a per-service, reimbursement system. Such a system will tend to look like the capitated contracts of the past. “For example, let's say the insurance carrier allots $1,000 per month for the care of an individual,” Coleman asserts. “If you're providing that care in the more expensive hospital setting, your dollars won't go as far. If you can provide the same care and safety with higher patient satisfaction and less cost, you'll be much better off financially. ASCs are a key piece in that puzzle.”

By securing ownership stakes in ASCs, hospitals also hope to gain market share. “Hospitals have been losing market share to ASCs for the past 15 years,” says Michael McKevitt, senior vice president at Regent Surgical Health. “Hospitals are realizing they would prefer to regain lost market share while at the same time implementing a collaborative strategy with physician owners of ASCs.” Regent is an ASC development and management company that facilitates physician/hospital joint ventures to operate ASCs. The company, which holds a minority stake in the facilities, believes that when hospitals combine their talents with those of physicians and Regent as a corporate partner, they can defend market share, enhance physician loyalty, increase OR capacity and improve quality, all of which help to ensure sustainable growth.

Physician loyalty is important to hospitals because doctors are still their referral base — in other words, their customers. “Hospitals aren't averse to partnering with physicians in an ASC as long as the physicians feel good about the facility and will use the hospital on the inpatient side of things when they need it,” Coleman says. Adds McKevitt, “Given the uncertainties of future healthcare economics, including that ACOs aren't yet clearly defined, it's best for hospitals to have collegial relationships with the referral base. Collaboration with physicians via ASC partnerships is preferable to competing with them for market share.”

OR capacity affects market share as well. For example, the ORs at one hospital with which Regent partners had been operating at 117% of capacity. “Doctors couldn't get cases on the schedule,” McKevitt says. “Now that the hospital has partnered with us and a physician-owned ASC, it has added outpatient OR capacity and can recapture the inpatient cases it was losing.”

Coleman also says that there are very few ways hospitals can successfully collaborate with physicians, because laws and regulations prohibit such relationships. Therefore, a partnership with a physician-owned ASC can be a “very powerful tie.”

What's in it for you?

At the same time hospitals are looking to partner with physician-owned ASCs, physician owners of ASCs are facing challenges of their own. First and foremost, the federal government has repeatedly ratcheted down ASC reimbursement, which is now at about 60% of what hospital outpatient departments (HOPDs) are reimbursed for the same procedures. Compounding this problem is that stand-alone ASCs typically have far less clout than hospitals when it comes to negotiating profitable contracts with non-government insurance carriers. As a result, many ASCs have chosen not to join insurance networks. They still have access to payers' patients, but only as out-of-network providers. When patients choose to undergo care out-of-network, it's more costly to the health plan. “Payers are less and less willing to tolerate this out-of-network phenomenon,” Coleman says. “So, they're redesigning benefits and saying to patients, if you go out-of-network, we'll only cover X dollars. So if you're an ASC whose out-of-network strategy is under this type of pressure, it may serve you well to partner with a hospital so you can benefit from its much richer insurance contracts. When hospitals own a stake in an ASC, they can use their negotiating clout to demand reimbursement rates for that facility that are similar to their hospital rates.”

Experts say that ASCs can't ignore the potential effects of healthcare reform and ACOs. As McKevitt notes, “Hospitals aren't the only providers that will be asked to do more with less as healthcare reform unfolds. Ambulatory surgery centers must determine how to position themselves to remain viable in the future. How can they accommodate as many payers as possible and keep up with patient demand? A hospital partner may be able to not only give the ASC access to better managed care and purchasing agreements, but also, in terms of ACOs, a larger pool of talent and financial resources for taking care of the center's patient population.”

Another potential benefit of a hospital partnership is an enhanced ability to recruit surgeon investors and utilizers to the ASC. This is becoming more difficult for ASCs because hospital employment of physicians is increasing rapidly, making fewer doctors available for ASC involvement. The name recognition of a hospital also can be an asset to an ASC for recruiting both physicians and patients. “When doctors sell a percent interest in their ASC to a hospital, it is a liquidity event that can be helpful in these hard economic times,” McKevitt says. “But more importantly, it can allow them to reposition the ASC for sustained growth and profitability while preserving their clinical autonomy. They can continue to enjoy the benefits of ASC ownership while adding a longer-term strategic plan and exit plan. When they're ready to retire, their center is better situated to recruit additional doctors into the partnership, so they may be able to exit the center at a higher valuation.”

On the other hand, McKevitt and Coleman agree, partnering with a hospital may not be a sound move for an ASC if the hospital can't offer enough benefit in terms of better payer or purchasing agreements to make the ASC more profitable. According to McKevitt, in some cases, an ASC may have better managed care contracts than the local hospital. “In some regions of the country, payers have been able to negotiate very strong positions with the hospitals. Also, some hospitals have discounted their outpatient services in order to preserve their inpatient revenue, so an ASC would have trouble being profitable in a partnership with certain hospitals.”

How Hospital/ASC Partnerships Are Being Structured

In their quest to benefit from ASC ownership, some hospitals are purchasing facilities outright. With 100% hospital ownership, the formerly physician-owned facilities are no longer considered freestanding ASCs for the purposes of Medicare licensure, accreditation and reimbursement. Instead, they're considered HOPDs and therefore receive Medicare's much higher HOPD reimbursement rates. This is increasingly considered a shortsighted approach. “The bump in revenue is nice, but hospitals using that strategy better have a plan for keeping the doctors connected to the ASC, incentivized to utilize it, and vested in its continued success and improvement,” Coleman says. He has seen some hospitals buy 100% ownership and grant the former physician-owners a management contract for the ASC and related business lines. “It has to be worthwhile for the physicians, but you have to be careful of what type of performance you reward. Rewarding on how profitable the center is or how many patients are coming through are legal no-nos. Fewer of these service line deals are taking place for that reason.”

Instead, the avenue most hospitals are more inclined to follow is a joint venture partnership with an ASC and, in some cases, also an ASC management company, such as Regent, American SurgiSite Centers or Ambulatory Surgical Centers of America. “In most situations, being in partnership with physicians is more important to the hospital than an ‘upgrade' to HOPD reimbursement rates,” says Regent's McKevitt.

This was the thinking for St. John Providence Health System (SJPHS) in Michigan when it was approached by three groups of ophthalmologists proposing an ASC joint venture. The proposal came to fruition nearly 4 years ago. The ASC, called the Eye Surgery Center of Michigan, was built from the ground up with physician involvement in every phase. It provides cataract, refractive, glaucoma and oculoplastic surgery. Nine doctors have a controlling ownership interest in the facility, and SJPHS has a minority interest. A governing board, which consists of five physician-owners and hospital system executive Doug Rich, is responsible for oversight and decision-making. Most day-to-day operational issues are delegated to ASC administrator Michael Cosgrove.

Rich says SJPHS sees the joint venture as a huge value going forward from a healthcare reform perspective. “Surgeries can be performed in the ASC at a lower cost than in any hospital-based environment. Furthermore, it provides a substantial return on investment, and we now have our brand flag in a market that had been dominated by one of our competitors. Most ophthalmologists in our area have no relationship with hospitals or health systems, and our partnership allowed us to maintain the relationships we had with ophthalmologists and broaden our physician network. I'm amazed at the level of surgeon involvement in quality and business issues. We would never get that type of engagement if we owned 100% of the ASC.”

Leslie Grosinger, MD, FACS, is medical director of the Eye Surgery Center of Michigan and one of its owners. He says the partnership gives the ASC access to the hospital's legal and marketing resources, which has been helpful. The joint venture also enables the doctors to perform nearly all of their cases at the ASC. They don't have to travel to other hospitals because SJPHS participates with virtually all health plans. Perhaps more importantly, Dr. Grosinger says, “We feel if there's a dramatic change in the way health care is delivered, it will be beneficial for us to have this alliance. It will likely be easier for us to gain contracts to provide care, since we are aligned with a large hospital system rather than independent.” Dr. Grosinger says he and his colleagues had seen how some ASCs controlled by hospitals weren't doing very well, so they wanted to be sure they could control their own destiny. “To the hospital's credit, they never asked for a majority ownership stake. We've been very lucky. Being part of a larger, more bureaucratic organization sometimes means we aren't as nimble as we'd like to be in some situations. On the other hand, we have a femtosecond laser in our ASC, something most hospitals would likely balk at. Because we have such a good relationship with our partner, we were able to make them understand why the laser was a good addition.”

ASC administrator Cosgrove says he wouldn't be surprised at all if more hospital/ASC joint ventures arose from the ground up. “When you have a good plan and the right partners from the outset, you're well-suited to have a very successful business operation. Ours has been a mutually beneficial relationship from day one.”

Ophthalmology Ahead of the Times Again

Wills Eye Institute, based in Philadelphia, has been entering into joint ventures with ASCs in the tri-state area since 1998. For many years prior to that, it ran its own ASC network, owning 100% of each facility. “Over time, it became strategically more important to partner with physicians in the facilities, rather than be the sole owner,” explains Joseph Bilson, executive director of Wills Eye. “Because of the way our 10 joint-venture ASCs are structured, our physician co-owners are incentivized along with us to provide cost-effective, quality care. They also help to provide direction for our overall success. It's all about teamwork in today's healthcare environment. Without it, you can really struggle.”

Each Wills joint-venture ASC has its own governing board and medical staff leadership. In most, the hospital owns 51% equity and the physicians own 49%. “But we share equally in the governance,” Bilson points out. “Typically, the board includes 2-3 doctors and the same number of hospital representatives.”

Equity Percentage May Not Equal Decision-making Power

There is no cookie-cutter approach to structuring hospital/ASC joint ventures, but in cases where the hospital is a nonprofit, it may be required to have a controlling interest and/or reserve certain powers, for reasons such as maintaining its tax-exempt status. Nonprofits aside, the most popular arrangement looks very much like the Wills model. In some arrangements, the hospital holds the 51% stake along with an ASC management company. This was not necessarily true in the past. “It used to be the management companies, if they were involved, would only provide management services for a fee,” McDermott Will & Emery's Coleman explains. “The better companies have realized that it's better for the entire venture if they have equity so all three parties' interests and goals are aligned. Plus, with equity, the management company shares in the profits if the ASC does well because of its services.”

One aspect of joint ventures important for doctors to understand is that the percent equity each party holds in the ASC doesn't necessarily correlate to the strength of the representation it has in the governing structure. For example, the structure Regent prefers is 51% ownership for it and the hospital, and 49% for the physician owners. “However, as a means of checks and balances, the physicians have more authority on the board,” McKevitt says. “They usually have four seats, the hospital has three seats, and Regent has one. In addition, physicians retain control of the ASC's daily operations, and as such, their clinical autonomy.”

Other joint-venture governing structures may not match the percentages of equity as closely. It's the operating agreement that dictates the key details of management and governance. For example, who has the authority to make decisions on behalf of the joint venture? As Bruce Maller, founder and president of the nationally recognized healthcare consulting firm BSM Consulting, says, “The surgeons should ensure they're an integral part of the governing structure so, at a minimum, major decisions cannot be made without their approval. When considering entering into a joint venture with a hospital, a number of business and legal issues need to be considered. The best way for doctors to make sure their rights are protected is to engage legal and tax advisors that have experience with these types of transactions. The advisors should be engaged early in the negotiations.”

Maller lists several other key issues joint-venture operating agreements should address:

• What if the hospital or third-party company that's managing the ASC is doing a poor job? There needs to be a means to remove a manager that, based on objective standards, is not performing in a satisfactory manner.
• What happens if the parties are not getting along or the surgeons no longer want to be part of the joint venture? Will one party have the right to re-acquire the interests of the other parties? Retaining this right can be a means for the surgeons to protect their interests.
• Explicit terms that address death, disability and retirement provisions for the surgeons should be clearly laid out. The redemption price and payment terms should be based on fair market value of the shares at the time of redemption.
• Restrictions on competitive activities, both during and after the term of the joint venture, must be carefully drafted to ensure the surgeons have few if any restrictions on ownership or operation of an ASC following termination of the joint venture.
• The operating agreement must provide a well-defined and objective means of determining the timing and amounts of distributions to partners.

Meeting the Future Head-on

The Eye Surgery Center of Michigan's Dr. Grosinger agrees on the primary importance of a joint venture's operating agreement. “Even though we were very much on the same page as our hospital partner, we made sure everything was codified,” he says, adding that from his point of view, hospital/ASC joint ventures are a big part of “what healthcare reform should look like. We're all motivated to provide the finest care possible in a cost-effective manner, and integrating our strengths means we're better prepared for any future challenges.” ◊