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Looking for Adventure

November 1, 2007
by Mark Hagland
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Anticipated regulatory changes may alter the entire landscape for ambulatory surgery center joint ventures.

Hospitals and physicians need each other more than ever these days, that much seems clear. But what exactly do those needs boil down to, especially when translated into the current environment for collaboration in individual healthcare markets across the country? When it comes to hospital-physician joint ventures, the answer is akin to Rorschach inkblot responses — everyone interprets the same picture differently.

Thus, though some fairly dark clouds are looming on the horizon with regard to reimbursement and regulatory changes, all those interviewed for this article agree that the fundamental need for hospitals and physicians to collaborate in some way going forward will continue.

But the upcoming changes, including payment cuts to ambulatory surgery centers (ASCs) for certain types of surgical procedures, and anticipated changes in the so-called Stark regulations, could narrow the opportunities for hospitals and physicians to work together to develop ASCs, the most popular joint venture vehicle, and one of the largest types in terms of scope. And ultimately, it may mean that hospital executives and physicians could turn more often to alternative joint ventures going forward.

The arithmetic is definitely shifting with regard to ASC joint ventures, say some CFOs and industry observers, including some who already have successful ASC joint ventures in place.

"We've got several joint ventures, including two ASCs, in place," says Joseph Corfits, senior vice president of finance and CFO of Iowa Health-Des Moines, the largest region in the 11-hospital Iowa Health System integrated delivery network. In fact, his system has one orthopedic ASC and one general-surgery ASC operating, as well as two cardiac cath labs, an endovascular lab, and an imaging center, for a total of six hospital-physician joint ventures. "They've all been successful, and have clearly been a way that we've been able to compete in this marketplace, and create a stronger allegiance with physicians," Corfits reports.

But, he adds, upcoming regulatory and reimbursement changes could alter the landscape for these existing joint ventures, as well as potential future ones. "We're waiting to see what happens," he says. "Our two cath labs in place could be jeopardized, as those are under-arrangements."

The contractual vehicle Corfits refers to, the so-called "under-arrangement," does in fact appear to be significantly imperiled by expected changes to the federal Ethics in Patient Referral Act ("Stark") regulations. The Center for Medicare and Medicaid Services (CMS) has proposed 11 significant changes to the Stark regs, most of which were published in the Federal Register in July. Until now, the "under-arrangement" model has provided an exception to the Stark regs' prohibition on physicians making referrals to entities with which they have a financial relationship.

Using the under-arrangement model, a hospital contracts with a separate provider, often a joint venture in which the hospital holds an interest, to perform services for which the hospital bills patients (and it is the fact of billing from the hospital that provides for the exception under the regs). In its July commentary in the Federal Register, CMS indicated that there are significant fraud and abuse concerns with the under-arrangement model, which has been a very popular one until now. CMS has also indicated it will allow or restrict so-called unit-of-service or "per-click" arrangements, which had provided yet another exception for physicians, by letting physician groups leasing hospital-owned space and pay the hospital back according to the volume of service (an especially popular arrangement with regarding to imaging centers).

Even more challenging to hospitals and physicians considering joint-venturing via ASCs, reimbursement levels are set to significantly decline in two of the clinical areas that have dominated ASC development until recently — gastrointestinal (GI) and pain management procedures. According to an entry in the Federal Register in August, ASC reimbursement for digestive system treatment will be cut by 15 percent in 2008 (based on fully implemented rates), while nervous system treatment will be cut by 5 percent.

Meanwhile, some clinical areas will see big jumps, including cardiovascular system, auditory system, and musculoskeletal system treatment.

Just say no?

The challenge for hospital executives and physicians is clear: if reimbursement for certain procedures and treatments in ASCs falls low enough, the economic argument for joint-venturing an ASC may be tenuous at best. Indeed, even in the current environment, some CFOs have been part of hospital teams that have said no to physicians asking to form ASC joint ventures.