Legalities of Joint Ventures: Hospital Health Systems

Lately, hospital health systems and physician owned urgent care businesses have been friendly bedfellows in the joint venture area of healthcare transactions. The Ambulatory M&A Advisor gives a look into planning out the transaction on both sides of the deal, the pros, cons and legal ramifications involved in a joint venture between a health system and urgent care business.

The way that you structure a venture may depend on the particular type of ambulatory facility that you are dealing with. For the most part, those are just straight up joint ventures with hospitals intended to be freestanding ambulatory entities. When you get into urgent care centers, a lot of times there are two different ways of approaching the structure of those organizations,” Sheryl Dasco, partner at Seyfarth Shaw says.

“One is going to be some form of hospital physician venture that might extend to the facilities, the hard assets of the entity. There might also be joint management involved. In states that have a corporate practice of medicine prohibition like Texas and California, the hospital is not really in a position to engage the physician and employ them directly. Oftentimes physicians will have a separate and independent relationship with that facility staffing that urgent care facility.”

Dasco says that sometimes hospitals will set up urgent care centers as an extension of the hospital, such as the department of a hospital and would operate that as an outpatient service of the hospital. However, she says those arrangements usually do not involve physician ownership except to the extent that the physicians participate in the ownership of the real estate, the building, or possibly the equipment.

“One of the more common structures is that it is becoming more common for hospitals and physicians in some respects to move away from the typical operating joint venture entity to the hospital outpatient department models. There are different reasons and different advantages and disadvantages to each of the models,” Dasco says.

Dasco says that the availability of setting up possible outpatient departments has become very attractive because the hospitals are able to clearly not only command a higher level of reimbursement treating the facility as an extension or a department of the hospital, but physicians can also participate contractually in co-management arrangements.

Bruce Irwin, MD, founder, CEO of American Family Care explains that joint ventures are going on all over the country, especially between urgent care, hospitals, and big provider groups.

Irwin says the method is so well embraced because the parties are seeking alliances not enemies. Joint ventures between urgent care and hospital health systems are good for the public and improves the quality and accessibility of urgent health care, Irwin says.

Irwin says that there are several negotiating points that need to be covered in these types of joint ventures.

“The first and foremost is that everybody needs to get on the same page. They have to have an alignment of interest. Then the structures vary. Some are joint ventures where hospitals buy 50/50. I think that is a difficult arrangement. If people can make it work. Then I think that is great. The difficulty that hospitals have an clinical operators have is the methodologies and ways of management are very different. It can be a very difficult marriage,” Irwin says.

“I think if a hospital wants to have a joint venture with an urgent care system, and wants to have some kind of minority stake, then that will work. Or, if the hospital wants to hire a physician group to do the management for them, that will work. There are urgent care companies where all they do are joint ventures with hospitals. Basically they develop the clinics, they manage them, but the hospital owns them, and the hospital brands them.”

Rob Scoskie, executive director of Strategic Ventures for North Shore LIJ Health System says that when it comes to assessing joint ventures in any space, he looks to entities that can deliver upon three or four core criteria.

According to Scoskie, the four questions asked of a potential business partner are: Can they be a successful operating partner? Can they provide for capital partnership? Can they yield and grow our platform of service effectively? Can they be reflective of both our brand and culture?

“Part of the partnership development strategy means that both sides have to find synergies and benefits,” Scoskie says.

Scoskie adds that as larger health systems, they bring brand, quality, recognition in the marketplace; ability to leverage a broader system.

“Iit’s not just a stand-alone tactic to be in the urgent care market, but it’s a much broader umbrella of relationships that we try to develop. When we are able to leverage that successfully, we are deemed to be very successful and competent partners for business partners,” Scoskie says.

As Dasco and Irwin have mentioned there are a number of benefits and challenges that come with joint ventures between hospital health systems and urgent care.

Dasco says that one of the main advantages to the deal for urgent care are that the hospital has access to capital in some respects, therefore having embedded resources that they bring into the relationship.

Dasco goes on to explain that urgent care partners can also bring some great things to the table for the health systems.

“Hospitals don’t always manage well. So, having external management or having businesses that have certain niche expertise, there is some attraction to bringing them in. Oftentimes these business organizations or these management companies also have relationships with physicians. So, they may become a bridge to bringing physicians to the table in a relationship with the hospital. An example being with cardiac cath labs; many hospitals and many physicians who are cardiologists are interested in developing cath labs. Sometimes they can do it directly on their own and in other cases, there are management companies that bring expertise and know how to handle the billing, know how to manage the coding, and they will be brought in as somewhat of a third party to manage the venture,” Dasco says.

“The hospital systems…great advantages,” Irwin says.

“Primary care is a big buzzword right now, and hospitals historically, have neglected primary care. Quite frankly it’s not a big money maker for a hospital. They would much rather have orthopedists, an OBGYN and people who do procedures. But, now everyone under the changes that have taken place in our healthcare system, and the anticipated changes, that is the trend. You have a lot of hospitals that do not have a primary care network. These types of joint ventures can do that for them.”

Irwin says that in these types of ventures, urgent care generally are included in the hospital health system’s healthcare plans which gives urgent care access to more clinics. Irwin says that affiliation, depending on how it is structured, adds to both entities because in some areas the linkage of names is valuable.

Howard Drenth, President and CEO of Presence Medical Group a division of Presence Health System says a health system can bring more to the table than many would believe.

“In a joint venture, what we bring is the broader continuum of care. What you find is if you look at that continuum of care, is that the urgent care center plays an important part of it. It plays an important part for providing a lower cost access point as an alternative to the Emergency Department,” Drenth says.

“It also plays an important part because these patients in the urgent care centers need ongoing care. Usually they are very episodic in nature with the care that they provide. So, they need ongoing care, whether it be primary care for a chronic disease, or they need ancillary testing, MRIs, CT Scans, physical therapy, those types of things.”

Drenth says the health system can help with the ancillary and diagnostic component of an urgent care business. It can help them with their primary care network to take a center’s patients and continue the care that they might have started in the urgent care center.

Dasco says that as well as benefits, there are a number of challenges involved in these particular joint ventures.

“Fundamentally, it comes down to control. Depending on the circumstances and the business goals that exist, the hospitals will generally want to have greater control over the venture. They sometimes cross wires with the physician investors. Because if it were that type of venture where it is primarily a facility that offers services that physicians are able to legally participate in, then the physicians may not want to give up as much control or ownership to the hospital,” Dasco says.

“It is really going to come down to the dichotomy between control and funding. Because the organization who has the gold often wants to rule; it doesn’t always work when the goal is also to be able to bring in those physicians who are in fact, the end users of the facilities to provide the services to the patients.”

Drenth adds that there is risk on a variety of levels, one of them being a co-branding arrangement.

“Our name is on the building, and I think a risk is, you want your name to be well represented for the services delivered there. You want to protect against that,” Drenth says.

“Another risk in some of these relationships is these joint venture companies are owned by significant investors, and you want to make sure that your partner is aligned in terms of your mission, of your values and what you are trying to accomplish and serve in your community; and has a focus on the patient as compared to a focus on other priorities. Whether it is making a profit no matter what the means are, or things along those lines.”

If you would like to learn more about the concepts covered in this article, want to sell your business or discuss how Ambulatory Alliances, LLC might be able to help you out, contact Blayne Rush, (469)-385-7792, or Blayne@ambulatoryalliances.com.

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