8 Insights Into Successful Hospital-ASC Joint Ventures

Christian D. Ellison, vice president of business development at Health Inventures in Broomfield, Colo., provides eight insights for successful joint ventures between hospitals and ambulatory surgery centers.

1. Know how ASC joint ventures benefit hospitals.
Such partnerships can enhance inpatient and outpatient volume, improve working relationships with physicians and encourage physicians to focus on cost management and efficiency, both in the ASC and in hospital ORs.

2. Keep in mind why physicians want to partner. "Ten years ago, the last thing physician-owners wanted was to sell to a hospital," Mr. Ellison says. But things have changed. "This is an uncertain period for physician-owned ASCs," he says. For physicians, partnering with a hospital can facilitate better payor contracting support, limit competition, augment physician recruitment efforts, and provide access to capital.

3. Consider acquiring an existing ASC. As opportunities for new ASCs decline, hospitals may want to consider acquiring an existing center. "This is a good strategy in areas where the market is already saturated and there are few physicians who are not aligned with a center," Mr. Ellison says. "Partnering on an existing ASC also allows you to get to market more quickly. You can access physician relationships and a revenue stream your hospital may have lost at some point in the past."

4. You may gain new volume. Hospitals are often concerned the surgery center will take volume away from their hospital-based ORs, but the opposite is also possible. "Through its ASC partnership, the hospital can access new inpatient and outpatient surgery volume from surgeons that once went to its competitors," Mr. Ellison says.

5. Spread your net wide at first. If you decide to acquire an ASC, thoroughly evaluate acquisition alternatives in the market and prioritize those, based on how each ASC adds value to your hospital. "The value for you might be a strong future income stream, partnership opportunity with the right doctors, keeping out competitors or gaining access to a new market," Mr. Ellison says. Once you have narrowed down your choice, contact one of the lead physicians in the ASC to determine physicians' interest in partnering.

6. Evaluate the ASC. Once you have an interested target, execute a non-disclosure agreement with the ASC so that you can evaluate basic financial and operational information. Once things get serious, you will need an independent valuation to verify price. Due to federal regulations, "you can't overpay physicians for their interest in an ASC," Mr. Ellison says. "You’ll have to propose a price that you believe is fair and gets the physicians interested, but the hospital can't be seen as paying for referrals."

7. Create a business plan. As you evaluate the ASC, begin to create a business plan for the entity, focusing on a five-year forecast for the operation to see if the deal is viable. "Make sure you feel comfortable that the ASC has enough opportunity for growth to support the price you are paying," Mr. Ellison says. Examine patient volume, physician profiles and reimbursement rates. "An ASC may add additional value to a hospital beyond the incremental income stream and physician integration," he adds. "It may lower costs and add capacity to a growing hospital or one with an aging infrastructure.

8. Decide your level of interest.
"There are a number of considerations in determining what percentage interest to purchase," Mr. Ellison says. If the hospital gains a majority interest, it can be easier to obtain higher reimbursement rates from payors. However, your physician-partners may want to retain majority control. Keep in mind that a controlling interest is more expensive and you may be out of reach for hospitals with capital constraints. Here is how the price for the hospital is determined for an ASC priced at a multiple of earnings. If its earnings are $1 million and the multiple is six, then the total price would be $6 million, less any long-term debt. If the hospital has a 50 percent stake, it would pay $3 million.

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