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Challenges and Opportunities of Forming ASC Joint Ventures

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This content is sponsored by Ambulatory Surgical Centers of America.

It's no secret that inpatient volumes are dropping at hospitals across the country: In 2011, there was an average of 111.8 inpatient hospital admissions per 1,000 people, down from an average of 123.2 days in 1991.

Additionally, as inpatient volumes have shrunk, outpatient visits have increased: There was an average of 2,105.6 outpatient visits per 1,000 people in 2011, up drastically from 1,273.4 visits in 1991.

There are several explanations for this trend, including the state of the economy and the rise of high-deductible health plans, which make patients less likely to pursue elective surgeries and treatments. Additionally, advancements in medical technology now allow for more surgeries to be performed safely in the outpatient setting.

Also contributing to this shift out of the hospital and into ambulatory settings is the growth in popularity of accountable care, or the desire to provide high quality care in a lower cost setting.

"Outpatient settings provide for that," says Luke Lambert, CEO of Ambulatory Surgical Centers of America. "Since the [Patient Protection and] Affordable Care Act passed, hospital interest in building outpatient capabilities has grown significantly."

All together, these forces have led to hospitals taking a closer look at outpatient strategy, including ambulatory surgery center relationships, to increase their outpatient offerings.

Historically, many hospital leaders have preferred to purchase an ASC and turn it into a hospital outpatient department, according to Mr. Lambert. Hospitals preferred this approach since it is an attractive investment strategy and helps reduce competition.
    
"When a hospital acquires 100 percent of the ASC, it then plugs into the hospital's reimbursement rates and methodology with payers. This is great for the hospital but it's increasing the cost of care," Mr. Lambert says. Today, more frequently, hospitals are looking into joint venture relationships with ASCs.

What it looks like

In most hospital-ASC joint ventures, the hospital will buy 51 percent of the ASC, leaving the remainder to be owned by the physicians and commonly a surgery center management company.

Though the hospital would be the dominant owner in a typical joint venture, hospital staff typically do not manage the ASC. "It's unusual to see a hospital-ASC joint venture that is hospital-managed do well," Mr. Lambert says. "Hospitals are familiar with how to run a hospital, but not necessarily how to run a surgery center." This can lead to inefficiencies, higher costs and physician frustration, he explains.

Most hospitals interested in the model are looking to partner with multispecialty surgery centers, instead of single specialty centers, since that gives the most flexibility in the future service offering, Mr. Lambert says.

While partner selection is important, hospitals "don't necessarily need to form a joint venture with the most profitable or successful surgery center in the community," he says. Instead, hospitals can acquire centers that are struggling at low cost and dramatically improve their profitability. "If the hospital can improve commercial payer contracts [at the ASC], the hospital can see…an outsized return on investment even without a change in case volume."

Hospital benefits

There are several benefits hospitals stand to gain from joining with an ASC in a joint venture, including the following:

Cost savings. As previously discussed, creating a joint venture with an ASC provides the hospital with high quality and low cost care capabilities. This is of particular interest to those hospitals and systems that are competing to access populations with cost sensitive payers. Services in ASCs commonly cost less than half of what the same services cost in a hospital outpatient department, according to Mr. Lambert. If a hospital contracts with a payer for population health management, "it's in the hospital's interest to have the cases done in the most cost-effective quality location," he explains.

Expanded physician relationships. Partnering with a local ASC can help hospitals develop stronger or new physician relationships. Strategically, it makes sense to be in a joint venture with the physicians allied with your competition. "If the physicians have a great experience working with the hospital through the joint venture, it may open doors for greater referrals in areas such as physical therapy, imaging, laboratory services or pathology," says Mr. Lambert.

Forming a joint venture can also be an attractive investment strategy for many hospitals.

Challenges

Though joint ventures with ASCs can bring many benefits to the hospitals involved, the relationship is not always simple to form. The following are a few challenges associated with the model.

Persuading the physicians. "Physicians are, I think, rightly cautious about entering into hospital joint ventures," Mr. Lambert says. After all, most of them started their surgery centers to get away from the hospital inefficiencies, politics, and quality issues, according to Mr. Lambert.

Therefore, any hospital interested in forming an ASC joint venture has to demonstrate the benefits that it can bring. The two most common benefits a hospital can contribute are:

•    Help with improving payer contracts. With help from the hospital partner, the ASC may be able to negotiate higher reimbursements with payers than they currently receive.
•    Increase in case volume. This is especially true if the potential hospital partner controls a significant base of referral in the community and discourages referrals to the ASC physician owners or directs the cases to the hospital. "If the hospital can stop that pressure or steering, it can lead to a significant increase in case volume for the center," Mr. Lambert says.

Thinking long-term. Many hospital CEOs see the long-term need to have access to the type of cost efficiencies seen in ASCs. In the short run, however, without a financial benefit they'll want to keep all the surgical cases they can inside the hospital, according to Mr. Lambert. Cannibalizing the hospital OR volumes isn't a winning strategy. Using an ASC joint venture as a competitive tool to grow market share at the expense of rivals while also enhancing system outpatient capabilities is.

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