Over the last five years, there has been a strong trend to have more surgery centers developed in conjunction with hospitals. Joint ventures or co-management of hospital outpatient units between hospitals and physicians have come back as the most common new area for surgery center development. This includes hospitals and physicians coming together to develop new centers, as well as hospitals reaching out to physicians to have them join as partners in existing surgery centers. The same is true for physician-owned centers. There is a strong trend in continuing to develop more integrated networks between physicians and hospitals. Surgery centers are certainly one of the common areas of joint venture activity. Surgery centers lend themselves extremely well to joint ventures given the fact that they are typically separate Limited Liability Companies and are allowed by the federal government to be jointly owned by physicians and hospitals. In fact, surgery centers are one of the few types of services that physicians can continue to own. There are strong reasons for hospitals and physicians to work together.
The most common reasons that we see an increase in joint ventures and physicians aligning with hospitals is that hospitals typically can bring several important key success factors to a surgery center. The first is that often times the hospitals have great presence in the market area and are able to expect high rates of reimbursement from the payors. In one case we have in New Jersey, one of the hospitals has negotiated with all the local payors to be paid very close to the hospital outpatient department rates. If the hospital contract applies, the center receives significantly higher reimbursement. In this case, the hospital has negotiated with payers to get approximately 90 percent of that rate vs. a lower rate for freestanding surgery centers that it typically pays in that state. For this reason, a joint venture with the hospital would significantly increase the net revenue per case to the surgery center for the surgeons that own that center. The key issue here is that the hospital must own 51 percent. The key negotiations to implement this joint venture center around the control issues relating to the hospital having majority share. More and more of the hospitals understand that the success for a surgery center depends on the physicians actually being very active in the operations of the center with outside third party management. Most hospitals don't manage surgery centers well, acknowledge it, and the physicians feel more comfortable with an outside management firm as an outside buffer between the parties.
Also professional management companies have a unique expertise because they are totally focused on running just that type of business vs. trying to manage multiple other businesses, which a hospital typically has to do. The second benefit in a joint venture with the hospital and reasons for increased physician alignment with hospitals on joint ventures and surgery centers is that the hospital can bring much better financing to the table. Specifically, the hospital usually has a significant share in a surgery center. The hospital can affect much lower interest rates and typically better terms than a freestanding surgery center. A professional management company can assist in this vs. solely a physician-owned center because of multiple facilities and able to leveraging on those facilities. However, at a local level, a bank that has a relationship with a local hospital and has a significant amount of their physicians within their bank, often times offers even lower rates at lower interest with better terms. Better terms would include guarantees that burn off after two years of cash flow, or a non-recourse loan for the equipment part of the loan. Also, terms related to debt service might be lowered to 1 vs. 1.25 to 1.3 debt ratios. These are all important terms that can help a surgery center be more successful as the result of a hospital physician joint venture.
The traditional healthcare model is that oftentimes, hospitals have different goals than the physicians' goals. Physicians are individual practitioners. They do what is best financially for their practice. The hospital's goals are often times in conflict since hospital management must satisfy multiple competing practices. There are some inherent conflicts that arise. Physicians own their own practice and are focused on the growth of their own particular practice. Hospitals must have the goals of keeping all the physicians happy and working with them to move the organization along as a whole. Often times, the hospital, the doctors in the past have sat on opposite sides of the table. The more successful model has been to "align goals to win together."
In our case at ASD Management, we have come from a group practice background, and we learned early in our careers to work for and with physicians, not compete with them. It is a blend in alignment of the goals to win together. Since 1986 when we formed ASD Corp., now ASD Management, it has been our goal to align physician's goals and results with our facility's goals. We have practiced that fiercely.
The underlying concept is taken out of the original hospital administration handbook that was used in most major hospital administrator graduate schools. On one of the pages, it quotes, "physicians have patients, and hospitals do not." This is absolutely true. This is the basic premise of physician alignment with healthcare facilities. Healthcare facilities get to service the physicians' patients (clients) for a very short, average length of stay or in our case in surgery centers, 3-4 hours maybe 2-3 times in their life. The physicians and the facility have a public trust, as well as to the patients, to provide quality care in a cost effective manner. By doing so, physicians and the ASCs also are attractive to managed care payors by doing so. It makes the physicians and the hospitals more attractive to payers to be cost effective in working in these types of venues. The ASCs allow us to align our goals together with the physician practices to make ourselves both attractive to the payers and self-insured employees.
In a joint venture ASC, it is a true partnership and it must be handled as such. It is not just driven by a particular hospital's needs or their recommendations or a physician's particular practice. There must be emphasis on the word "joint." When we do joint ventures, we have this discussion with both parties at the beginning and throughout the process of developing the joint venture. It is very important that everybody understands that these decisions are going to be done jointly and for mutual benefit. The most successful surgery centers adhere to this concept throughout the decision making process not only during the development of the center, but also during its management. It is even more critical during the management phases because conflicts do arise given certain practices wanting to go certain directions and hospitals wanting to do something else at times. It is particularly acute at this time since there are a lot of hospitals trying to lure physicians from other hospitals back to their hospital or to their surgery center or to their ambulatory care satellite clinics. It is even more important to have the physicians aligned with the hospital and stay aligned with proper financial incentives.
Management must balance the desires of the hospital and physicians and navigate the differences and goals to come to mutually beneficial results. We are consensus builders. Physicians want to grow their practices, but the hospitals have to be careful not to play favorites with individual practices. We address that with our firm in setting up marketing programs for each set of specialties with a center. An example is the spine service we have developed at one of our managed ASC centers. We have a spine program where the inpatient and outpatient programs are coordinated but separate programs. In our collateral materials we combined the new outpatient spine surgery programs in our surgery center with the hospital's inpatient and rehab program. Combined they are more attractive to payors, as well as workers' comp and self-insured employers. We blended the inpatient and outpatient programs at one of our surgery centers with the hospitals agreement. They had already set up a very outstanding inpatient spine program and we augmented that by putting in the outpatient surgery programs. We then put the package together and promoted that to key payors in the area, as well as workers compensation carriers. This is an ongoing marketing effort, but it is a joint effort to benefit the hospital and the surgeons. The goal is to ultimately beneficially impact the outpatient surgery center by making it more attractive to other payers and other workers' comp carriers. We can work together with the hospital and the physicians to cooperate in this effort to form a win-win situation. We were able to actually get an outstanding Blue Cross Blue Shield contract for the state to promote the hospital and the outpatient surgery services as well as the doctors' offices as preferred vendors for this service. The spine service that is typically very expensive and done only on an outpatient hospital based outpatient or inpatient operating room at many other facilities at a much higher cost to the patient, employer and payor.
Buying equipment is a constant issue of potential conflict in surgery centers due to the high costs. One must be careful not to get equipment just for one physician. We look for services that can co-utilize equipment like a C-Arm that can be used for orthopedic, spine, pain and podiatry programs. Microscopes also fall into this category. In these cases, the hospital might have a piece of equipment that we could use as a trade-in or use it for the surgery center. We often times try to do this in order to mitigate the costs or we are able to use that as part of the hospitals' contribution to the center to help reduce the lease cost or purchase cost of items. Physicians have superb relationships with vendors and often times will beat the GPO pricing that a professional management has or the hospital has. We use our leverage of our approximately 30 surgery centers to help get the price down on supplies, implants, drugs, etc. The hospital buys lots of supplies as well, but they buy a large number of different kinds of items whereby surgery centers buy a smaller range of products and a lot of it from the same sources. Therefore, the pricing for surgery center items turns out to be very competitive if not often lower than what the hospital buys it for. It is a bit counterintuitive, but has been proven in most of our surgery centers. With that stated, the physicians do have unique leverage with vendors and they are able to often time help purchase equipment through those vendors that also benefits the hospital. Again, the idea is to work through physician alignment with the hospitals to jointly benefit both and ultimately the surgery center in this particular case benefits from the higher profitability of these efforts.
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The most common reasons that we see an increase in joint ventures and physicians aligning with hospitals is that hospitals typically can bring several important key success factors to a surgery center. The first is that often times the hospitals have great presence in the market area and are able to expect high rates of reimbursement from the payors. In one case we have in New Jersey, one of the hospitals has negotiated with all the local payors to be paid very close to the hospital outpatient department rates. If the hospital contract applies, the center receives significantly higher reimbursement. In this case, the hospital has negotiated with payers to get approximately 90 percent of that rate vs. a lower rate for freestanding surgery centers that it typically pays in that state. For this reason, a joint venture with the hospital would significantly increase the net revenue per case to the surgery center for the surgeons that own that center. The key issue here is that the hospital must own 51 percent. The key negotiations to implement this joint venture center around the control issues relating to the hospital having majority share. More and more of the hospitals understand that the success for a surgery center depends on the physicians actually being very active in the operations of the center with outside third party management. Most hospitals don't manage surgery centers well, acknowledge it, and the physicians feel more comfortable with an outside management firm as an outside buffer between the parties.
Also professional management companies have a unique expertise because they are totally focused on running just that type of business vs. trying to manage multiple other businesses, which a hospital typically has to do. The second benefit in a joint venture with the hospital and reasons for increased physician alignment with hospitals on joint ventures and surgery centers is that the hospital can bring much better financing to the table. Specifically, the hospital usually has a significant share in a surgery center. The hospital can affect much lower interest rates and typically better terms than a freestanding surgery center. A professional management company can assist in this vs. solely a physician-owned center because of multiple facilities and able to leveraging on those facilities. However, at a local level, a bank that has a relationship with a local hospital and has a significant amount of their physicians within their bank, often times offers even lower rates at lower interest with better terms. Better terms would include guarantees that burn off after two years of cash flow, or a non-recourse loan for the equipment part of the loan. Also, terms related to debt service might be lowered to 1 vs. 1.25 to 1.3 debt ratios. These are all important terms that can help a surgery center be more successful as the result of a hospital physician joint venture.
The traditional healthcare model is that oftentimes, hospitals have different goals than the physicians' goals. Physicians are individual practitioners. They do what is best financially for their practice. The hospital's goals are often times in conflict since hospital management must satisfy multiple competing practices. There are some inherent conflicts that arise. Physicians own their own practice and are focused on the growth of their own particular practice. Hospitals must have the goals of keeping all the physicians happy and working with them to move the organization along as a whole. Often times, the hospital, the doctors in the past have sat on opposite sides of the table. The more successful model has been to "align goals to win together."
In our case at ASD Management, we have come from a group practice background, and we learned early in our careers to work for and with physicians, not compete with them. It is a blend in alignment of the goals to win together. Since 1986 when we formed ASD Corp., now ASD Management, it has been our goal to align physician's goals and results with our facility's goals. We have practiced that fiercely.
The underlying concept is taken out of the original hospital administration handbook that was used in most major hospital administrator graduate schools. On one of the pages, it quotes, "physicians have patients, and hospitals do not." This is absolutely true. This is the basic premise of physician alignment with healthcare facilities. Healthcare facilities get to service the physicians' patients (clients) for a very short, average length of stay or in our case in surgery centers, 3-4 hours maybe 2-3 times in their life. The physicians and the facility have a public trust, as well as to the patients, to provide quality care in a cost effective manner. By doing so, physicians and the ASCs also are attractive to managed care payors by doing so. It makes the physicians and the hospitals more attractive to payers to be cost effective in working in these types of venues. The ASCs allow us to align our goals together with the physician practices to make ourselves both attractive to the payers and self-insured employees.
In a joint venture ASC, it is a true partnership and it must be handled as such. It is not just driven by a particular hospital's needs or their recommendations or a physician's particular practice. There must be emphasis on the word "joint." When we do joint ventures, we have this discussion with both parties at the beginning and throughout the process of developing the joint venture. It is very important that everybody understands that these decisions are going to be done jointly and for mutual benefit. The most successful surgery centers adhere to this concept throughout the decision making process not only during the development of the center, but also during its management. It is even more critical during the management phases because conflicts do arise given certain practices wanting to go certain directions and hospitals wanting to do something else at times. It is particularly acute at this time since there are a lot of hospitals trying to lure physicians from other hospitals back to their hospital or to their surgery center or to their ambulatory care satellite clinics. It is even more important to have the physicians aligned with the hospital and stay aligned with proper financial incentives.
Management must balance the desires of the hospital and physicians and navigate the differences and goals to come to mutually beneficial results. We are consensus builders. Physicians want to grow their practices, but the hospitals have to be careful not to play favorites with individual practices. We address that with our firm in setting up marketing programs for each set of specialties with a center. An example is the spine service we have developed at one of our managed ASC centers. We have a spine program where the inpatient and outpatient programs are coordinated but separate programs. In our collateral materials we combined the new outpatient spine surgery programs in our surgery center with the hospital's inpatient and rehab program. Combined they are more attractive to payors, as well as workers' comp and self-insured employers. We blended the inpatient and outpatient programs at one of our surgery centers with the hospitals agreement. They had already set up a very outstanding inpatient spine program and we augmented that by putting in the outpatient surgery programs. We then put the package together and promoted that to key payors in the area, as well as workers compensation carriers. This is an ongoing marketing effort, but it is a joint effort to benefit the hospital and the surgeons. The goal is to ultimately beneficially impact the outpatient surgery center by making it more attractive to other payers and other workers' comp carriers. We can work together with the hospital and the physicians to cooperate in this effort to form a win-win situation. We were able to actually get an outstanding Blue Cross Blue Shield contract for the state to promote the hospital and the outpatient surgery services as well as the doctors' offices as preferred vendors for this service. The spine service that is typically very expensive and done only on an outpatient hospital based outpatient or inpatient operating room at many other facilities at a much higher cost to the patient, employer and payor.
Buying equipment is a constant issue of potential conflict in surgery centers due to the high costs. One must be careful not to get equipment just for one physician. We look for services that can co-utilize equipment like a C-Arm that can be used for orthopedic, spine, pain and podiatry programs. Microscopes also fall into this category. In these cases, the hospital might have a piece of equipment that we could use as a trade-in or use it for the surgery center. We often times try to do this in order to mitigate the costs or we are able to use that as part of the hospitals' contribution to the center to help reduce the lease cost or purchase cost of items. Physicians have superb relationships with vendors and often times will beat the GPO pricing that a professional management has or the hospital has. We use our leverage of our approximately 30 surgery centers to help get the price down on supplies, implants, drugs, etc. The hospital buys lots of supplies as well, but they buy a large number of different kinds of items whereby surgery centers buy a smaller range of products and a lot of it from the same sources. Therefore, the pricing for surgery center items turns out to be very competitive if not often lower than what the hospital buys it for. It is a bit counterintuitive, but has been proven in most of our surgery centers. With that stated, the physicians do have unique leverage with vendors and they are able to often time help purchase equipment through those vendors that also benefits the hospital. Again, the idea is to work through physician alignment with the hospitals to jointly benefit both and ultimately the surgery center in this particular case benefits from the higher profitability of these efforts.
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