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Remarks      Hospitals Want to Meet You Off-Campus By joining forces in new ventures, physicians and hospitals can both benefit. By patrick m  connolly     Unique Opportunities,  Sep/Oct 2007 If you were a fly on the wall of a hospital boardroom a few years ago, you would’ve heard something like this: “Another surgery center? Those greedy doctors want to skim off all the patients with good insurance. It just isn’t right. They don’t have to staff an emergency room, work nights and weekends, or run a burn unit. They don’t have to stay open around the clock and absorb the losses on indigent care. If they want to compete with us, we’ll show them who runs this town. Let’s open our own outpatient centers and beat them at their own game!” Today, that fly could buzz into a director’s office and overhear a phone conversation that sounds like this: “Doctor, my friend, I hear you’re thinking about opening a surgery center on Lakeview Boulevard—an excellent idea. We’re looking at that area, too. Maybe we should consider doing this as partners instead of competitors. You know, a joint venture could open up a lot of mutual benefits. What do you say, partner?” Suddenly, by expanding off-campus ancillary services, the doctor has become the big man on campus. How’d that happen? Clinging to their historical position of power, hospitals have been slow to accept that technological innovation and reimbursement trends have swung the pendulum of power toward physicians. But they are finally catching on. In the world of outpatient care and freestanding clinics, hospitals can’t beat you—so they better start joining. For years, hospitals have seen large chunks of their traditional revenue stream diverted to facilities opened by physicians. Ambulatory surgery centers and specialty hospitals have been accused of cherry-picking the most profitable patients from full service hospitals. Trying to compete put hospitals in the position of alienating the community’s leading surgeons and specialists—a losing proposition. Hospitals increasingly understand that they are, in effect, ancillary service providers themselves. Therefore, they must be receptive to various forms of physician-hospital partnerships if they wish to protect their dwindling share of health-care reimbursement dollars. Getting back together Some of the more prevalent of the evolving partnership arrangements include: * Joint ventures in ancillary services, off or on campus * Exclusive specialty services contracts * “Under arrangements” contracts While physicians have demonstrated the ability to operate an ambulatory surgery center independently, cooperative efforts with hospitals may still be in physicians’ best interests long term. Joint ventures enable doctors to minimize managerial demands of ownership, spread risk, leverage a hospital’s status in the community, and participate in more lucrative managed care contracts negotiated by hospitals. With exclusive specialty services contracts and “under arrangements” contracts, a physician-owned facility provides services to patients of a hospital in return for agreed-upon fees. Both structures minimize the need for physicians to be entrepreneurs, marketers, and managers. Yet each structure has operating and legal quirks that must be thoroughly reviewed. Clearly, there is a spectrum of new opportunities for physicians to take advantage of the leveled playing field with hospitals. As physicians take a stronger leadership role in the health-care system, alliances with hospitals to provide comprehensive care still make economic sense. The art of the deal So, now you may well have the upper hand, but you shouldn’t overplay it. Hospitals are just one tool physicians have for providing care, but one that, even

if declining in relative importance, remains indispensable. That said, in any negotiation with a hospital, remember that you’re in a position of strength. Physicians control most of a hospital’s revenue stream, either directly or indirectly. In fact, more than half of all surgery in the United States is ambulatory. Remind hospital negotiators of the business trends that have converged to decrease the need for physicians and patients to rely on hospitals. Advances in technology and medical science, changes in reimbursement policies, and liberalized certificate-of-need laws (in many states) have created the perfect storm for exponential growth in outpatient care. Doctors are simply adapting to the weather. Keep your head cool. You have the power and the resources to be the driving force—and will doubtless have hospitals interested in partnering with you. Be sure you have done your homework and consult with knowledgeable advisers—otherwise hospitals will assume they can intimidate you with what they will assume is superior business acumen and regulatory knowledge. Make sure you have thought through the arrangement and had all of your questions answered about everything from ownership structures to governance, to operational control, to compensation, incentives, and buy-out provisions. Dotting the i’s Map out the goals of the alliance. Are the goals of both parties aligned? Can any differences be reconciled? Are the hospital’s motives strictly defensive? (You may not want to partner with a hospital that wants only to protect its revenue, not to proactively contribute to the strategy which will enable you to realize your business vision.) Ideally, the interests of all parties should be aligned to focus on profitably providing better patient care at lower costs. Structure the relationship carefully. First, make sure the venture has a sound business plan. Take into account future uncertainties, such as changes in reimbursement rates, evolving technology, the opening of similar facilities by competing groups in your market, or the loss of a key partner or payer. Questions you need to ask: * What will the ownership structure be? * What arrangement will there be for management services? * What are the governance provisions? * How should non-compete agreements be structured? * What measures should be taken to assure that the partnership will stand up over time in the face of operational and market issues? * What are the foreseeable trends in reimbursement and regulatory compliance? A word of caution: Don’t let the perception of having the upper hand intoxicate you. In negotiating any venture with a hospital, respect its position and be open-minded about what the hospital can bring to the table. Remember that partnerships don’t work unless the relationship is balanced and mutually beneficial, and that, sooner or later, the pendulum of power may swing their way!  g Patrick M. Connolly is lead counsel of Smith, Gambrell & Russell’s health care practice in Atlanta, which provides legal representation to physician groups, surgery centers, hospitals, and related entities. The comments in Remarks are solely those of the author and may or may not be shared by UO or its advertisers.