There exist over 5,000 Medicare certified ASCs in the country, up from around 3,000 ASCs a decade ago. Over 90 percent of these ASCs have physician ownership. Around 20 percent of the ASCs have a hospital as an equity partner. Approximately 20 percent of ASCs also have a corporate management partner. Furthermore, a meaningful percentage of these ASCs are three-way joint ventures between surgeons, a management company and hospital.
There are numerous benefits a hospital can accrue in participating in an ASC joint venture including improved recruitment and retention, enhanced market share, and improved operating room capacity. After having made the choice to pursue a joint venture, the choice on the optimal ownership structure given a specific operating environment must be assessed closely.
Three dominant paradigms exist: the hospital minority ownership model, the control model, and the co-management agreement.
The joint venture catalyst
The desire to recruit and retain physicians represents the primary impetus for a hospital to incorporate an ASC JV in its delivery network. Major draws for surgeons include the potential economic upside of an ownership interest in the ASC, the enhanced productivity in the ASC environment and the patient experience in the ASC. Further, surgeons recruited to a hospital through an ASC often come from the local market, have established practices and, especially in suburban and urban environments, operate at more than one hospital. As such, through the ASC, the hospital can capture outpatient volume which otherwise goes to competing hospitals. Finally, hospitals involved in an ASC are well poised to shift outpatient volume to the ASC in order free up operating room capacity for both higher acuity and more inpatient cases in the hospital’s main operating rooms. Logically, the hospitals best positioned to deploy
such a strategy are those that have operating rooms that are at high capacity utilization.
Minority ownership model
After having validated the benefits of an ASC joint venture, hospitals often seek a minority stake in an ASC. Under this ownership model, three classes of shareholders typically exist. Physicians represent Class A shareholders and own over 51 percent of the ASC. The hospital and potentially a management company, Class B and C shareholders respectively, own the remainder. Because of their majority position, physicians in effect have operational control over all key decisions of the ASC such as credentialing, partnership decisions, budget approvals, capital expenditures, and selection of the management company.
There are various instances in which a hospital seeks to have a minority position. For example, in a given market, an ASC has successfully captured the majority of a hospital’s outpatient volume. The hospital leadership concludes the hospital is better off with a minority position in the ASC vs. no position at all.
The ASC also seeks to align itself close to the hospital through sale of a minority stake. Often, hospital minority positions in a surgery center originate from majority positions. Hospital
majority-owned ASCs often fail due to their inability to meet physicians’ needs of administrative
authority and financial returns. Hospitals often engage ASC management companies to syndicate their majority position out to surgeons, reducing the hospital’s ownership to a minatory stake.
Hospital control model
The hospital control model can represent a superior alternative to the hospital minority ownership model, depending on the specific market environment. In the hospital control model, two classes of shareholders typically exist. Physicians represent one Class A owning 49 percent or less of the ASC. The hospital and potentially a management company represent Class B shareholders, owning 51 percent or more of the ASC. Furthermore, the hospital owns the majority of the Class B shares. As such, per the ASC’s operating agreement, the hospital controls the vote the for all the Class B shares on key decisions which enable the hospital to illustrate its controlling interest in the facility. These decisions include the budget, debt service, contracting and strategic sales. As such, the hospital can represent itself as the majority owner of the facility.
The hospital control model can be optimal if two criteria are satisfied:
1. The hospital has superior insurance contracts to the ASC.
2. The hospital has the ability and willingness to assert its contracting power to benefit the ASC.
Under the control model, hospitals can make a credible statement to payors that the hospital has controlling interest in the ASC. However, it does not necessarily follow that the hospital can procure superior contracts for the facility. Note that Medicare pays hospitals almost 200 percent more than ASCs for the same outpatient procedures. While under the control model, a hospital cannot procure the same hospital outpatient department (HOPD) rates for the ASC. However, hospitals have successfully contracted rates at a 25 percent discount to HOPD rates.
In allowing a hospital to have controlling rights in an ASC, physicians generally will be concerned about the financial downside of less ownership as well as the implications of limited control. Various factors offset these concerns. In terms of ownership, while physicians may own less of the center, if the joint venture executes the Control Model well, physicians will experience higher investment returns than if they were majority owners. With respect to the physicians’ concern regarding loss of control, successful JVs under the control model carve out numerous operating decisions to the physicians such as choice of management company, hiring of an administrator, admission to the partnership and the anesthesia provider.
Co-management model
As an alternative to joint ventures based on ownership, Co-management arrangements are becoming an increasingly common form to structure ASC joint ventures. In a co-management arrangement, the hospital owns 100 percent of the ASC and bills the facility’s volume as a hospital outpatient department. The hospital engages surgeons and potentially a management company to provide clinical and operational oversight to the facility and in return compensates these parties at fair-market value for their services.
Typical fees in co-management relationships range between 2 percent-6 percent of net revenues of the facility. In compensating the surgeons, significant attention must be placed on defining performance metrics and determining fair market value in order to remain clear of legal scrutiny surrounding physician self-referral and anti-kickback statues. While the co-management model is largely a nascent structure, but based on discussion with industry practitioners, the model works best at physician-owned ASCs which lacked historical economic success. If physicians earn less in a co-management relationship than as former owners of the ASC, the relationship with the hospital can likely become strained.
Conclusion
In the new era of the accountable care organization, incorporating ASCs, 90 percent of which are physician owned, into healthcare delivery systems will assume increasing importance. Central to the issue of physician alignment is the selection of the appropriate joint-venture structure for the ASC. Depending on the market environment with payors, the Minority Ownership, Control, and co-management models can all generate optimal alignment outcomes.
The Surgery Center of Reno is an example of restructuring a joint venture to create a minority
ownership JV that aligns interests with surgeons and benefits all partners. Prior to 2005, St. Mary’s Medical Center, a large hospital in Reno, Nev., owned more than 90 percent of the ASC on its campus.
While the center enjoyed high volume, numerous low paying cases, oftentimes lower than the costs, poor reimbursements due to, at best, average managed care contracts, high labor and supply costs eroded the facility’s profitability.
The board contacted a management company to recruit surgeons and restructure the joint venture. A new JV was created with the management company and 19 additional local surgeons, many of whom practiced at the competitor’s hospital. The hospital retained a minority share and one seat on the seven-member board. The management company expanded the new partnership from only ENT and orthopedics to include spinal neurosurgery, bariatric surgery, urology and pain management.
During the first year under the new structure, the center generated a 50 percent return on investment; by the end of the 14th month of opening, the facility has had a 110 percent return on investment.
Many of the physician partners moved their practices to St. Mary’s campus, which resulted in an
increase in activity by these physicians at the hospital. The ASC continues to perform extraordinarily well even after four years of operations. St. Mary’s has since opened a second outpatient facility in competitor territory to expand its system’s reach.
Ownership Structure
Before: Hospital owned 90% and physicians owed 10%
After: Physicians own 74%, hospital owns 14%, and management Group owns 12% control. St. Mary’s and the management group each have one seat on the seven person board. The physicians have complete operational and clinical control of the facility.
Learn more about Regent Surgical Health.
There are numerous benefits a hospital can accrue in participating in an ASC joint venture including improved recruitment and retention, enhanced market share, and improved operating room capacity. After having made the choice to pursue a joint venture, the choice on the optimal ownership structure given a specific operating environment must be assessed closely.
Three dominant paradigms exist: the hospital minority ownership model, the control model, and the co-management agreement.
The joint venture catalyst
The desire to recruit and retain physicians represents the primary impetus for a hospital to incorporate an ASC JV in its delivery network. Major draws for surgeons include the potential economic upside of an ownership interest in the ASC, the enhanced productivity in the ASC environment and the patient experience in the ASC. Further, surgeons recruited to a hospital through an ASC often come from the local market, have established practices and, especially in suburban and urban environments, operate at more than one hospital. As such, through the ASC, the hospital can capture outpatient volume which otherwise goes to competing hospitals. Finally, hospitals involved in an ASC are well poised to shift outpatient volume to the ASC in order free up operating room capacity for both higher acuity and more inpatient cases in the hospital’s main operating rooms. Logically, the hospitals best positioned to deploy
such a strategy are those that have operating rooms that are at high capacity utilization.
Minority ownership model
After having validated the benefits of an ASC joint venture, hospitals often seek a minority stake in an ASC. Under this ownership model, three classes of shareholders typically exist. Physicians represent Class A shareholders and own over 51 percent of the ASC. The hospital and potentially a management company, Class B and C shareholders respectively, own the remainder. Because of their majority position, physicians in effect have operational control over all key decisions of the ASC such as credentialing, partnership decisions, budget approvals, capital expenditures, and selection of the management company.
There are various instances in which a hospital seeks to have a minority position. For example, in a given market, an ASC has successfully captured the majority of a hospital’s outpatient volume. The hospital leadership concludes the hospital is better off with a minority position in the ASC vs. no position at all.
The ASC also seeks to align itself close to the hospital through sale of a minority stake. Often, hospital minority positions in a surgery center originate from majority positions. Hospital
majority-owned ASCs often fail due to their inability to meet physicians’ needs of administrative
authority and financial returns. Hospitals often engage ASC management companies to syndicate their majority position out to surgeons, reducing the hospital’s ownership to a minatory stake.
Hospital control model
The hospital control model can represent a superior alternative to the hospital minority ownership model, depending on the specific market environment. In the hospital control model, two classes of shareholders typically exist. Physicians represent one Class A owning 49 percent or less of the ASC. The hospital and potentially a management company represent Class B shareholders, owning 51 percent or more of the ASC. Furthermore, the hospital owns the majority of the Class B shares. As such, per the ASC’s operating agreement, the hospital controls the vote the for all the Class B shares on key decisions which enable the hospital to illustrate its controlling interest in the facility. These decisions include the budget, debt service, contracting and strategic sales. As such, the hospital can represent itself as the majority owner of the facility.
The hospital control model can be optimal if two criteria are satisfied:
1. The hospital has superior insurance contracts to the ASC.
2. The hospital has the ability and willingness to assert its contracting power to benefit the ASC.
Under the control model, hospitals can make a credible statement to payors that the hospital has controlling interest in the ASC. However, it does not necessarily follow that the hospital can procure superior contracts for the facility. Note that Medicare pays hospitals almost 200 percent more than ASCs for the same outpatient procedures. While under the control model, a hospital cannot procure the same hospital outpatient department (HOPD) rates for the ASC. However, hospitals have successfully contracted rates at a 25 percent discount to HOPD rates.
In allowing a hospital to have controlling rights in an ASC, physicians generally will be concerned about the financial downside of less ownership as well as the implications of limited control. Various factors offset these concerns. In terms of ownership, while physicians may own less of the center, if the joint venture executes the Control Model well, physicians will experience higher investment returns than if they were majority owners. With respect to the physicians’ concern regarding loss of control, successful JVs under the control model carve out numerous operating decisions to the physicians such as choice of management company, hiring of an administrator, admission to the partnership and the anesthesia provider.
Co-management model
As an alternative to joint ventures based on ownership, Co-management arrangements are becoming an increasingly common form to structure ASC joint ventures. In a co-management arrangement, the hospital owns 100 percent of the ASC and bills the facility’s volume as a hospital outpatient department. The hospital engages surgeons and potentially a management company to provide clinical and operational oversight to the facility and in return compensates these parties at fair-market value for their services.
Typical fees in co-management relationships range between 2 percent-6 percent of net revenues of the facility. In compensating the surgeons, significant attention must be placed on defining performance metrics and determining fair market value in order to remain clear of legal scrutiny surrounding physician self-referral and anti-kickback statues. While the co-management model is largely a nascent structure, but based on discussion with industry practitioners, the model works best at physician-owned ASCs which lacked historical economic success. If physicians earn less in a co-management relationship than as former owners of the ASC, the relationship with the hospital can likely become strained.
Conclusion
In the new era of the accountable care organization, incorporating ASCs, 90 percent of which are physician owned, into healthcare delivery systems will assume increasing importance. Central to the issue of physician alignment is the selection of the appropriate joint-venture structure for the ASC. Depending on the market environment with payors, the Minority Ownership, Control, and co-management models can all generate optimal alignment outcomes.
Case Study: The Surgery Center of Reno - A Minority
Partnership ModelThe Surgery Center of Reno is an example of restructuring a joint venture to create a minority
ownership JV that aligns interests with surgeons and benefits all partners. Prior to 2005, St. Mary’s Medical Center, a large hospital in Reno, Nev., owned more than 90 percent of the ASC on its campus.
While the center enjoyed high volume, numerous low paying cases, oftentimes lower than the costs, poor reimbursements due to, at best, average managed care contracts, high labor and supply costs eroded the facility’s profitability.
The board contacted a management company to recruit surgeons and restructure the joint venture. A new JV was created with the management company and 19 additional local surgeons, many of whom practiced at the competitor’s hospital. The hospital retained a minority share and one seat on the seven-member board. The management company expanded the new partnership from only ENT and orthopedics to include spinal neurosurgery, bariatric surgery, urology and pain management.
During the first year under the new structure, the center generated a 50 percent return on investment; by the end of the 14th month of opening, the facility has had a 110 percent return on investment.
Many of the physician partners moved their practices to St. Mary’s campus, which resulted in an
increase in activity by these physicians at the hospital. The ASC continues to perform extraordinarily well even after four years of operations. St. Mary’s has since opened a second outpatient facility in competitor territory to expand its system’s reach.
Ownership Structure
Before: Hospital owned 90% and physicians owed 10%
After: Physicians own 74%, hospital owns 14%, and management Group owns 12% control. St. Mary’s and the management group each have one seat on the seven person board. The physicians have complete operational and clinical control of the facility.
Learn more about Regent Surgical Health.