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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.

Garren Colvin, vice president and CFO at St. Elizabeth Medical Center in Covington, Ky., reports that, following the development of an outpatient surgery center on campus, he and his colleagues were approached by a group of physicians who wanted to joint-venture an ASC with the hospital. Carefully analyzing the potential involved, Colvin and his colleagues on the executive team declined to participate in the doctors' ASC.

"We definitely anticipated a significant decrease in rates; we didn't see someone willing to invest in an ambulatory surgery center, knowing the financial situation. It would just have been a defensive maneuver," he says.

Negotiations with the group of doctors who wanted to joint-venture an ASC ultimately were unsuccessful, and those doctors went ahead with their ASC, which recently opened and now directly competes with the hospital's surgical services. Some of the ASC's services, particularly in orthopedics, will be going head to head with the hospital. But Colvin isn't worried. Given the looming reimbursement cuts for some areas, he doesn't see the ASC ultimately proving successful.

The key takeaway from this experience? CFOs and their colleagues on the executive management team shouldn't leap at every offer of collaboration, particularly if the business-model fundamentals aren't there.

Specialists' eagerness to find ways to partner with hospitals will only increase as physician reimbursement continues to decline or level off in numerous specialties, says Kenneth Smithson, M.D., vice president for clinical performance at VHA Inc., an Irving Texas-based national hospital alliance.

"Imagine yourself in a singles bar an hour before closing, and everybody has to choose a partner; that's what it's like," Smithson says. "The deal for doctors is that the traditional professional fee approach to healthcare is no longer sustainable for many specialties — not enough money even to cover their overhead in some specialties."

So doctors are being driven harder than ever to supplement their incomes. For the surgical specialties, already hard-hit by reimbursement and other challenges, ASCs are an obvious option.

Will ASCs survive?

Still, the looming regulatory and reimbursement changes coming to ASCs may well make them far less desirable as an option, both for hospitals and for physicians, for different reasons.

Experts say that one fundamental problem will be that physicians, who typically expect positive financial returns on any venture after a year or two at most, will likely balk at the impact of payment cuts. On the other side of the street, some hospital executives foresee a greater financial burden in terms of funding classic "50/50" joint ventures, as under-arrangements become disallowed or heavily restricted.

"I would assume that the ASC safe harbors would still exist, so you could still structure hospital and health system joint ventures with physicians, but it may not be economically viable after the reimbursement cuts," says William Fischer, attorney and counsel to the Holland & Hart law firm in Denver.

Meanwhile, adds Fischer, who has advised numerous provider organizations on joint ventures, "Here in the Front Range" — the geographic area that includes metropolitan Denver, Boulder, Fort Collins, and Colorado Springs — "as in a number of markets around the country, the regional market is rather overbuilt with regard to existing ASCs, so we really haven't seen too many new ASC joint ventures emerging."

Still, he says, the impending changes in the Stark regs might open new areas for collaboration, around such topics as person service contracts, management contracts and provider-based status.

Stephen Nyquist says he can understand CMS officials' concerns over some under-arrangement-based models that may have skirted legal correctness.

However, Nyquist — a co-founder and partner in Salient Health Ventures, a Cullman, Ala.-based consulting firm that has helped create numerous hospital-physician joint ventures, primarily in outpatient surgery centers — explains, "Our concern is the throwing out of the baby with the bathwater; let's address those who are unscrupulous and not harm those who are appropriately aligning physicians and hospitals."

Like Fischer, Nyquist believes that hospital executives and physicians will continue to seek out ways to collaborate, but that under-arrangement-based outpatient surgery centers and other joint ventures could well be sealed off as a practical possibility within the next year.

On the other hand

Of course, not everyone is pessimistic about the emerging environment; some see bright days ahead for most types of joint ventures.

Caryl Serbin, president and founder of Surgery Consultants of America, a Fort Myers, Fla.-based firm that develops and manages ASCs for hospital-physician business partners, says, "I think under-arrangements were a threat to surgery centers. So I view the prospect of under-arrangements going away as a positive thing, because then that will circle back to the more traditional types of ASCs."

What's more, says Serbin — who with her colleagues has developed more than 50 ASCs — many of the ASCs in operation that will be negatively affected by the anticipated changes will be those that have specialized in gastrointestinal (GI) and pain management procedures. "What you'll be left with is large, multi-specialty, co-owned facilities," she says, "and that will be beneficial to the industry."

What will be more important than ever will be seeing to the fundamentals, Serbin continues, and that means doing intensive feasibility studies before launching ASCs, carefully evaluating such key considerations as location. It will also be very important to ensure that both physicians and hospital executives get educated about all the ins and outs of an ASC joint venture before actually launching one.

That having been said, she predicts, "We'll see fewer and fewer of the single-specialty, wholly physician-owned ASCs. And I think we're going to see more comprehensive cases done in the larger ASCs," as advances in medical technology make the treatment of more complex surgeries possible in the ASC setting.

"I think the annual growth of ASCs will continue in the 7-8 percent range, because the ASCs opening in the next year or two have already been started," says Kathy Bryant, president of FASA, the Washington, D.C.-based national trade association for ambulatory surgery centers. "There is reason for concern for pain management and GI," she adds, but overall, the ASC sector can be expected to continue to grow.

The bottom line, from the CFO standpoint, in evaluating any potential joint venture, whether an ASC, an imaging center, or some other business enterprise, is to look to the strategic fundamentals by answering questions such as: Does the proposed joint venture fit into the hospital's broader strategic plan and goals, both in terms of financial and service line goals, and with regard to physician relations?

In fact, says Jeff Rooney, executive vice president and CFO at the four-hospital, 800-bed St. Vincent's Health System in Birmingham, Ala., "There's a tendency to look at joint ventures as a purely economic transaction, whereas in reality, there's usually a strategic angle, and it's important for the CFO to be aware of the strategic aspects of any potential arrangement. And even in terms of doctors, it's more than just a financial arrangement . Doctors want to have some control over their own destiny. Because so often, you have opportunities to work with your doctors who are already loyal."

In fact, Rooney says, "Some joint ventures look really good economically, but they may not have a good strategic purpose. In a previous hospital I worked at, one joint venture proposal emerged that had good economic prospects, but ultimately, it didn't make sense in terms of the strategic goals of that organization, so it never went forward." St. Vincent's has several hospital-physician joint ventures currently in place, including ASCs, imaging centers, and durable medical equipment joint ventures.

Specialty success

Of course, there are hospital-physician joint ventures that are larger than ASCs, though the shifting regulatory landscape has made some of these more difficult in the past few years. Joint-venturing a specialty hospital is the main example of such a large-scale hospital-physician enterprise, though the specialty-hospital moratorium that effectively existed between late 2003 and mid-2006, and was put in place by the Medicare program to address concerns that community hospitals were being disadvantaged, until recently made new specialty-hospital joint-venturing nearly impossible.

One organization that has joint ventured successfully with physicians to create a specialty hospital is the 11-hospital Integris Health in Oklahoma City. There, cardiologists partnered with hospital management to create the 168-bed IntegrisHeartHospital, a cardiovascular hospital situated on the eighth and ninth floors of the system's 508-bed flagship facility, IntegrisBaptistMedicalCenter.

"We constructed this as a long-term management contract, and then built that contract around achieving certain goals, some of which were financial, but many of which were quality-driven," reports Charles Bethea, M.D., chief medical officer for Integris Heart Hospital, and the key physician leader on the joint venture, which opened the heart hospital in 2000.

In fact, it was critical work on alignment of goals between the health system's CFO and its physicians that helped forge the strategic partnership, smoothing the way to the heart hospital's creation, Bethea notes.

Alignment was natural in the sense that both the health system's executives and its cardiologists saw the same kind of potential in creating the specialty hospital, with win-win possibilities for both sides. For the cardiologists, it was the opportunity to work in a specialized practice environment with an intense emphasis on quality of care and professionalism, says Bethea. "Most of our guys are not highly entrepreneurial. We wanted to be competitive, but didn't really want to own a hospital. The management contract has allowed us to practice medicine in the best way," he says.

In the end, says William Dinsmoor, vice president and CFO at The Nebraska Medical Center, a 689-bed academic health system in Omaha, "A true joint venture between hospitals and physicians can create alignment. Everyone talks about reimbursement; but the reality is that reimbursement pressures will continue, and reimbursement overall may well go down, especially on a per-unit basis. The opportunity is to bring providers together in attempts to bring down cost."

Dinsmoor and his colleagues have joint-ventured with their physicians to create both a 24-bed orthopedic hospital (the NebraskaOrthopedicHospital, which opened in 2004), and a general hospital (BellevueMedicalCenter, scheduled to open in late 2009 in the outlying town of Bellevue, south of Omaha).

In fact, Dinsmoor concludes, efficiency-focused alignment "needs to take place in this country, and we need physicians' input on how we operationalize things, how we select supplies, and so on, and really need to work together to align on cost issues."

Mark Hagland is a contributing writer based in Chicago.


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