The question no longer is which hospitals are building surgery centers in partnership with physicians, but which ones aren't. While it's hard to know how much of the $100 billion that the country's 4,900 community hospitals have spent on new facility construction over the past five years has gone toward outpatient surgery, many of the building cranes seem to be standing over joint-ventured ambulatory surgical centers.

As part of its expansion, Williamson Medical Center in Franklin, Tenn., formed a 51-49 partnership with 23 surgeons, GI docs and anesthesiologists to open an outpatient surgery center last October in the hospital's new tower. Twice before, a group of surgeons had left the hospital to build a competing ASC. Hospital CEO Dennis Miller wasn't about to watch history re-repeat itself.

"I've been in this business for 30 years and I've yet to admit a patient," says Mr. Miller, who also serves as the president of the ASC. "Partnering with physicians in a surgery center means we've got their loyalty. And we've got their business that was going out to other surgery centers."

Amid published reports that hospital bed capacity declined by 18,000 between 2001 and 2004 comes an estimate from healthcare lawyer and industry observer Scott Becker, JD, CPA, that hospitals have a stake in about one-fourth of the nation's 5,000 ASCs. Hospitals are partnering with physicians in an increasing number of these projects, their ventures connected by hyphens and handshakes, by walkways and parking lots.

Third-generation projects Hospitals developing ASCs are part of the natural progression in the broader ASC development cycle, says Ryan S. Daniels, CFA, an equity research analyst with William Blair & Co. in Chicago. Mr. Daniels calls hospital-physician ASCs third-generation projects, distant cousins to the entrepreneurs who first partnered with doctors to build and operate ASCs and siblings to physicians groups that began to develop more ASCs on their own.

"Hospitals would be foolish not to think about building their own ambulatory surgery centers. If the hospitals don't build it, the physicians will," says Christy Dempsey, BSN, MBA, CNOR, the vice president of surgical and emergency services at St. John's Regional Health Center in Springfield, Mo., which built an on-campus ASC in July 2004. Before the eight-OR ASC opened, St. John's was doing a mix of inpatient and outpatient cases in its 26 ORs.

"It was a mess," she says. "Any time you have very predictable, scheduled cases in the mix with very unpredictable, unscheduled, urgent, emergent, in-house patients, the schedule is a mess. The outpatients get bumped, you have poor patient satisfaction and efficiency suffers - you can translate that into lost revenue."

And now? "We can do twice as many cases by noon in the surgery center than we can in the main OR because of efficiency, not necessarily the lengths of the cases," says Ms. Dempsey.

St. John's runs and manages the ASC as a freestanding facility, even though the hospital is the sole owner, she says. Physicians have input in staffing and get to see income statements and expenses.

A few years back, Reid Hospital & Health Care Services, Inc., in Richmond, Ind., went to great lengths to prevent a group of physicians from leaving and forming a competing surgery center.

The hospital was in the middle of planning a $233 million construction project, one that would create a new campus of about 750,000 square feet of building space. A group of physicians, feeling locked out of a surgery center partnership Reid already had with another physicians' group, was threatening to break away. Essentially, they were saying, "If we can't get into that one, we'll form our own," says Ted Sobol, the hospital's senior vice president.

But Reid's executives had learned then what more hospitals are finding out now: "Going to war never works," says Mr. Sobol. "It's not worth competing head to head."

The hospital moved to accommodate the surgeons bent on leaving, and though it took months to hammer out a deal, the hospital and physicians ended up with a mutually beneficial partnership - not to mention a bigger- and more-expensive-than-planned outpatient care center that included 26 (instead of eight) physician-owners.

Count the reasons What are some of the other reasons why a new wave of hospitals is getting into the outpatient surgery game?

• Good financial outlook. First and foremost, hospitals are realizing that partnering with physicians is a good way to go because of the Medicare climate. While hospital reimbursements may be higher now, a freestanding, outpatient-surgery-only center may prove more profitable later.

By 2008, Medicare is expected to link ASC reimbursement rates to the generally higher rates it pays hospital outpatient departments. Under the terms of a Congressional bill, Medicare would pay ASCs 75 percent of the HOPD rate, as well as let ASCs perform and receive facility payment for all surgical procedures except those that require an overnight stay or pose a substantial risk to patient safety.

"This will bring ASC reimbursement closer to that of hospital outpatient departments, which may drive even more hospitals to consider freestanding facilities," says Caryl Serbin, RN, BSN, LHRM, president and founder of Surgery Consultants of America Inc., a Fort Meyers, Fla., company that develops, manages and bills for surgery centers.

• Serving the market. When Michael Monsour came on as CEO and chairman of the board of Monsour Medical Center in Jeannette, Pa., in August, he took over a facility that had seen better days. The hospital was in debt, and it had been operating under provisional licenses after the state health department revoked its two-year operating license in 2004.

Looking at facilities in the surrounding area, Mr. Monsour saw that, while they offered plenty of general beds, short-stay surgical facilities were lacking. When he looked at his facility, he saw five large ORs that could handle just about any procedure.

A focus on short-stay surgery seemed to be a perfect fit. He proposed that a portion of the facility - a 20-bed, 54,000-square-foot, two-story pavilion - be turned into a specialty surgical hospital that would handle a mix of in- and outpatients.

• Maintaining a patient base. Some areas, though, can't support more than a couple centers, so there's no guarantee a hospital will be able to build its own surgery center down the line. If physicians want to joint venture, then a hospital would do well to at least consider the notion. "If you let docs walk away with 50 percent of your business, you'll be out of luck," says Ms. Serbin. "Fifty percent of the pie is better than no pie."

In addition, as patient comparison-shopping increases, ASCs can fill two growing consumer demands: the demand for quicker, easier medical services and the demand for services provided in more comfortable surroundings.

St. Michael Hospital in Milwaukee retooled its day surgery unit when it noted the latter trend. The hospital had been doing same-day surgery for 20 years, but its surgery area was an open unit that wasn't too inviting and didn't offer much privacy, says Mary Kay Hart, BSN, the hospital's manager of day surgery, pre-admission and the GI centers.

So the hospital gutted and expanded the unit, doing patient surveys to see what was expected of the new construction. One of patients' concerns was parking, so the hospital now offers complimentary valet parking and gives patients' escorts pagers. There are playrooms and places for people to do work in addition to the waiting room.

• Happier physicians. "Hospitals, in general, don't offer physicians the chance to invest," says Mr. Monsour.

Take advantage of this. Rather than letting an ASC develop into an us-versus-them situation, hospitals and physicians should both view a joint-venture as a way to better both their situations: physicians get a piece of ownership and a degree of laterality, and hospitals get a profit center.

The joint venture between Spartanburg (S.C.) Regional Healthcare System and a physicians group that resulted in the ASC of Spartanburg is a good example of these good relations in action, says Ms. Serbin.

"In the beginning, everyone from the hospital side stressed they wanted physician involvement at every step," she says. "From the very first meeting with Ray Shingler, CIO of Spartanburg Regional Healthcare System, he stressed repeatedly, ?I can't and won't make decisions without the support of the physicians.'"

Mr. Shingler made sure the physicians interviewed all the prospective development and management companies, says Ms. Serbin: "It set the tone for the project. Before then, I had never seen such cooperation and friendliness between medical staff and hospital administration."

It shouldn't end once the center is up and running. Dawn Beljin, RN, BSN, the director of the surgery center at Parma Community General Hospital in Parma, Ohio, says that, for example, if physicians want to offer a new procedure, she listens and investigates whether it's feasible.

"We're open to ideas," she says. "It's to my advantage. If I'm not going to listen to them, someone else will."

• More ways to do it. As joint ventures have increased in popularity so, too, have the number of ways to partner, adding flexibility - and possibly making the idea more appealing. These are the four most popular models, say Ira Coleman, Esq., and Amanda K. Jester, Esq., of McDermott, Will and Emery in Miami:
• 50/50 deal. The hospital and the physicians equally share ownership and governance.
• Management model. The physicians and the hospital share ownership; an outside company manages the center.
• Tri-party model. Similar to the previous model, but the management company owns equity in the ASC.
• 70/30 deal. The physicians have a majority ownership interest and are clearly in control of governance issues.

Reid has decided to offer all sorts of joint venture opportunities to physicians. For instance, it issued tax-exempt bonds to finance space and fit-up of an imaging center in the new outpatient care center. Members of the Reid medical staff, plus providers in the county, are eligible to invest in these.

So far, about 70 physicians have signed on for various joint ventures. "Satisfy your physicians' desires to invest as much as possible," says Mr. Sobol.

Monsour is offering shares of the surgical hospital to physicians for $24,000. Ultimately, physicians would own a 50 percent stake. This investment will instill loyalty in physicians, for if they buy a share, they'll be required to remain active in the facility, says Mr. Monsour.

• Taking advantage of one another. Each party brings its strengths to the table, and they are stronger in combination. For example, says Ms. Serbin, Mr. Shingler felt that Spartanburg Regional's purchasing power for equipment and supplies was a major contributing factor in the ASC's early successes. And COO Charles Townson notes that the hospital had the ability to provide assistance from its very successful managed care organization, she says.

This is enhanced if the ASC is on the hospital campus. Offering more than just management and financing, the hospital can also provide equipment and supply storage space more easily to an on-campus center. Dana McGrath, RN, MSN, the director of the Algonquin Road Surgery Center in Lake in the Hills, Ill., notes that you have to contract out fewer services if the ASC is nearby.

Housekeeping, laundry and telecommunications are just some of the amenities that Parma's surgery center uses from the hospital next door. "If I need something, I can get it from the main house," says Ms. Beljin. "It's all right there."

Proactive and reactive responses The American Hospital Association says hospitals are in the middle of the most significant period of hospital reconstruction and expansion in the past 50 years. Outpatient surgery is driving that growth, in large part because hospitals have realized that, in a consumer-driven healthcare market, ASCs often provide a more convenient location and better experience for an outpatient surgical procedure. "[Hospitals] are proactively building ASCs to meet market and patient demands," says Mr. Daniels. Also keep in mind that this new wave of surgical construction is likely a reactive response to new competition. "Many hospitals also are seeing doctors - and subsequently their case volumes - moving to competing ASCs," says Mr. Daniels.

According to Albert Matyas, the vice president of development and marketing for Parma Community (Ohio) General Hospital, the reason for the trend is simple: It's for for the long-term fiscal health of both parties.