535 Anton Boulevard, Suite 880 Costa Mesa, CA 92626 P: 714 754 5424 ■ F: 714 754 6995 www.medicaldevelopmentspecialists.com Physician/Hospital Collaboration and Competition in Southern California November 14, 2007 Eric Themm Senior Vice President Medical Development Specialists, Inc.
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Physician/Hospital Collaboration and Competition in Southern California November 14, 2007
Physician/Hospital Collaboration and Competition in Southern California November 14, 2007. Eric Themm Senior Vice President Medical Development Specialists, Inc. Topics For Discussion. Southern California Overview Current Trends and Drivers of Physician/Hospital Collaboration - PowerPoint PPT Presentation
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535 Anton Boulevard, Suite 880Costa Mesa, CA 92626
Ongoing challenges with escalating costs – operating, building, labor and living – Very expensive place to do business
Difficult reimbursement and payor mix challenges (uninsured, Medi-Cal)
LA County in crisis (e.g. MLK closure, ED backlogs). Private hospitals being affected (e.g. Downey, Centinela). Several in financial distress. More closures expected.
Hospital systems divesting (e.g. Tenet, CHW). Physician groups (e.g. Prime) are buying.
Highly competitive market with fragmented market share and challenges maintaining centers of excellence
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Major Trends in Southern California
Proliferation of freestanding outpatient centers. Saturation and oversupply in some sub-regions.
– Pace of new center development has slowed– BBA has affected imaging– Ownership restructuring occurring with hospitals offered a bigger piece
of the pie in some instances
Physician group consolidation/growth and increase in
market share. Physician market share increasing on O/P side.
Difficult for hospitals to recruit doctors. Kaiser-Permanente and large groups securing a high percentage of new recruits.
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California Age Shift
Source: OSHPD Annual Utilization Report of Hospitals 6
Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1981 – 2004, for community hospitals and US Census Bureau: State and County QuickFacts, 2004 population estimate data derived from Population Estimates, 2000 Census of Population and Housing
Per
Thousa
nd
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Total Inpatient Days in Community Hospitals1981 - 2004
Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1981 – 2004, for community hospitals
OutpatientSurgeries
InpatientSurgeries
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Outpatient Surgical Market Share
1998 2003 2005
Source: FASA
Number of Freestanding Ambulatory Care Surgery Centers
2,4252,754 2,864
3,508 3,5703,836
4,601
5,095
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
1996 1998 2000 2001 2002 2003 2004 2005
Source: Verispan11
Further I/P Shifting to O/P Setting
Strong growth of ASCs projected for the next 5+ years
Other centers of excellence inevitable (Radiation Therapy, Cath Labs, Retail Mini-Clinics)
Lower cost setting and technology advances will continue to shift services to the ambulatory setting
Healthcare consumerism will increase the demand for care in settings that favor customer-focused services such as more flexible hours of operation (evening and weekend hours) and ease of access (close to home, easy parking, quick turnaround times)
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Consumerism : Healthcare the Patient’s Way
Private Rooms
Convenient Access
Documented Quality
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Quality Expectations and Transparency
AHRQ Indicators:
Prevention, Inpatient, Pediatric, Patient Safety
This site includes ratings for clinical care, patient safety, and patient experience for the 210 hospitals in California that have chosen to participate in this important voluntary project.
CalHospitalCompare.org
In August 2006, President Bush signed an Executive Order to help increase health care transparency by encouraging the adoption of health information technology standards, the provision of options that promote quality and efficiency in health, and that pricing and quality information be made publicly available
Hospital Compare has quality measures on how often hospitals provide some of the recommended care to get the best results for most patients
Organizations working with IHI in many areas, including programs such as IMPACT Learning and Innovation Communities; initiatives such as Pursuing Perfection, Transforming Care at the Bedside, and the Safer Patients Initiative; IHI's global projects; and the work of IHI's Strategic Partners.
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Leveling the Playing Field
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What We Are Seeing: Physician Side
Struggles with cost escalation & growing administrative burdens of practice management
Shortage of PCPs (especially IMs) and growth of hospitalist models
Continuing and growing participation in JVs – ASC, surgical hospitals, MOBs. Desire to supplement income and have more autonomy
Erosion of solo practitioner model
Quality of life/lifestyle = key for younger physicians
Desire for state-of-the-art technology
Increase in employment & participation in integrated models
Hospital Industry Dilemma
Historical inpatient focus achieved at the expense of developing an outpatient core competency
Lack of focus and expertise (jack of all trades, master of none) created an opening for single-specialty niche providers
Focused factories have provided a more efficient, service-oriented alternative
Hospitals have been slow to respond and embrace the changing landscape
Physicians view hospitals as IP operators and they have little confidence in their OP expertise
Dependence on external OP center operators to facilitate JV deals and manage centers
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Common Hospital Strategic Questions
What outpatient services should we focus on?
Is it too late to develop a freestanding ambulatory surgery center? Imaging center? How can we recapture the market?
Should we cannibalize our own services in order to offer a physician joint venture?
Should we develop a satellite office building/ambulatory center? What services should we offer in a satellite center?
How creative can we get with joint ventures in order to anchor our specialists?
What should we do about specialty hospitals?
How do we prevent our best physicians from being our competitors?
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The Hospital of the Future
Much greater dependence on dedicated OP Centers of Excellence (Focused Factories) competing on service, convenience and quality of care
Smaller IP acute setting surrounded by a portfolio of OP centers/services (e.g. Cancer Center, Cardiac and Vascular Center, Urgent Care Center)
As the portfolio of services grows and becomes more decentralized, providers must create an information-enabled environment to integrate care
Many of these centers will be JV’s requiring operating expertise and discipline
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GAC Hospital Value Proposition?
What’s the hospital’s value proposition if they’re not developing/managing the center?
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“Because of improvements in medical science, big hospitals are not needed for most treatments. You still need them for transplants, high-end oncology and very complex cardio thoracic operations, but that’s less than 10-15% of what is provided by hospitals. The rest of it can be provided by short-stay or outpatient facilities. We can do things a whole lot cheaper because we have fewer expenses and because we are a lot more efficient.”
»James Thomas, CEO of Cirrus Health, “Traditional hospital feeling the squeeze from doctor-owned specialty clinics,” Los Angeles Times, 7/25/07. (In reference to a pending orthopedic hospital partnership)
Hospital-MD Joint-Venture Imperative
Defensive Strategy: Creating joint-ventures to keep physicians from branching out independently. Partner or lose the business.
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“Everybody wants to create outpatient buildings that tether physicians to the hospital. They’re operationally more efficient. They provide a more-satisfying patient experience. They protect – or grow – market share. And they establish more harmonious relationships with doctors.”
» Hospital Executive, “Now Entering the Outpatient Zone,” Modern Healthcare, 8/06.
535 Anton Boulevard, Suite 880Costa Mesa, CA 92626
– Service Line co–management– Service Line co-marketing– Service Line Clinical Services– 1206D– Gain Sharing– Straight and Per Click– Joint Ventures– 1206L– Employment (not CA)
Low Risk
Investment
High Risk
Investment
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ASC Case Study
Hospital System in California – 2 regional hospitals within 8 miles
Affiliated, high volume surgical group interested in ASC
Hospital concerned about losing group. Better to have part of something than all of nothing.
Feasibility process to identify options, select optimal model and frame project (financials, structure, timeline)
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Hospital Business Options (ASC)
1. Hospital Joint Ventures the ASC with Qualified Surgeons: Hospital and surgeons own and operate the ASC
2. Hospital, Surgeons and For Profit ASC Company Form Joint Venture: Hospital, surgeons and third party management company invest in ownership. Outside for-profit ASC company provides management
3. Hospital owns and operates the ASC under the Hospital License: Hospital operates the ASC without physician investors (Eliminated as an Option)
4. Surgeons form an Operating Company to Manage the Hospital ASC: Hospital owns the ASC which is operated under the hospital license. Operating company is formed as a physician venture in order to manage the ASC for the hospital
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Option 1: Hospital Joint Ventures the ASC with Qualified Physicians
Hospital501(c)(3)
51%+ ownership
Ownership Surgeons
49% or less
Terms – Free standing ASC owned and operated by a limited liability
corporation– Qualified physicians must have a third of their income from
surgery– Ownership percentages must be based on the investment
amount, not the volume of surgeries or procedures
Freestanding ASC
• Space and Equipment
• Operations and
Management
Ownership
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Option 1: Hospital Joint Ventures the ASC with Qualified Physicians
Description Free standing ASC through a limited liability company joint venture formed between Hospital and qualified physicians. Joint venture operates the ASC and profits are divided according to investment/ownership percentages.
Pros– Involves interested group of surgeons in ownership of the ASC avoiding
physician start up of separate venture or loss of volume to other competing ASCs
– Opportunity to attract Group physicians and patients– Physician ownership involvement can lead to better efficiencies and
cost effectiveness
Cons– Profitability would be greatly reduced from Hospital’s historical
performance with resulting losses for all investors– Management/performance by physician/hospital joint venture may not
be as effective as an experienced for profit company- leading to investor disappointment
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Option 2: Hospital, Surgeons and For Profit ASC Company Form JV
Hospital ASC
ManagementCompany
ASCManagement
Company
VRC
Terms – Percentage ownership split between physicians, hospital and
management company (e.g. 40%/40%/20%)– Negotiated management fees with for profit company– Profits distributed according to investment/ownership percentages
Joint Venture
•Space•Personnel•Equipment
SurgeonsSurgeons
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Option 2: Hospital, Surgeons and For Profit ASC Company Form JV
DescriptionFree standing ASC through a limited liability company joint venture formed between Hospital, qualified surgeons and for profit ASC company. Outside for profit company operates the ASC and profits are divided according to investment/ownership percentages.
Pros– Involves interested surgeons in ownership of the ASC
preventing loss of volume to other competing ASCs – Opportunity to attract physicians and patients– Outside management and physician ownership involvement
can lead to better efficiencies and cost effectivenessCons
– Profitability would be greatly reduced from Hospital’s historical performance with resulting losses for all investors
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Option 3: Physician Owned Operating Company Manages Hospital ASC
Hospital ASC
Surgeons
Terms – ASC location within 250 yards of hospital buildings– Physicians establish operating company to provide services
at FMV to hospital owned ASC – Ownership interest and profits based on investment
Ownership
Agreement for
management
of Hospital Outpatient
ASC
Physician Owed
Operating Company
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Option 3: Physician Owned Operating Company Manages Hospital ASC
DescriptionASC is run as a hospital outpatient department and managed by an operating company created by qualified surgeons. Joint venture services provided at fair market value and profits are divided according to investment/ownership percentages.
Pros– HOPD reimbursement is greater than freestanding rates– Involves interested surgeons in the operating company ownership preventing
loss of volume to other competing ASCs – Opportunity to attract physicians and patients– Physician ownership involvement can lead to better efficiencies and cost
effectiveness– Profitability for Hospital could be about half of historical performance based on
prior contribution margin comparisons– Retains flexibility to operate as hospital department if physicians elect not to
invest– Allows management operations, personnel policies similar to for profit company
Cons– Certain legal issues and restrictions:
» Limited distance from hospital (Medicare issue: 250 yards)» Separate building address (union contract issue)
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Key Volume and Financial Assumptions
Volume: new versus cannibalize– By service line– FFS vs MC
Volume assumption by physician
Major capital requirements
Expenses – staffing, supplies, purchased services, etc.
Profit/(Losss) Before Tax 1,912,258$ 2,101,505$ 2,359,113$ 2,650,565$ 2,902,087$
% 20.9% 21.9% 23.4% 25.1% 26.4%
Average Revenue Per Patient 1,542$ 1,547$ 1,552$ 1,556$ 1,550$
(1) Includes both Hospital and Group(2) Includes depreciation on $10.8m in CAPEX and TI(3) Assumes no debt. Any leasing or bank loan facilities will have to be accounted for.
Outcome
Hospital and physicians selected model
Potential short-term financial loss projected for Hospital but far less than probable outcome of physician exodus
Long-term partnership solidified (expectation)
12-15 month timeline to implement38
Surgical Hospital Case Study
Highly attractive and competitive market in CA
30 orthopedic surgeons in 3 groups looking for ownership in a surgical hospital
Physicians anxious and aggressive
Two hospital competitors looking to beat each other to market
(1) EBITDA agrees to 3 year Business Plan and Forecast Beyond
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Preliminary Conclusions
60,000 to 65,000 sq. ft. should be adequate for the Orthopedic Hospital. This correlates to 1,875 to 2,031 sq. ft. per bed. The facility does not need to be as large as some freestanding orthopedic hospitals across the country because no ED is needed and other services (e.g. dietary, pharmacy) can be contracted with the main hospital.
32 beds (in private rooms) should be more than adequate in light of projected volume. Flexibility to “ramp up” capacity will ensure that bed availability will not be an issue.
4 O.R.s should be adequate for anticipated volume assuming that capacity in an O.R. is 700 to 1,000 surgeries per year (2,800 to 4,000 total surgeries) depending on the mix of inpatient to outpatient surgeries.
30+ physician users is optimal based on the experience of other surgical hospitals across the country.
There are numerous examples of joint ventured specialty hospital across the country with the ownership “split” varying. For the facilities that we polled, physician ownership ranges from 20% to 50%.
Facility completion should be feasible within 24 months or less.
Preliminary costs for the facility are in the $15-20 million range.
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Legal Considerations
Choice of Entity
Structure of JV
Securities laws
Stark Self-Referral Law
Federal Anti-Kickback Statute
Licensure, Provider Agreement
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Securities Considerations
Private placement memorandum
Accredited investors only
Residents of the state only
45 day offer period– Can be extended at Hospital discretion
Cash only from Physician Investors
Hospital will not loan money to physicians to buy units
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Partnership Management
Informal process with some financial reporting not enough
Investing in the operational and financial infrastructure necessary to support these free-standing centers
Dedicated, engaged, seasoned specialty care “leaders” to oversee center operations
Monthly partnership financials with quarterly ops review meetings at a minimum
Research variances and prepare explanations for all key financial metrics and drivers (e.g. cash flow, capital calls/distributions, A/R and DSO status, P&L variances)
Strong communication and follow-up
No surprises!
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JV Development: Some Pointers
Transactional experience, resources and skills a must have in order to avoid reinventing the wheel with lots of room for mistakes
Realistic and conservative financial modeling (the model becomes the budget and expectation of the MD partners)
Avoid over-building and over-staffing
Leverage hospital managed care advantage vs. OON reimbursement strategy
Beware of 3rd-parties strong on sales but weak on operations (look for track record and supporting infrastructure)
Open book negotiations critical to establishing physician trust and confidence
Engage center operators in the development process
Speed to market – timely response and constant follow-up