The ambulatory surgery center industry stands at a crossroads. With most areas of the country saturated with ASCs, net growth has stalled for the first time in recent history. The across-the-board elimination of out-of-network reimbursements has reduced profit margins at most ASCs, putting some facilities in peril and forcing others to take a hard look at their business strategies. At the same time, ASC reimbursements during the past decade have declined by more than 30 percent as a percentage of hospital outpatient department reimbursements. And the average per-case reimbursement for independent ASCs is 40 percent lower than that of a hospital-affiliated ASC. Given this challenging environment, it’s easy to understand why there’s been a nearly 20 percent decrease in the number of independent ASCs since 2000: In many markets, it’s simply too hard to turn a profit as a stand-alone facility. To meet this changing landscape, ASCs increasingly are partnering with hospitals to optimize profit and secure sustained growth. In our May 7 session at the Becker’s Hospital Review 6th Annual Meeting, I walked through many aspects of Regent’s innovative approach to structuring hospital and physician joint ventures, including:
The evolution of ASC partnerships
While fewer ASCs are being built today, hospitals and ASC companies are acquiring existing ASCs to create successful three-way partnerships. In the past, hospitals have had reservations regarding physician partnerships: Hospital leaders not only wanted majority ownership, but also control of operations — frequently a nonstarter for physicians. Financial realities are forcing many hospitals to reconsider this demand. The latest ownership and governance models typically allow physicians to maintain operational control of an ASC, while providing them a healthy financial result both in the case of a sale and on future earnings. Shrinking reimbursements, too, are forcing physicians to reconsider an ASC partnership with a hospital. The reasons are numerous: 1) hospital-affiliated ASCs reap significantly higher payments for cases than independent facilities; 2) strategic alliances with hospitals are consistent with the aims of healthcare reform models; 3) these deals provide a hedge against shrinking practice reimbursements for surgeons; and 4) joint venture ASCs hold a competitive advantage over ASCs that do not partner with hospitals.
Hospital contracting model
The hospital contracting model is emerging as the leading approach for structuring joint venture partnerships between physicians and hospitals. By allowing the hospital to form a strategic alliance with select surgeons, it minimizes the provider’s financial investment and helps achieve physician alignment goals. If structured correctly, payments per case using the hospital contracting model are at least 30 percent higher than an independent ASC’s reimbursements. This model also provides competitive protections for doctors and allows them to maintain daily clinical and operations control over the facility. The governance structure of the hospital contracting model maximizes physician financial upside, while also promoting hospital earnings. In this model, hospitals hold two board seats, physicians hold four seats and a management company maintains one seat. Physicians are Class A shareholders, while hospitals and the management company are Class B shareholders. Hospitals control Class B and the majority vote, and physicians retain voting control over clinical issues while the management company controls key legal and financial issues. This model also provides hospitals with decision-making authority over budgets, strategic decisions and disposition of assets, while physicians manage the selection of anesthesia providers, clinically related operating policies and procedures, and approval of equipment purchases. The hospital contracting model, however, is not recommended in every situation. Typically, the hospital contracting model is successful:
- When the doctors trust the local hospital;
- In an over-saturated, competitive ASC market;
- In a community where payors squeeze the independent ASCs on price and out-of-network facilities have to change to a contracted model;
- In a market where the hospital of choice is accustomed to joint ventures with doctors;
- Where hospitals are interested in partnering with doctors;
- In a market where the hospital has a strong track record of negotiating favorable contract rates and also has contracting power;
- In an existing ASC, when the ASC has matured and/or does not see a significant increase in profits in the future; and
- If the local surgeons can utilize this model to form a strategic alliance with the local hospital of choice.
The HOPD model
In situations where hospital contracting model is a poor fit, the HOPD model provides an alternative solution that allows for a co-management agreement between hospitals and physicians. In this model, hospitals own 100 percent of the ASC, thus enabling HOPD rates. Furthermore, surgeons and management companies are united to provide operational and clinical oversight. The HOPD model provides an excellent opportunity to create a partnership in situations when a joint venture is unrealistic. As with the hospital contracting model, HOPDs can help achieve physician alignment and patient volume goals and be a successful part of a hospital’s overall business strategy. For more information about ASC partnerships, please contact firstname.lastname@example.org.