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Choose your ASC partners wisely

By Albert R. Riviezzo, Esq

Few investments offer greater returns for a physician than owning and operating a freestanding ambulatory surgery center (ASC). With the ability to control virtually all operational aspects of the facility, physician owners are able to maximize efficient use of the facility, improve the efficiency of their office practice scheduling and create a surgical environment tailored to their needs, all of which can enhance the quality of care they provide and, at the same time, enhance the profitability of their practices. For example, physician owners have complete control over the operating room (OR) schedule and may allocate OR time among the owners and other physicians on the ASC staff in block time increments. Using a block time schedule enables ASC staff to set the OR rooms up for the specific types of cases to be performed and allows for maximum efficiency in turning around ORs between cases. This, in turn, enables physicians to more efficiently schedule their practice office time because they are able to block out designated hours for surgery. In addition, as owners of the facility, the physicians have complete control over hiring and firing decisions with regard to facility staff, so underperforming staff can be replaced without unnecessary administrative wrangling.

While enhanced efficiency and the ability to control the OR environment are perhaps reason enough to invest in an ASC, these benefits pale in comparison to the true economic benefit of owning an ASC: the ability to bill for and obtain reimbursement for the facility fee associated with each procedure performed in the ASC. In fact, in some cases, the facility fee can exceed the professional surgery fee. So, with the right mix of cases and payors, an ASC can result in significant profitability for its owners.

With all of the obvious benefits an ASC can offer physicians, some might ask why every physician has not started or invested in an ASC. While there are perhaps many answers to this question, physicians simply feel that they do not have time or expertise to develop, own and manage an ASC. In addition, designing and building an ASC can be expensive. Development costs can easily exceed $500,000 per OR. For these and other reasons, physicians considering developing an ASC are often tempted to bring non-physician partners into the mix. However, as discussed more fully below, physicians are well advised to choose their ASC partners carefully, since choosing the wrong partner or failing to incorporate adequate protections in the organizational documents of the ASC can result in the physicians losing both control and much of the economic benefit of owning the ASC.

Partnering with a Hospital

When word gets out that physicians are considering developing an ASC, it is not uncommon for a local hospital (or hospitals) to seek an ownership opportunity in the ASC. Faced with the prospect of losing lucrative surgical cases, many hospitals have come to the realization that even a minority ownership interest in an ASC may be better than no interest at all. From the physicians’ perspective, having a hospital involved in the ownership may be attractive for a variety of reasons. A hospital will often have significantly deeper pockets than the physicians; hospitals may, therefore, not only share in the costs of developing and operating the ASC, but lenders may be willing to lend more money to the ASC when they are able to look to a large entity like a hospital as a guarantor. In addition, many physicians believe (often mistakenly) that hospitals have greater expertise than physicians when it comes to operating health care facilities. Finally, inviting the local hospital to be an owner in the ASC may ameliorate the political fall-out many physicians fear from their hospitals when they threaten to take cases to an ASC.

Under certain circumstances, it may make a great deal of sense to involve a hospital in ownership of the ASC. However, physicians must take great care to ensure that in involving a hospital they do not cede too much control over the management and operation of the ASC. In addition, if the hospital in question is a non-profit, tax exempt entity, the hospital may have to be able to demonstrate that it has sufficient control over the ASC to ensure that the ASC operates in a manner consistent with the hospital’s charitable purpose. For this reason, non-profit hospital investors may demand a majority ownership interest in the ASC, management control over specific decisions relating to the hospital’s charitable purpose or other attributes of control.

Physicians must also be careful when considering allowing a hospital investor to get involved in the operational management of the ASC. For example, a hospital investor may be eager to do the billing and collections for the ASC, but billing for ASC facility services is very different from billing for hospital services. The ASC may be better served by hiring and training its own billing staff or engaging a third party billing company that has expertise in billing for ASC facility services. In addition, hospital investors, particularly if they are non-profit, may be less interested in maximizing the profitability of the ASC than in appeasing physicians who are on staff at both the hospital and the ASC. Accordingly, allowing a hospital investor to have a say in day-to-day operational decisions, such as OR scheduling, could undermine the very purpose of establishing the ASC in the first place.

Partnering with a Management Company

Hospitals are not the only “deep pockets” that may be interested in investing in a free-standing ASC. There is also a host of national (and in some cases publicly-traded) ASC management companies that may also be interested in owning an interest in an otherwise physician-owned ASC. These companies typically offer management services ranging from initial feasibility studies to development, licensure and accreditation and day-to-day operational management. Often these services are provided pursuant to a long-term management contract through which the management company maintains significant control over the day-to-day management of the ASC and in exchange for which it receives a significant management fee that “comes off the top.”

In addition to providing management services, the management companies will typically seek an equity position in the ASC which, depending on the company’s model, may be a majority interest or a minority interest. In addition, these companies may require physician investors to agree to what are called “bring along” stock purchase rights whereby the management company investor may require the physician investors to sell their interests in the surgery center if the management company finds a willing buyer and is desirous of selling its interests in the ASC.

ASC management companies may offer significant management expertise and, as for-profit entities, they do not bring the same “charitable mission” issues that a non-profit hospital investor brings to the table, but their management fees may cut sharply into the physician investor returns. Moreover, when it comes to day-to-day management issues, the physicians find that they have only traded one master (i.e., the hospital) for another, without gaining any more control over the ORs than they had when they operated in the hospital. Often, the goal of the management company is to maximize profits (earnings) and then sell the ASC at a multiple of earnings. This goal may conflict with the physicians’ objective of long-term ownership. For these and other reasons, physicians considering partnering with an ASC management company should carefully evaluate whether, in fact, the management company brings sufficient value to the bargaining table to warrant the management fees and the equity and stock purchase rights the management company is seeking.

Consider D.I.Y.

So, do hospitals or ASC management companies hold secrets akin to the formula for a famous soft drink? Not really. While the development, design, construction, financing and certification of an ASC may seem a daunting task, there are architects, consultants, legal counsel and accountants who have the knowledge and experience to guide a group of physicians through the entire process. In addition, banks and the lending arms of equipment manufacturers view ASCs as extremely attractive, low-risk lending opportunities. Accordingly, the amount of capital contributions from the physicians may amount to about only 20 percent of the overall cost of the project. In some circumstances, it may be possible for the physicians to have an ownership interest in the building which houses the ASC. This may enhance the cash flow from the project. Finally, once the ASC is constructed and outfitted, the employment of an experienced administrator and a director of nursing will assure the success of the venture.

ASC ownership represents a tremendous opportunity for physicians to enhance the quality of care they provide, the efficiency of their practices, the control they exert over the ASC’s day-to-day workings and their income. However, as these benefits come at a cost, physicians may be tempted to share the financial burden with a partner better able to absorb it. However, physicians will find that financing for a well-planned ASC venture is readily available. In addition, the process of developing and operating an ASC is not so complex that physicians, with the assistance of experienced advisors, cannot successfully launch an ASC without the involvement of a hospital or management company.

Albert R. Riviezzo, Esq., is a partner at Fox Rothschild LLP resident in the firm’s Chester County Office.

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