The U.S. ambulatory surgery center industry is now facing perhaps the most critical moment of its 45-year history: Evolve — or else. For the first time in recent history, net growth of ASCs is stalling. And in the wake of the Affordable Care Act, payers are all but eliminating out-of-network reimbursements in most markets, reducing the profit margin of most ASCs and making it difficult to stay in business, particularly for independent facilities. Hospital-physician joint ventures are emerging as a leading solution for the vast majority of ASCs that operate independently of a hospital. The market also is relatively untapped: Of the approximately 5,400 ASCs in the United States, only 20 percent have a hospital partner. Partnering with a hospital allows an ASC to use a hospital contracting model and earn significantly higher reimbursements. In addition to creating significant value, joint ventures also address one of the biggest challenges hospitals face today: physician alignment. In our June 12 session at the Becker’s 13th Annual Spine, Orthopedic and Pain Management-Driven ASC Conference + The Future of Spine, I walked through how hospital and physician ASC JVs help hospitals achieve their physician alignment goals. Highlights of my session included:
ASC JVs: A growing trend
More and more, hospitals and management companies are teaming up to acquire existing physician-owned ASCs and create mutually beneficial partnership agreements. In fact, 80 percent of Regent’s new ASCs are partnerships with hospitals and surgeons. As fewer ASCs are being built, there is a trend toward closer alignment with physicians and surgeons. Most ASC transactions today are acquisitions due to the consolidation of the markets and the increase in JV activities by other local hospitals in the area. Acquiring an existing independent facility means hospitals do not have to acquire surgical practices to obtain noncompete agreements and alignment patterns. Some states also are not allowing new ASC JVs without a hospital partner, while accountable care organizations need a lower cost surgery option outside of the hospital to meet their goals. Meanwhile, physicians choose to partner with hospitals for a number of reasons:
- Higher payments for cases with the hospital model versus the independent ASC model;
- Competitive advantage over ASCs that do not partner with hospitals;
- Hospitals are again buying practices and developing ancillary services; and
- Partnering provides a hedge against shrinking surgeon reimbursements.
Generally, a hospital is a good partner if its management does not require control of clinical and operational activities. Most hospitals historically only wanted to partner with surgeons if they could own, control and manage most of the ASC – an insistence that has changed dramatically over the past few years. A successful acquisition plan balances the desires of hospitals and physicians and leads to shared success for all parties. Regent’s ownership model allows physicians to maintain operational control, while providing doctors a healthy financial result in the case of a sale.
Hospital Contracting Model
In most cases, Regent recommends the hospital contracting model. When structured correctly, payments per case using this model are at least 30 percent higher than independent ASC reimbursements. The hospital contracting model also provides protection for doctors: Hospitals cannot compete with physicians in any other transactions. The typical governance model for the hospital contracting model was designed to maximize revenue for all involved parties and includes two hospital board seats, four physician board seats and one Regent seat. Physicians are class A shareholders, while hospitals and Regent are class B shareholders. Hospitals control class B decisions and hold the majority vote, which enables rate negotiation. Physicians retain control over clinical issues impacting quality and efficiency. This governance model maximizes physician financial upside while also maintaining hospital earnings and consolidation ability. Regent holds control over key legal and financial issues. This arrangement results in an ASC obtaining hybrid payer contracted rates, which are larger than independent ASC rates. Laying out a clear structure helps all parties understand how different operational and clinical issues will be addressed from an organizational standpoint. The hospital contracting model works well when a number of conditions are met:
- Doctors trust the local hospital;
- The ASC market is over-saturated and competitive;
- Hospitals in the market are accustomed to joint ventures with doctors; and
- The ASC has matured and/or does not see a significant increase in profits in the future.
The HOPD Model
The hospital contracting model isn’t always a realistic option. In such cases, Regent recommends the hospital outpatient department (HOPD) model. The HOPD model uses a co-management agreement system: A partnering hospital owns 100 percent of the ASC, while surgeons and the partnering management company combine to provide operational and clinical oversight. The HOPD model, like the hospital contracting model, can also lead to physician alignment and help an ASC meet its business goals. For more information about how ASC partnerships can further physician alignment goals, please contact jsimmons@regentsh.com.
