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Joint business ventures: Practice partnerships that you can take to the bank
Partnering with or subcontracting for hospital services can add to your practice’s bottom line.
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While physicians are skilled at controlling all aspects of medical care within their practices, many do not monitor the business aspects as other small business owners do. The astute physician can recognize new trends and outdated strategies in time to take the right action to forestall any negative influences they may have.
In this round table, we review some basic principles for achieving financial efficiencies and some considerations that may contribute to a more enjoyable work environment.
Given the quickly changing state of medical care, we need to track of all possible business strategies in order to increase revenue. Some may involve entering into new relationships with your hospital.
In a virtual round table in the February issue of Orthopedics Today, we discussed some of the potential advantages of participation in limited mergers with other orthopedic surgeons and physicians in your community. Doing so can bring economies of scale that would otherwise be out of reach, yet leave all participants autonomous in their individual operations. Here, we take that concept to the next level as I ask our experts about the benefits and complexities of these joint ventures and how to incorporate them into relationships with other medical institutions.
Douglas W. Jackson, MD
Chief Medical Editor
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Douglas W. Jackson, MD
Jack M. Bert, MD
David M. Glaser, JDDouglas W. Jackson, MD: How does a physician or group build equity within a practice?
Jack M. Bert, MD: Equity by definition is building value within a company that extends beyond its liabilities.
The orthopedic surgeon should attempt to build equity or value within his group in several ways:
- Surgeons need to build a strong practice with excellent management that will watch over payer relationships to avoid reimbursement reductions, and ensure the practice is using its ancillary services to provide high-quality, low-cost care.
- It is critical for private groups to avoid single-payer relationships that dominate the practice. The reason: Should the payer reduce reimbursements, it may be difficult for the group to reject the offer since the payer represents a large percentage of the practice’s receipts. Furthermore, several group practices have seen patient volumes drop 50% to 60% overnight after a large HMO or single payer group decides to hire their own orthopedic staff.
- Orthopedists should seriously consider operating any of the multiple ancillary services that are available to an orthopedic group, including an ambulatory surgical center (ASC), with or without a hospital partner. The services include MRI, physical therapy, durable medical equipment, pharmacy, occupational health department or an independent medical examination company.
Jackson: Attorney Glaser, what are some of the joint business ventures physicians may participate in with their associated hospital or medical institution?
David M. Glaser, JD: People use the term “joint venture” differently. In my mind, it refers to joint operation of a service line such as an ambulatory surgical center (ASC), imaging, or physical therapy. Some use the term to describe any business relationship, like call coverage agreements or gain sharing.
While there are many types of joint ventures, most fall into one of three broad categories:
- Joint ownership of an entity: The physicians and hospitals form a new entity that provides services directly to patients. For example, they may set up an ASC, with the profit from the ASC divided according to ownership, ie, if you own 25% of the ASC, you receive 25% of any profit. Because Stark law limits ownership of designated health services, the joint ownership model is more common in rural areas. It can also be used for ASCs, since Stark does not cover ASCs.
- Providing a service to the hospital: Because hospital reimbursement is often higher than physician reimbursement, it may be better for the hospital to perform a service. A physician group or other organization may provide equipment, staff (such as physical therapists) or services on behalf of the hospital. There are many possible structures for this relationship. The hospital might lease the equipment or staff on a “per use” basis, or they may pay a flat fee. The hospital then bills for the services.
- Shared use of equipment, staff or space: It is possible for physicians and the hospital to share expensive equipment or staff. FIf an MRI is located in the building with a physician group (or in a rural area) the physician group and the hospital can jointly purchase a scanner, with each billing for its own scans. The hospital and the physician can each agree in advance to use a certain number of hours or to simply allocate the expenses of operating the scanner between the participants based on the actual use of the scanner. For example, it may be possible to place an MRI in the physician’s office building, and if the physician uses the scanner 60% of the time and the hospital uses it 40%, the physician pays 60% of the expenses for operating the scanner and the hospital pays 40%. Each entity bills for its own scans and keeps any profit, or absorbs any loss.
Obviously, federal laws such as Stark, the Antikickback statute and state laws may limit the options for structuring these relationships, but it is usually possible to develop some legal structure that complies with these laws.
Jackson: What are some general obstacles in starting an ancillary service?
Bert: State and national hospital associations are doing everything possible to convince local and federal legislators that physicians should not own their own ancillary services. Equity in the group practice can only be created with strong and vigilant group management, clear and functional goal setting by the physician group members and development of “products” that enhance the group’s quality of care and efficiency. This is a difficult and arduous process that must be accomplished to keep the group financially and functionally viable into the future.
Jackson: I have heard of physicians who have a Management Service Agreement (MSA) with their hospital? How does an MSA work?
Glaser: In an MSA, the hospital seeks the physician’s expertise to manage one or more of the hospital’s service lines. The physician may be paid a flat hourly rate for work, or more commonly, the physician shares in the hospital’s overall revenue for the service.
If the hospital realizes that the physician may be able to operate the operating suites more efficiently. The parties can enter an MSA under which the physician agrees to staff and manage the orthopedic surgeries. The hospital may elect to pay the physician on an hourly basis, basing the payment on projected savings, or it may pay the physician on a cost-plus basis or, in some cases, on a percentage of revenue.
Jackson: What effect can hospital outsourcing of certain services (ie, the outpatient therapy) have on a practice?
Glaser: There are a number of ways that hospitals can provide services. While hospitals can always provide services directly, they may also provide them “under arrangements.” When a service is done under arrangements, the hospital contracts with an outside vendor to provide the service. The hospital is still responsible for the service, and the hospital bills for the work. A hospital may contract with a physician group to provide physical therapy services. Under this model, the hospital typically pays the physician group for staff and space and then bills for the services. In most cases, the outsourced service can even be provided outside the hospital. For example, it is possible for a hospital to lease physical therapists from a physician group and have the services provided in the clinic building.
Jackson: What conflicts may occur in dealing with the local hospital?
Bert: Hospital relationships can be very difficult and in my opinion are only achieved successfully from a position of strength. The orthopedic group must approach these relationships with the understanding that it is the goal of the orthopedist to control the efficiency and quality of care within the hospital system.
Administrators are primarily concerned with costs, whereas the orthopedist is concerned with efficiency and the quality of care, which is not necessarily based on cost. This clearly creates a conflict for the hospital system. If the orthopedic group and the hospital share in the management of the orthopedic service line, not only can revenue sharing occur if appropriately set up but physician management can lead to dramatic efficiencies in care delivery.
This must be the goal of a surgeon group, ie, to deliver optimal patient care in a cost-effective and efficient fashion.
Jackson: Attorney Glaser, my personal experience with hospital joint ventures over 30 years has not been good. Would you comment on the some generalities related to physician/hospital joint ventures?
Glaser: While I have had clients that have been very frustrated with joint ventures, most relationships have gone well.
In general, I believe that the more authority retained by the physicians, the happier the physicians have been.
Jackson: I have had trouble anticipating all the complexity and legality of the possible joint ventures and management arrangements. What would be a good approach?
Glaser: There are definitely legal issues involved in establishing the ventures. In addition to the Antikickback and Stark issues, most hospitals are tax-exempt, which adds a bit more regulatory complexity.
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However, the complexity is often not as bad as hospitals suggest. For example, it is common for hospitals to insist that the tax-exemption rules require the hospital to have 51% control of any venture.
The legal support for that position is dubious at best; 50-50 joint ventures are the norm throughout the country. If you work with experienced legal counsel, you should be able to anticipate most of the problems that may arise.
Jackson: Many proposed ventures never materialize. When should legal counsel get involved?
Glaser: It is best to involve legal counsel immediately because some of the applicable laws are so counterintuitive that it is possible for well-intentioned physicians to violate one. I want to emphasize, however, that the lawyer’s involvement can be quite brief. Think of it as analogous to a presurgery physical.
Jackson: What type of legal issues should we pay particular attention to going forward?
Glaser: The scariest law is the Medicare Antikickback statute, which makes it a felony to enter any venture if one purpose of the relationship is to pay for referrals. One poorly worded statement, such as “we want to give the physicians a financial incentive to use the hospital” might expose both the hospital and the physician to criminal penalties. Additionally, the Stark and state laws, including Certificate of Need [CON] laws, can apply. The good news: Despite the laws, profitable joint ventures are possible.
Jackson: Working out the “divorce” and buy-out of the joint venture has been a real lifesaver for me in the past. What tips do you have to minimize downside risk for the venture that fails or does not meet expectations?
Glaser: First, be a cynic before entering any transaction. Many pro forma agreements are simply not realistic. Many ASC joint ventures have failed because the projected volumes never materialized. Before entering any relationship, carefully consider what may cause it to fail. For example, many insurance contracts permit an insurer to refuse to credential a new ASC, MRI or other service. Geographic factors may doom a new service. Carefully review every potential challenge to the venture’s performance. You are wise to have the terms of any potential break-up determined up front. The legal documents should clearly define the termination provisions.
Jackson: Attorney Glaser, I know you work with many clients who have similar problems that I have had. Would you comment on the following statements?
- Hospital systems offer a unique changing environment driven by local, state and national economic and political winds.
Glaser: There are certainly wide differences between hospital systems. It is anecdotal, but in my experience, in a two-hospital town, typically one of the hospitals works to foster a strong relationship with physicians while the other seeks to dominate the physicians.
The “cooperative” hospital makes an excellent venture partner. The “competitive” hospital is much more problematic.
- The high turnover in hospital administration results in frequent reprioritization of existing and/or strategic programs.
Glaser: A carefully designed venture may help ensure that the relationship stays positive. If the hospital realizes that the venture improves its bottom line, it will seek to preserve the relationship, as long as the hospital is rational. Like all entities, hospitals can act irrationally, but as long as you have a well-drafted termination provision for the venture, I do not let fear of change prevent you from entering an otherwise sound relationship.
- After my experiences, I remain supportive and helpful to the hospital and staff, but try to remain totally financially independent.
Glaser: With some hospitals, that is wise. But there are situations where a relationship with the hospital will improve your bottom line. In a state that requires a CON, cooperation with the hospital may be necessary to offer ancillaries that improve physician compensation.
I heartily endorse the notion of maintaining financial independence. But, I believe it is possible to be financially independent and be in a venture. As long as you ensure that you have the ability to manage the venture, or leave it if the venture moves in a direction with which you disagree, there is no reason to fear that the relationship should compromise your independence. In fact, a well-structured venture may improve your economic performance, augmenting your independence.
For more information
- Jack M. Bert, MD, 17 W Exchange Street, Ste. 307, Gallery Medical Bldg, Saint Paul, MN 55102; 651-223-9204; bertx001@tc.umn.edu.
- David M. Glaser, JD is a health care attorney at Fredrikson & Byron, P.A., 200 South Sixth Street, Suite 4000, Minneapolis, MN 55402; 612 492-7143; dglaser@fredlaw.com.