4 Benefits of Hospital-ASC Joint Ventures

As inpatient utilization continues to stagnate, the opportunity surrounding outpatient care grows.

The outpatient environment is viewed as a way to reduce costs (outpatient services are generally reimbursed less than similar services provided in an inpatient setting). In addition, patients see an outpatient setting as a way to get home quicker — a desire of nearly all patients.

Mark Babin is vice president of development at ASD Management, one of the largest privately funded ambulatory surgery center development and management companies. ASCs have proliferated during the past decade — there are about 5,400 Medicare-certified ASCs, as of 2011 — and he says hospitals can reap several efficiencies from partnering with them.

Mr. Babin explains four benefits hospitals and physicians gain from joint venture ASC projects.

1. Leverage with commercial payers. Payers are looking for ways to reduce medical expenses, and the outpatient venue is a prime avenue to achieve that goal. According to data from VMG Health, ASCs were reimbursed only 56 percent of what a hospital outpatient department received in 2011, compared with 87 percent in 2003.

An ASC will not yield as much gross revenue per procedure as an HOPD, but Mr. Babin says the reduction in top-line per procedure revenue is mitigated by the efficiencies and increased surgical volume in a joint venture ASC model. In addition, hospital will become more favorable from the payers' point of view because they are utilizing a lower-cost setting, and physician owners will be able to garner better commercial contracts thanks to the hospital's size and negotiating clout.

As the shift continues from inpatient to outpatient, as well as in-network versus out-of-network, payers are willing to work with an ASC joint venture supported by a known hospital.

"You can use that leverage and relationship with that payer to get better rates than if you were calling independently, which is an important consideration when discussing with prospective physician partners concerned with a hospital maintaining a significant percentage of ownership," Mr. Babin says.

2. Improved volumes. As noted, lower reimbursements for ASCs are also partially offset by the increased caseload from physicians who now have a vested interested in the center.

Many times, a surgery center will be rolled up into a department within a hospital that shares overhead, such as personnel. Having a tech or nurse schedule to work a full day in the ASC with limited case load adds to the cost and is difficult to measure in the hospital setting, Mr. Babin says.

However, with a freestanding joint venture ASC, capacity and scheduling can be maximized. "This is all about running an efficient business and being accountable to the physicians who trust your company to generate the best profit," Mr. Babin says. "The hospital is also looking for validation that the joint venture reflects well on their decision to remove service lines that were run inefficiently, losing money or both."

3. Quicker turnaround times. Improved volumes do not sprout out of nowhere, Mr. Babin says. A major factor of obtaining a larger case load is better productivity from staff.

He has historically seen hospital employees "get complacent" when it comes to the outpatient surgery department. Turnaround times could be two to three times what they should, and he says that's "not acceptable" and is compounded for specialties like ophthalmology or gastroenterology.

The joint venture ASC model encourages hospital leaders and physicians to create more efficient, standardized and methodical pre- and postoperative processes, he says.

4. Physician alignment. Hospital and health system CEOs have consistently ranked physician alignment as one of their top priorities during the past three years. ASCs can help hospital executives reach that goal, Mr. Babin says.

Physicians may initially be leery of joining an ASC partnership with a hospital that has majority ownership. They may think, "Why would I join an LLC in which the hospital gets 51 cents of every bottom line dollar?" Mr. Babin says. However, in addition to the payer contracting benefits, the hospital sometimes incurs many startup costs for the surgery center. This could be in the millions of dollars, for example, for an existing center where the hospital paid for the tenant improvements and equipment.

For a new or existing center, the equity a hospital provides is also an important consideration. Deep pockets go a long way for a startup, Mr. Babin says, and every surgery center needs a banking relationship and lenders to see hospitals as a partner. This allows them to provide favorable terms for working capital, equipment loans and, if needed, tenant improvement financing. Physicians are spared major obstacles, but the hospital is able to gain trust and "retread" an entire department.

"There are inherent benefits to the surgeons and the hospital in an ASC joint venture," Mr. Babin says. "Crafted properly and managed well, the center can be very successful."

More Articles on Hospitals and ASCs:
Bronson Battle Creek Hospital Partners With Surgery Center
Challenges and Opportunities of Forming ASC Joint Ventures
Edward Hospital Invests in 2 Surgery Centers

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