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Legal Update
The Art of the Physician-Hospital Joint Venture
Scott Becker
Publish Date: October 10, 2007

Scott Becker, Esq., CPA Good news if you're growing tired of the turf battles that are raging between hospitals and physician-owned ASCs: more hospitals and physicians are joining together to develop outpatient surgical facilities. Here are some tips for developing a successful hospital-physician joint venture, which can be tricky for both sides.

Habits of highly successful JVs
Successful hospital-physician JVs have seven common characteristics:

  • The hospital has a specific plan and desire to join with its physician specialists. It intends to manage the business through alliances, not by controlling referrals through primary care physicians or insurance plans.
  • The physicians, too, appreciate the value of the hospital. The hospital provides a strong, generally positive community presence, a strong primary care base and managed-care contracts. In a CON state, the hospital can help obtain this often-overwhelming but important approval.
  • The hospital owns enough interests to remain interested - but too large an interest may lead the physicians to resent the fact that most of the profits go to the hospital. Typically, this means the hospital should own 25 percent to 50 percent.
  • Distributions and reserve cash and capital are balanced. The hospital's desire for cash distributions is sometimes not as high as that of the physicians. A cash reserve for a new building project or an expensive new piece of capital equipment is nice, but too few distributions can cause physicians to lose interest in the JV.
  • Substantial majority rules. By making decisions this way, each party will be more wiling to relinquish a little control and live with the other party's making certain decisions. The parties should only fight over significant differences on the most major issues.
  • The facility is located near or on the hospital campus.
  • A third-party management company helps keep the parties focused and on good terms.

Business decisions to negotiate
Here are the five questions you need documented answers to before the JV moves forward:

  • How will you split the ownership? Each physician should own a large enough percentage to maintain long-term interest in the venture; 30 physicians owning 1 percent each is a prescription for disaster; however, 20 to 30 each owning 2 percent to 3 percent gives the physicians a much greater stake in the venture and leaves a fairly large percentage for the hospital.
  • Who will be on the board of directors? Board members should be based on the ownership split. It may also make sense to have a physician-majority board and allocate to the hospital certain reserve and unilateral powers to ensure the community benefits are served.
  • What reserve powers will exist? These are veto powers that each side holds to ensure that neither party acts too strongly and takes the venture in a direction different than planned.
  • What type of charity care will the JV serve? This is a hot button for many physicians, but it is highly unlikely that the percentage of patients served by charity or Medicare/Medicaid care will hurt a JV.
  • What is the valuation? Especially when a JV consists of an already-running ASC and either physicians or the hospital coming in as investors, a valuation is important. The valuation must reflect fair market value and be perceived as such by both parties. Each party should approve the valuation firm; many ventures falter if the valuation is not thought legitimate or, if legitimate, provides a purchase price that does not make sense.

Steering Clear of the Anti-Kickback Statute

The hospital and physicians must ensure the joint venture complies with these seven general rules of the Medicare/Medicaid Anti-Kickback Fraud and Abuse Statute.

  • Interests will be sold only to physicians who are outpatient surgeons or proceduralists.
  • Share prices and other terms will not be differentiated based on the volume or value of referrals for a particular physician.
  • No party to the JV will loan money to or finance the investment of another investor.
  • The venture and its participants will not discriminate against Medicare or Medicaid patients.
  • Each physician will disclose the ownership interest to patients.
  • The hospital will not be brought into the venture as a reward for referring or driving patients to the venture.
  • Each party will pay fair market value for shares in the JV; the price will not be discounted in exchange for referrals from a physician or the hospital.

- Scott Becker, Esq., CPA

The exempt-status issue
If the hospital is an exempt hospital, the JV must not negatively impact this status and it should let the hospital treat the new income as exempt income.

The loss of exempt status is potentially explosive; it's the type of concern that causes CEOs to lose their jobs. Even if a JV doesn't serve community benefits, it arguably must re-flect 10 percent to 15 percent of a system's assets or revenues to threaten the hospital's exempt status. However, the the assets and revenues of the JV would be combined with other non-exempt activities of the hospital system to assess whether the threshold is met. To avoid any exempt-status impact, the hospital may place the JV interest in a for-profit subsidiary.

On the other hand, whether the income will be treated as exempt is often flexible. The worst-case scenario would be that the hospital pays taxes on income it receives from the JV. The income might be exempt if the hospital has sufficient power in the JV's organizational documents to act regularly to ensure community service.

A good framework
Whether you're with the physician's group or the hospital, you can work toward a more successful JV if you follow these general steps. For more detailed information, download The Fraud and Abuse Statute and Investor-Owned Ambulatory Surgery Centers at writeOutLink("www.outpatientsurgery.net/resources/forms",1).