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7 key lessons for establishing healthy hospital-physician ASC partnerships

In partnering with ASCs, both hospitals and physicians can gain efficiencies and improve their attractiveness to payers, third party administrators, IPAs and patients. While all parties stand to gain significant benefits from ASC joint ventures, some potential hazards exist.

In an April 1 ASD Management-sponsored webinar, Robert Zasa, MSHHA, FAMPE, founder and managing partner of ASD Management, led a presentation examining the traits of successful joint ventures and pitfalls to avoid.

"There is one thing all joint ventures have in common, and this is that they're all different," Mr. Zasa said. "They all take on the different characteristics of the market they are located in, the physicians involved and why the hospital wanted the venture in the first place, among other things."

The seven key lessons from the webinar are shown below.

Lesson 1: The foundation of a healthy partnership is trust and respect. Each of the parties involved in developing partnerships — the physicians and hospitals — bring unique and valuable experience to the joint venture. According to Mr. Zasa, it is critical that there is mutual respect among members for the contributions each party brings to the table. Each must listen to the other not impose one party's ideas. It is often the case that one party has preconceived notions of what the partnership should look like and how it should run, but all of this needs to be discussed openly on the front end, Mr. Zasa said.

As part of this foundation of trust, it is crucial that a hospital involved in a joint venture acknowledges they may not know the ASC business.

"It's a completely different animal," said Mr. Zasa.

Hospitals cannot replicate their governance and administration structure in an ASC because the two are very different businesses that require different types of business administration and use different reimbursement systems. Hospital management of an ASC must be oriented to various ASC trends. For example, there are starkly different processes for streamlining and safety protocols. While ASCs are still required to meet Medicare accreditation standards, these standards are not as heavily regulated as those imposed on hospitals.

Hospital-managed ASCs must also become oriented to differences in staffing, as ASCs employ many registered nurses and licensed practical nurses.

Lesson 2: Come to a clear agreement on the reason for the project, goals and objectives in a timeline. Hospitals and physicians want different things out of a joint venture ASC partnership, according to Mr. Zasa. Physicians want an efficient work environment, steady cash flow and profit as soon as possible. They also want control on equipment selection and the people in the operating room.

Hospitals are interested in joint venture ASCs because the lower costs of services is attractive to payers, ASCs serve as a bonding vehicle with physicians and they can help free up the hospital's OR for more profitable hospital cases.

A common impediment to success for both parties occurs when the hospital's bottom line drives the venture instead of the combined interests of the partnership.

Lesson 3: Have a clear understanding of timing. It can take up to six or seven months for an ASC to become fully Medicare accredited, according to Mr. Zasa. Even when a hospital outpatient department converts to an ASC, the ASC must be examined and approved before it can start billing and collecting.

This lag has significant impacts on the ASC's cash flow, so it is important to get all partners on board and set realistic expectations, establish a health credit line and build the initial lag in Medicare reimbursements into the financial projection.

Lesson 4: Set clear understanding of financial management. "The best thing to do is to have the CPAs selected for a free standing ASC to sit down with the CFOs from the hospital and the physician leadership team and make sure everyone is on the same page," Mr. Zasa said. For instance, physicians will need to understand the different between cash reporting and accrual accounting when managing the ASC's finances, as physicians typically see cash reporting in private practices.

The difference in financial cultures between hospital executives and physician leaders could also lead to issues. According to Mr. Zasa, physicians typically want to maximize distributions while hospitals want more cash in reserve. An ASC's cash reserves are usually smaller than a hospital's because business stabilizes once the entity knows their caseload.

Lesson 5: Review assumptions on the budget and debt. Because payer and Medicare reimbursement rates change, budgeting is often re-done based on current rates right before the center opens. Often, physicians anticipate they will be partners when the original projections/budget is developed, but they may not ultimately join as partners, which can affect the financial projections. Budgeting may be re-done again within the center's first three months.

Because of the lag in reimbursements from Medicare due to the accreditation and licensing process, financial loss during this time does ramp up. It is important to note that while it may be tempting to repay debt once the revenue begins streaming in, debt should not be paid off before distributing payments to the physicians within a proper time frame.

Lesson 6: Spell out difference in ownership and control. The ASC operating agreement should articulate the ownership and control differences, the rights of minority and majority shareholders, ownership eligibility and clearly defined partner buy-in and buy-out. A hospital might own 51 percent of an ASC joint venture, but this does not translate to the hospital controlling all of its operations. The physician leadership team — even if it is the minority — usually retains control key operating issues.

A hospital needs specific nonprofit controls in any joint venture. When physicians have the majority share, hospital nonprofit status and minority rights need to be protected. If the physicians own 51 percent of the ASC joint venture, the hospital will need specific provisions to protect its ability to provide care to the underserved and address its mission. This must be done while maintaining the ASC's ability to create a profit under current Medicare and Medicaid reimbursement rates.

Lesson 7: Agree on adding services. Physicians, like hospitals, should not use an ASC just to protect their bottom line. Hospitals and the physician partners must agree on moving appropriate services to ASCs that are attractive to payers, reduce patient out of pocket costs and improve the patient satisfaction experience.

To view the webinar on YouTube, click here.

To download the webinar as a PDF, click here.

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