Innovative Strategies for Physician-Hospital Alignment

Beth Connor Guest and James S. Mathis, for HealthLeaders Media, August 11, 2008

Recent changes in the law have created considerable uncertainty about the future of physician-hospital joint ventures—particularly for imaging joint ventures, whole hospital joint ventures, ASC joint ventures, and "under arrangement" services in general.

Election-year talk of healthcare reform together with the recent economic slowdown has exacerbated these uncertainties. In 2008, providers continue to face changes in law, changes in reimbursement, and pressure from managed care. These market pressures will chill some joint venture activity and inevitably cause other joint ventures to unwind.

In addition to the impact of regulatory changes, political vagaries and economic uncertainties as mentioned above, some historical strategies for physician-hospital joint ventures are now demonstrating that either they cannot deliver the desired financial results or that operating tensions within the model itself require that they be unwound.

What alignment strategies work?

Although the current environment for joint ventures is uncertain, the economic pressure on healthcare providers to develop innovative strategies has arguably never been greater. To create alignment strategies that will not only survive but also succeed in this challenging environment, it is essential to understand what motivates providers and physicians.

Providers have traditionally sought joint ventures in order to:

  • Align the interests of the physicians with those of the health system—share the risk and costs
  • Enhance physician professional accountability and quality of care
  • Provide access to a new service or new technology
  • Access capital

Physicians have traditionally sought joint ventures in order to:

  • Align the interests of the hospital or health system with those of the physicians—share the risk and costs
  • Enhance physician autonomy and quality of care
  • Provide access to management services, group purchasing and IT services
  • Access capital

Despite multiple legal and market challenges to traditional joint ventures, providers and physicians will continue to demand alignment opportunities to generate revenue, to control costs, and to improve the quality of care delivery.

Equity models remain viable

In certain sectors, such as outpatient surgery, dialysis, cardiac cath labs, sleep centers, and cancer centers, equity models still remain a viable alignment strategy. In a typical equity model, a physician—who can use the facility as an extension of his or her practice—and a provider each own equity in a facility. The joint venture bills the provider for the facility fee or technical component and the physicians will bill for the professional fee. Usually the provider will furnish management services for a fair market value fee and a physician will serve as medical director for a fair market value fee.

Typical equity joint venture structure

The benefits of equity models in certain sectors include the safe harbor protection for certain types of joint ventures; for example, outpatient surgery centers under the federal Anti-Kickback Statute. In other sectors, even where Anti-Kickback Statute safe harbor protection is not explicitly granted, absent either legislative or regulatory changes, equity models will continue to be viable where the risks can be mitigated and sufficient safeguards against fraud, waste, and abuse can be established because of the sense of security physicians derive from ownership. Accordingly, equity models continue to be a preferred model among many physicians.

New focus on quality standards and governance

Although the equity model has been around for some time, the current trend is for joint ventures to focus on quality standards and governance rather than pure financial performance and the division of the resulting revenue. The increased scrutiny on quality standards is evidenced by an abundance of quality studies and reports, the adoption of MS-DRGs, reporting of underperforming hospitals, nursing homes, and physicians by Medicare, state and private agencies and payers, and the movement to value-based purchasing and pay-for-performance reimbursement by both government and non-government payers. These trends demonstrate that joint ventures that align interests to improve quality will be most successful.

With respect to governance, successful alignment will occur when the organizations have synergies and create a governance structure that will best neutralize inherent cultural differences. For example, a physician group may have strong preferences about the type of surgical supplies that a facility uses, but a provider may have a group purchasing arrangement that precludes it from acquiring the supplies preferred by the physicians. The successful joint venture will sensitively compromise and effectively address this tension by such measures as establishing an active physician committee to hear, manage, and resolve clinical and quality issues.

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