HOPD to ASC Joint Venture Conversion
Top financial issues, regulatory concerns & more
Ambulatory surgery centers are becoming an attractive strategy for hospitals. While some hospitals seek to build their own ASCs or partner with an existing center in the market, others decide to transition an existing outpatient department to a joint venture ASC. In this Q&A from Becker’s ASC Review (Nov. 10, 2014) by Carrie Pallardy, ASD Management’s Vice President Mark Babin describes the process of this conversion and offers insight into the most important issues to consider.
Q: Why are hospitals interested in converting a HOPD into an ASC joint venture?
Babin: Efficiency. Hospitals are certainly becoming better at reducing their operational costs. They are all following strategic plans, benchmarking success factors, reducing patient readmission and are driven to increase patient satisfaction indexes. Payment and census are all predicated on the success of efficiently running a hospital. The same metrics used do not always translate to the surgery center environment.
For example, staff within the hospital is often cross-trained, which is critical for multiple service lines but, ideally in a surgery center you will have the nurses and techs specialists with one or two specialties. This decreases turnaround time, reduces operating room times and improves outcomes, which translates to greater availability to do more cases. Also, a surgery center has greater ability to flex staff if needed, saving money when volume is reduced. Close ORs or procedure rooms when not in use and maximize the open ORs on lighter surgery days. Finally, as one last example, there is still the ability to minimize supply costs if the joint venture uses a national management company. Supply costs are always one of the top three expenses and group purchase organization contracting can usually mirror what the hospital costs are via a national agreement with a known surgery center management company.
More than ever hospitals and physicians are having complex conversations about working together to provide quality care in a reduced payment environment. Narrow networks and population health are two new phrases with the common thread of intending to provide a full scope of measurable services. Surgery centers play a key role.
More types of cases are moving to the outpatient environment. Hospitals have the understanding that the reduction in reimbursement rates is offset by the increase in volume and loyalty by the physician. It’s part of the conversation. Also, a joint venture is generally less risky than a standalone center with no hospital partner and fits the new model of this cohesion with the hospital, physicians and ancillary services. This is not to avoid the long-standing fact that physicians will have ownership in a surgery center. For a hospital not to participate is to lose a significant volume of cases to a competitive surgical facility. The hospital needs to align with physicians to strategically and proactively drive the future of care in their market.
Health plans are requiring procedures be done at an outpatient surgery center. With HOPD rates 50 percent to 60 percent higher than a standalone center they are incented to have patients receive services from a joint venture center. Health plan medical directors are very involved with understanding what procedures will be approved or even may be done without Medicare recognition (orthopedic total joint procedures for example).
Differentiating the center is critical in saturated markets where the payer may utilize the supply of surgery centers to its advantage in driving down rates. Something to consider for any center: published bundle payments and cutting edge procedures not being done elsewhere. In essence, health plans view surgery centers as a critical component offered to their patients. Whether a new center provides competitive care or something that differentiates itself is dictated by the hospital, physicians and demands of the payer and market.
Relevance in the market
A joint venture plays into the big picture of staying in front of the changes in healthcare. Opening the surgical services to investors/physicians allows the administration at a hospital to have another mechanism to keep a pulse on their market, competition and coming changes.
Q: What are the biggest financial considerations in this type of project?
Babin: Without question equipment and working capital are the biggest financial considerations. More often than not the new LLC joint venture will be purchasing the existing equipment from the hospital, whereby the value was derived by a third party. Additionally, there will be new equipment necessary for new service lines or to replace outdated equipment. Our most recent projects had values of $1.5 million to $2.2 million with additional equipment needed of $500,000 or more. What is attractive is most of the equipment is purchased at a fraction of the original cost and the JV has the option of purchasing all or a portion of the existing equipment. All of this should be structured under a five year to seven year capital lease with pro-rata guarantees from the owners or a hospital guarantee with a guarantee fee charged to the physicians. Some of the value of the equipment may be considered as equity from the hospital.
Working capital will come in the form of equity from the physicians and provided all of the hospitals equity is not a consideration from the value of the equipment the hospital will put in cash as well. Additionally, a working capital facility must be in place with a bank, usually the one providing the equipment lease. There should be enough working capital and availability in a line for a minimum to cover the first year of operations with a comfortable cushion.
Q: Is the resulting joint venture typically between the hospital and a management company or are physicians offered buy-in opportunities?
Babin: ASD believes the best model is with physicians and the hospital for the reasons I mention above. ASD can maintain an ownership percentage, but its nominal and usually in the event there is a shortfall on the physicians’ side. The hospital dictates what percentage the split should be. Some want to maintain control and will take a greater than 50 percent stake. Others prefer the physicians have majority. Regardless, the boards of every surgery center are split evenly between hospital and physicians with a Medical Advisory Committee comprised completely of physicians.
Q: What are the major regulatory concerns in this type of project?
Babin: Ensuring compliance with the safe harbor rules under the anti-kick back regulation and making sure that there is no unintended inducement by the hospital toward the physicians. Share prices, the facility lease (provided the hospital is the landlord or master tenant), lease of hospital employees, fair market rate if the hospital is leasing equipment. These are just a few examples and we require all clients seek advice of counsel if there is ever a question. Without exception our hospital partners are hyper-vigilant when it comes any interaction with their physician partners.
Q: Are there any common mistakes you’ve seen made during this process?
Babin: Converting a surgery center creates its own set of challenges and usually it is the things that are outside of your control that create the biggest issues. An example is the accreditation surveys and the timeline for receiving the Medicare number. These things you cannot control affect the timing and happen when the center is the most vulnerable.
- The key is preparation. There is no one way to convert an existing center and the punch list of things that must be done is more than 200 items long. Some consistent considerations are:
- Are the employees unionized and how will that translate to a new non-union center?
- What positions need to be eliminated or added? When was the asset purchase agreement finalized and have the interested physicians reviewed the list? Is there a clear understanding of what physicians will join and is there a steering committee?
- Is the contracting team at the hospital engaged with the project? Will they work with the management company to secure desirable contracts?
- Will the center need to close or can it stay open with a defined date to “flip” and will it need to be run as in tandem for a period of time as an independent ASC and a department of the hospital?
Q: What is your advice for ensuring the transition runs smoothly?
Babin: There must be a plan set in place and a timeline with specific action items addressed along that timeline. Set the expectation and build in a time buffer. The hospital administration and key physicians must make up a steering committee and be fully engaged. Key members of the staff that will stay on after the conversion need to participate and contribute to ideas and tasks that need completion.
Engage the payers very early on in the process. If they are informed and get excited, they will begin contracting after accreditation and before receiving the Medicare number. This cannot be done soon enough. Early dialogue also uncovers potential issues with getting contracted. Make sure there is a detailed review of the business operations. Knowing what systems have to be replaced, implemented or shared with the hospital (right down to the telephones) has to be addressed early on to consider cost and time to replace and train personnel. Talk to key physicians regarding what changes are required in the surgical environment. Turnaround times, personnel and equipment considerations are vital. Start times are key to physician satisfaction and unless addressed and known to change it will be difficult to get physicians interested as partners.