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26 Transactions & Valuation Issues 6 Considerations for ASC & Hospital Joint Ventures By Heather Linder T he ownership landscape of ambulatory surgery centers continues to evolve, and many centers may be looking for financial partners to improve or expand business. A hospital joint venture could be an advantageous course of action. Wayne J. Miller, Esq., is a healthcare transaction and regulatory attorney and founding partner of the Los Angeles-based Compliance Law Group. He has extensive experience in hospital-physician ventures and acquisitions. Stephanie Tarry is the senior vice president of business development with Nueterra Healthcare, a national management and development company that pioneered the physician-ownership business model in surgical facilities. Here are Mr. Miller and Ms. Tarry's six considerations for physician-owned ASCs looking to pursue a hospital joint venture. 1. Align goals of both parties. Having aligned goals and initiatives with a future joint venture partner is crucial for both parties, Ms. Tarry says. Learn the agenda of potential partners before finalizing any plans. "It is important [for physician ASC owners] to try to ascertain whether the real intentions of the hospital are compatible with the doctors' goals," Mr. Miller says. "Is the desired transaction a true joint venture, where the hospital will manage jointly with the existing surgeons in the ASC? Or, instead, are they looking to try to buy out the existing ASC ownership, take over operations to add to its holdings and essentially marginalize the doctors?" Both sides should be up-front from the first conversations about each party's goals of the venture. Under some circumstances, the financial goals of the physician owners may be a hospital acquisition and takeover whereas in other situations they may want to stay involved and just achieve better billing rates and resources. Find a hospital with goals consistent and not at cross purposes with these physician objectives, Mr. Miller says. "At the same time, the goals should be consistent with fraud and abuse and Stark law principles. For example, the venture should not be established with the intent of achieving a certain level of referrals or utilization between the hospital and physician owners," he says. The overarching goal, though, will always be for physicians to find a quality and efficient place to provide healthcare, Ms. Tarry says. 2. Agree upon future ownership and management structure. Economic control and governance control of the surgery center are separate considerations. In some cases, both sides may agree that the hospital may attain a significant capital investment in a surgery center but accept a passive management role, allowing greater say in management by the physicians. In other cases it may make more sense for a hospital to have majority management control with a commensurate ownership interest. Again, these decisions need to comport with federal and state law regulatory standards applicable to ASC joint ventures, says Mr. Miller. ASCs should also be aware that as a condition of its investment, a hospital may want its own administration or a third party professional management company to be in control of surgery center operations, Mr. Miller says. "Doctors need to think about whether that's an acceptable scenario for them," he says. "They should do due diligence of the desired managers or management company, particularly as to whether they have had good relations with physicians for other ASCs. For example, ask physicians in other ASCs whether the proposed management listens to and engages surgeons or if they just treat the physicians solely as statistics, bringing in cases." The equity interest structure is important as well. Mr. Miller is seeing more joint ventures where an entity comprised of surgeons in turn holds ownership in an ASC joint venture. This kind of structure may be organizationally efficient and may add a level of liability protection. However, it creates an indirect ownership relationship between the individual physicians and the ASC and can dilute an individual's interest in the center itself. Under this structure, physicians becoming part of an ownership group may feel that their individual connection and influence over the ASC is diminished. "Potentially doctors that now have a 5 or 10 percent individual interest now may end up having a smaller interest in the doctor investment company and even a smaller indirect interest in the ASC as a whole," he says. Wayne Miller Stephanie Tarry Physicians should investigate how any proposed ownership structure changes would impact their total equity interest. A diluted ownership isn't always negative, however; if the ASC becomes more profitable under the joint venture, holding the smaller percent interest may end up being a larger share of profit than before the venture, he says. 3. Understand the financial impact. Surgery centers can no longer assume that hospital ventures will automatically result in better commercial payor reimbursement rates, Mr. Miller says. It may be true in some cases if the hospital successfully transfers its favorable contract rates to ASC services. In other cases, the payors may prefer that the ASC not be saddled with hospital overhead that gets reflected when hospital rates apply, he says. When approaching a joint venture, first see how a hospital investor would impact existing managed care contract arrangements. For example, ASCs that have thrived on being out-of-network may be forced to go in-network because the hospital's contracts require it, so always get a financial analysis of how the hospital's involvement will impact each contract before sealing a deal. "You can't assume reimbursements will be better because a hospital is involved," he says. Another potential financial impact is the amount of cash or assets required at the deal's onset. ASC owners should be clear on what each party brings to the table financially. "When an existing ASC wishes to bring on a hospital partner, the valuation or expectation of the physicians can be worlds apart," Ms. Tarry says. "Usually this situation will require a third party appraiser to assess the fair market value." Mr. Miller adds that regulatory requirements, at minimum, mandate that asset valuations need to be consistent with fair market value and that each party needs to contribute money or assets in line with their respective ownership interests.