Are JVs Losing Some Luster?

Philip Betbeze, for HealthLeaders Magazine , May 12, 2008
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As physicians grow more comfortable with hospital employment, demands for joint ventures may be dwindling.

Joint ventures between hospitals and physicians have been one of healthcare's hottest trends in recent years, as hospitals and certain high-revenue specialties have combined equity and management stakes to operate outpatient-focused centers near the main hospital. But after seeing the shortcomings of such alliances play out over a number of years, many hospitals and physicians are taking off the rose-colored glasses when it comes to joint ventures.

Until recently, hospital leaders felt driven to agree to such deals as a way to hold on to at least part of lucrative revenue streams such physicians once brought exclusively into the hospital. Physicians, under a variety of pressures from reimbursement cuts to hospital duties to scheduling problems, wanted to capture the additional income from equity stakes in outpatient centers that capitalized on patient desires for easy access and better service. In justifying such joint ventures, many hospital senior leaders argued that the arrangements allowed the hospital to retain half of that revenue rather than risk losing it all. Hospitals believed they had no choice—their physicians weren't employees but free agents who decided where and when to practice medicine.

So the two parties often joined up. But in many cases, the results haven't been as beneficial to either as was predicted.

Driving wedges between doctors
The first argument often cited in favor of joint ventures was that hospitals had little choice about whether to do these deals. Cardiologists were taking procedures out of the hospital one way or the other. Radiologists were taking imaging to their own centers. Orthopedists were going to take imaging and outpatient procedures off campus. Did the hospital want to retain half the revenue its lucrative specialty physicians were going to take with them or lose it all? The argument was compelling, but too often, says Linda Haddad, a senior partner with the law firm of Horty, Springer & Mattern in Pittsburgh, hospitals didn't take enough time examining the premise and entered these arrangements out of fear rather than for solid business reasons.

"Getting half of the revenue never happened," she argues. First, joint ventures are separately licensed entities that tend to get reimbursed both by managed care and the government at rates 30% to 50% below what hospitals get reimbursed for the same service. Second, in a for-profit joint venture, hospitals have to pay taxes on the profits. "So what they thought was going to be half turned out to be 25% to 27%, or considerably less than they bargained for."

Nathan Kaufman, managing director of consultancy Kaufman Strategic Advisors in San Diego, agrees, but makes a distinction between offensive and defensive joint ventures, "where you do it because you want to avoid losing 100% of a given business." In such defensive JVs, he argues, "you pick up maybe 20% in net income because you're discounting your own book of business to the payers." With the rare offensive JV, which makes up only about 10% of hospital-physician JVs, the hospital is penetrating a new market, partnering with new doctors and taking business from a competitor.

In doing joint ventures, many hospitals created additional headaches for themselves outside the balance sheet by feeding resentment among the physicians who didn't get such a sweet deal. "One of the most diabolical things about these deals is that you could only do JVs with your richest doctors because they were the only specialties where it made sense to do them," says Haddad. "Your family practitioners, your pediatricians, and your internists are seeing you doing deals with your richest doctors. They want a piece, too, and you just can't do it."

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