Historically, hospitals have entertained reliable income streams from the their surgical and diagnostic imaging components. Now, because patients have greater access to physician-owned surgery centers, coupled with advancements in imaging technology, it is increasingly difficult for hospitals to have income certainty from these procedures within a hospital setting.

On the other hand, proposed and already implemented changes to the Medicare payment system suggest that physician providers face the threat of losing a greater percentage of revenue. Thus, many are seeking partners with hospital systems from a joint venture perspective.

1. The most common form of joint venture is the division of ownership between the hospital and physicians. In this agreement, the hospital and participating physicians form a new entity and each contribute funds or lender approved interest equal to their pro rata ownership in the new entity. The equity investment model has proved to be a “win-win” situation for both the hospital and the participating physicians. The hospital better secures a long-term relationship with referring physicians, builds loyalty and trust, and recaptures a lost revenue stream. The physicians are better positioned for a positive ROI and can focus on patient care rather than highly detail-oriented tasks and risks that exist in real estate ownership and management. A potential drawback under the surgery center setting is that the payment received under this form of joint venture can be significantly less than what the hospital would receive for the same procedures performed on a hospital inpatient basis.

2. The healthcare industry has seen more “under hospital arrangements” over the past decade, although many have been recently banished from hospital settings. While this model can take on many variations, several characteristics are in common. The participating physicians provide to the hospital a certain ancillary service (from the use of primary equipment to turn-key management).The hospital purchases that service on a “per-click” or “per-use” basis. The hospital is the billing entity and is paid under the hospital ambulatory payment classification codes. The primary advantage of an under arrangements model is the higher payment received by the hospital as a result of the hospital billing under the hospital payment system. Moreover, the hospital bills under its managed care contracts, which commonly provide for higher payment than what is received by freestanding outpatient facilities. A few potential drawbacks to the under arrangements model are the increasing regulatory scrutiny of hospital and physicians transactions. Also, because the hospital performs the billing of the surgical procedures, the Stark law is in effect.

3. A standard block lease is where the hospital leases ancillary equipment or management responsibilities to participating physicians in return for a fair market value lease. Each participating practice bills under its own group number. The primary advantage of a block lease arrangement is its ease to initiate and terminate. Since a participating practice does not have ownership of the equipment or facility, the hospital or physician practice can quickly terminate the relationship. One major disadvantage to block leasing arrangements is that the physicians do not feel like ownerHistorically, hospitals have entertained reliable income streams from the their surgical and diagnostic imaging components. Now, because patients have greater access to physician-owned surgery centers, coupled with advancements in imaging technology, it is increasingly difficult for hospitals to exercise income certainty from these procedures within a hospital setting.

4. The shared expense model is a variation of the block lease model, except that instead of each practice leasing blocks of time, it would assume a commercially reasonable proportion of the costs of the diagnostic business and utilize the imaging equipment on a first-scheduled, first-served basis. From a regulatory perspective, the shared expense arrangement may be considered more aggressive than a block lease arrangement because it will not qualify for safe harbor protection under the Anti-Kickback Statute. However, many physician practices may still prefer this type of an arrangement due to its added flexibility of being able to schedule patients on a first-scheduled/first served basis and paying expenses in a manner that more closely reflects the actual use of the imaging equipment.

MREA is a truly comprehensive medical real estate platform that plugs the gaps from that of traditional buy-sell-lease-manage commercial real estate companies. To receive a complete package of our healthcare services, real estate offerings, consulting assignments, or merger/acquisition successes, please contact Robert S. “Bob” Lowery at 713-701-7900.