Physician owners of outpatient facilities who have teamed up with managing partners will tell you that when it's good, it's really good. But when it's bad, it's a nightmare. In this article, physicians who have successfully teamed up with management firms share their advice on how to do it right.

Why partner up?
The three biggest benefits of a productive equity partnership are increased value, less liability and an overall reduced burden.

• Increased value. A good management firm will boost a center's value by cutting costs and generating new revenue. Typically, cost savings result from less expensive supplies and insurance that come with group purchasing power, whereas new revenue is often the result of renegotiated insurance contracts, improved collections and better utilization. "Even without bringing in more cases, a management company can increase revenue by 20 to 30 percent by renegotiating contracts with payors," says John Vick, president of the Valley Center, California-based ASCs, Inc. Management partners will typically change the accounting procedures from a cash to an accrual basis, adds Mr. Vick, noting that "most centers do a poor job of collecting on their own." A good managing partner will also "materialize" the value of the surgery center and show a track record of success, thereby helping attract new surgeons with tangible offers of equity. "Some doctors have a hard time getting other doctors to invest in their centers," says Mr. Vick. "The owners think they're offering a good deal, but the investors don't know what kind of value they're buying into."
• Less liability. A typical multispecialty center carries $2 to $3 million in debt initially, says Symbion's Billy Webb, and a big benefit of a managing partner is that it lifts this liability off of the physicians' shoulders. After running the Eastside Endoscopy Center for more than three years, Robert Gannan, MD, PhD, and his physician partners decided to team up with Physicians Endoscopy, LLC, for this very reason, among others. "At the time, we looked for someone to share the risk. We weren't sure which way ASCs would go then, and this was an asset in our minds," says Dr. Gannan.
• More time. Many physicians simply don't have the time, desire or expertise to run the administrative side of the business, and the ability to rely on an expert can bring peace of mind to overburdened doctors. This is why, after running an ASC for seven years (now known as Wilmington SurgCare, LP), David Lensch, MD, MMM, and the center's team of physicians partnered with Symbion.

Equity Partner or Consultant: What's Your Best Option? Once you decide that you need help managing the business side of your center, the next decision is whether to hire a consultant or an equity partner. "Some wanted to own pretty much all of us, and at the other extreme were consultants who wanted to give us a laundry list of things to do and walk away while we did the work," says Robert Gannan, MD, PhD, medical director with the Eastside Endoscopy Center in Seattle. Many in the industry say an equity partner is a good bet, for several reasons: First, they say, an equity partner is more likely to add long-term value to the center rather than create short-term cost savings because it has ?skin in the game.' "We considered turnkey operations but, ultimately, their success didn't depend on the contracts that are negotiated," says Louis La Luna, MD, medical director of the Berks Center for Digestive Health in Wyomissing, Pa. Second, an equity partner assumes the lion's share of financial risk, taking personal liability off the physicians' shoulders. Third, many industry players say it's not economically feasible to offer just management contracts because of the tremendous resources it takes to get and keep a center running at peak efficiency. Many firms prefer to acquire a minority interest so the physician owners can keep the majority share and thereby stay committed to the facility. However, not all centers are attractive to an equity investor. "Half of the centers that call us are not of the quality that would be interesting to an equity investor," says Jon Vick, President of ASCs, Inc. For example, he says, plastic surgery centers that are not Medicare-certified or state-licensed are not ?saleable'. In addition, he says, if the facility is not expandable - that is, physically, in terms of specialties and/or in terms of adding physicians - it may not be attractive to an investor. ASCs that are associated with a single practice or dominated by a single surgeon, for example, are often considered unsaleable. For these centers, or for physician owners who simply do not want to relinquish equity, consultants can still be a good option. For the past five years, the Omaha-based Midwest Endoscopy Services, LLC, has proliferated under a non-equity management contract with Kansas City, Mo.-based Ambulatory Surgery Assistance, Inc. According to Kenneth Maxwell, MD, the consulting firm helped build the center from scratch and has done a "bang-up job" of managing it ever since. "We received Medicare certification the day we opened and JCAHO certification six months after we opened," he says. "We have had very few problems." - Dianne Taylor

"Our facility was getting larger than we were able to manage," says Dr. Lensch, "and our partner offered a number of resources we didn't have access to, such as information software experience, accounts receivables and payables expertise, and group purchasing contracts."

How to evaluate firms
Before moving forward with a corporate partner, consider your options carefully, advise doctors who've been there. To maximize the chances for success:

• Ensure adequate capitalization. The most common cause of partnership failure? Undercapitalization, says Mr. Vick. That is, the management firm does not have the resources to deliver what it promised. At the very least, be sure the firm can secure a "nonrecourse" loan so the physicians are not liable should the center go belly up, says Louis La Luna, MD, Medical Director of the Berks Center for Digestive Health in Wyomissing, Pa. When seeking his own management partner, Dr. La Luna obtained financial records and had his accountant and lawyer investigate the candidates thoroughly.
• Assess the firm's level of involvement. It's critical to find out just how involved the management firm intends to be in the center's administrative, clinical and financial decision-making. Although this can depend on the amount of equity the management firm purchases, it also depends on the corporate philosophy. "Some companies throw you lots of money and leave you to run things, whereas others stay involved and are very hands-on," says Dr. Gannan. "We wanted a true partner who'd be willing to invest in our ideas because they enhance the practice of medicine."

No matter which approach you prefer, physician partners universally recommend maintaining full control over clinical decision-making. "Clinical issues impact the bottom line dramatically, and you don't want a partner who tries to control what you do clinically" in order to improve revenues, advises Dr. La Luna, who along with his physician partners sold a 35 percent equity interest to Physicians Endoscopy. "You want them to present economic information and rationales for purchasing or not purchasing items, but you want to maintain control over the final decision."

Still, it is equally important to relinquish control over the daily operations. "I was reluctant to give up a lot and felt that no one could do billing as cheaply as I could," says Dr. Gannan. "But after a six-month trial period, our turnaround time and accounts receivables improved far beyond my expectations. I haven't looked back since."

• Evaluate the firm's areas of expertise. Although all of the companies may promise similar services, it helps to take a close look at how each firm can meet your specific needs. For example, your state might have particularly stringent regulations that affect your facility. In addition, Dr. La Luna advises finding out if the firm can deal effectively with your type of payor mix. "Payor mixes can vary dramatically from county to county, much less from state to state," he notes. Further, connections can help, says Joan Dispenza, chief operating and financial officer with the Ambulatory Surgery Center of Western New York. According to Ms. Dispenza, the physician owners of her center were attracted to its current managing partner, Ambulatory Surgery Centers of America (ASCOA), in part because the firm was uniquely positioned to help them obtain a hard-to-get certificate of need. "At the time, there was a moratorium on setting up freestanding ASCs in New York," says Ms. Dispenza, "but this firm had a knack for dealing with state government agencies."
• Aim for maximum flexibility. Physician partners recommend seeking out a management firm that is flexible enough to work not only with your particular payor mix, but with your patient population, competitive environment and overall personality, as well. "We didn't want a group to present a ?cookie-cutter' approach ? and march in telling us ?This is the way it's done'," says Laurie Hendrix, administrator with The Surgery Center of Columbus, Georgia, a multispecialty ASC that teamed up with ASCOA in the early stages of its development. From the beginning, the center's seven orthopedic surgeons wanted to continue their good-faith relations with the large orthopedic hospital next door. Ms. Hendrix notes that such flexibility was integral to the center's success in other ways, too. The center got off to a shaky start, she says, because the administrator and clinical coordinator appeared to have a personality conflict and the company felt their performance was not meeting expectations. "ASCOA didn't let that linger," says Ms. Hendrix. "They stepped up to the plate and replaced them before ? damage was done."

Average Charge Per Case Limited partnerships $1,426 Sole proprietorships $1,062 Physician partnerships $1,048 SOURCE: SMG Quintiles (figures are for 2000)

Perhaps most importantly, some physician partners advise seeking out a firm that is flexible enough to separate the management contract from the equity ownership. When Martin Schor, MD, and his urology colleagues teamed up with Roswell, Georgia-based Specialty Surgicenters, Inc. (SSI), to form the Shore Outpatient Surgery Center in Lakewood, NJ, they obtained a management contract that is separate from the firm's 25 percent equity ownership. Dr. Schor and his colleagues entered into the equity arm of the partnership in exchange for a $2-million note that SSI took on to start the center. "I would absolutely insist on this option," says Dr. Schor, "because you have the option to buy out of the management agreement if the firm sells its business."

• Call references and visit centers. Physician partners strongly recommend checking references closely and visiting other centers that have partnered with the management firm(s) of your choice. Without question, they agree, this is the only way to uncover the information you need and achieve some level of confidence in your decision. "Do background checks. Look at several people at the same time just like any other bid process. Sniff around through your contacts and find someone with firsthand experience with the firm," advises Dr. Lensch. "Find out what their perspective is and what problems they've had." Dr. Lensch says this process was key to helping him and his colleagues pick their management partner. "We did not want a ?drive-down-from-the-top' culture that some companies have. We were not going to have them put a photo of their president on the wall, change our name and institute ?corporate-wide policies.' We wanted to continue to do things the way we were doing them but have access to resources that would help us improve our practice."

Dr. Lensch says this process can be harder than it may seem, because the physician owners have to first admit what they don't know. "As Dirty Harry said, ?A man's got to know his limitations.' Most physicians don't. Get over it, and ask questions," says Dr. Lensch.

Prepare for the future
Physicians who have been through the partnering process say that, no matter how much research you have done, you still need to be prepared for change and even a few new challenges when you do bring in a managing partner. Although a managing partner can boost physician recruiting efforts by bringing structure and support to an equity offer, some say the label of ?corporate partner' can raise suspicions among some physicians at first. You will also need to navigate through a transitional phase, which could involve dealing with new office employees, a new administrator, new nurses and new procedures for tasks like buying capital equipment.

For many physician owners, the hardest part is giving up a piece of the pie, but those who have partnered successfully with a management firm vow that it is well worth the financial sacrifice. For one thing, when the partnership works, the sacrifice is often relatively small because the loss of equity is distributed among a number of surgeons, and because a good management firm will offset part of the loss by increasing the center's overall profitability. For another, a good managing partner brings value to the center that many say is well worth the loss of equity, such as access to legal, billing, contracting, regulatory, and other experts that an independent center could not otherwise afford. In addition, a good partnership is a welcome security net for many doctors who prefer to practice medicine rather than conduct business in this increasingly competitive and regulated environment.

"There is a downside to being out there on your own," says Dr. Gannan.

Concludes Dr. Schor: "If I were to be purely selfish, I'd say I regret giving up 25 percent of a very successful center. But physicians just don't have the time to deal with every state regulation that comes out, every change in Medicare, and all the accounting, legal and managed-care contracting work. I don't begrudge my managing partner a dime."

Contact Dianne Taylor at [email protected].