Ambulatory surgery centers (ASCs) are an appealing vehicle for physicians and health systems seeking to capitalize on orthopedic surgery cases’ shift from the inpatient to the outpatient care setting.
Many health systems pursue a joint venture (JV) to finance, manage, and govern an ASC, but some struggle to build a high-functioning JV due to operational, cultural, or financial roadblocks.
ECG has identified four tactics for maximizing the success of an orthopedic ASC JV.
1. Find the Right Partner
Identifying attractive physician or health system partners is imperative. Health systems often view ASCs as a means to expand the system’s presence in a region. To avoid “cannibalizing” the existing service line when developing ASCs, health systems typically seek new physicians to partner with. This strategy overlooks two important factors:
- Health systems are more likely to have functional relationships with physicians they already work with. Partnering with new groups through JVs presents a sizable level of relationship risk; however, new groups should not be overlooked as potential partners, as they create accretive value and may possibly build a more robust ambulatory surgical center.
- Musculoskeletal (MSK) cases that health systems hope to retain in the hospital setting will likely transition to the outpatient setting over time, regardless of the level of trust the health system has established with physician partners. ASC JVs are as much a defensive strategy as they are an offensive one.
Doubling down on a strong partnership that is positioned for growth sets the foundation for a successful orthopedic ASC JV.
2. Ensure That All Parties Add Value
In ASC JV relationships, all parties are not created equal. Health systems should evaluate each potential partner to confirm that the equity offering to each member is aligned with the value expected from the member. Steep surgery center management fees, coupled with large equity positions of ASC management companies, inflate the impact of cannibalization even further. Consider ASC JV management alternatives to mitigate losses attributed to cannibalization and migration.
3. Understand trade-offs in equity distribution.
An ASC’s ownership breakdown can be a point of contention. Many ASCs allow for varying levels of ––investment based on a number of factors, including the physicians’ appetite for risk and likely contribution to the ASC’s success. For orthopedic ASC JVs that don’t expect to have physicians exit the investment in the next 10 years, one option to consider is an ownership structure that remains as “flat” as possible. By ensuring that each physician has relatively equal access to share ownership, this model can equip the JV to perpetuate itself with new physicians who eventually invest in the group. Succession planning is arduous when only a small number of shareholders control the majority of shares.
4. Consider your physician transition strategy up front.
Physician practices often struggle to find mutually beneficial exit strategies for retiring physicians with equity in an ASC. This is likely to be an ongoing issue, given the high average age of orthopedic physicians. Before formalizing a partnership, ASC JV operating agreements should identify and implement terms that support desirable exit strategies. For example, it is often favorable to have provisions in the operating agreement that have a predetermined multiple on EBITDA for buying out partners at retirement (e.g., 3X). These terms often stipulate that physicians must sell their shares to other physicians when they retire. This enables new physicians to enter into the partnership as surgeons retire, making for an effective recruitment strategy while enhancing the value of the ASC. Poorly defined exit strategies can result in ASC JVs that have partners who do not add value and, in fact, reduce it for the next generation of ownership
Published June 21, 2021