Experts Weigh in on Hospital – Urgent Care Center Joint Ventures

A high-interest topic of conversation among those involved in the Urgent Care Center space is that of joint ventures between such centers and hospitals. Here, four expert professionals weigh in on what they think about these types of partnerships and how physician-owners should approach them.

Steve Sellars is the CEO of Premier Health in Baton Rouge, LA, and is on the Board of Directors of the Urgent Care Association of America. Daniel Frier is one of the founding members of Frier & Levitt, LLC, in New Jersey, a firm that focuses on the representation of physicians and other healthcare providers in regulatory and corporate matters. He is also Chairman of the Health Law Department. Mohamed Nabulsi is a partner at Frier & Levitt in the Healthcare Regulatory/Transactional Department. Blayne Rush is the President of Ambulatory Alliances, LLC, in Dallas, Texas, a healthcare investment banking and M&A brokerage firm.

hospital urgent care center joint ventureQ: A joint venture isn’t a one-size-fits all answer for every Urgent Care Center (UCC). How can UCC leaders know if they’re in a good position to sell?

Steve Sellars: “The important first step is for each organization involved in the discussion to understand its business and corporate goals and strategies, to determine whether there are synergies between the potential partners. You need to assess the suitability of the potential partnership for fit with each group’s strategy and compatibility in the partnership. Really, having a clear understanding of the goals that each partner has, the reasons they have a desire to get into the business and what an exit will look like is important. Is it purely financial, or are there other reasons for entering into an urgent care partnership? Reaching an agreement on the number of Urgent Care locations each party thinks is possible within a certain market is also important. Some of the other operational aspects are important to discuss, as well. Is the model going to be physician-staffed, or a mid-level staffed model? Hours of operation is something else that has to be addressed. A lot of times a hospital system has a primary care network, and sometimes the hospital affiliated physicians may view the UCC as competition. It’s important to work that out on the front end to make sure that both sides are in agreement on what the goals are for the potential partnership.”

Daniel Frier: “Sometimes these kinds of joint ventures make a lot of sense and sometimes they don’t make any sense at all. They make sense depending on the situation that the physician-owned entity is in. The first question is, what does the hospital bring to the table? Hospitals aren’t in a position to build business and add revenue in most cases. They are generally in a position to supply capital. They may also be in a position to supply political influence if a UCC is trying to obtain facility licensure from the state Department of Health. Sometimes hospitals can provide space that is on or near a hospital campus at a reasonable rate that allows the UCC to have access to providers that they wouldn’t otherwise have access to. Lastly, depending on the hospital, the hospital may be able to provide expertise in the form of administrators who can help operate the center if the physicians don’t feel comfortable doing it themselves.”

Q: Some experts say hospitals are increasingly looking to purse joint ventures with UCCs. What is your take on this?

SS: “There’s definitely more activity in that area. I think what most hospitals are trying to accomplish is that they are trying to improve access to care in their community. They are looking for opportunities to ease the crowding of their emergency department, which ultimately results in improved patient satisfaction for the hospital. An Urgent Care model enables hospitals to get those patients out of the ER who don’t belong in an ER setting. We are also seeing some different payment methodologies from payers now, for example bundled payments for certain diagnoses. Having an Urgent Care model might help a hospital avoid unnecessary ER visits or readmissions back to the hospital.”

Mohamed Nabulsi: “I agree that the trend has been for hospitals to joint venture with or acquire UCCs and I think that’s driven by the new program that Medicare has put forth, including the shared savings program. The idea today is to shift patients away from hospitals, from the ER to less expensive venues for services and an UCC is one of them. A lot of my physician clients recognize that the easiest way to actually generate savings in patient care in accordance with the new benchmarks established by Medicare is to reduce their ER admissions. So hospitals see the writing on the wall and they want to be able to control these UCCs since now they realize that a lot of their patients will be steered away from the ER and into UCCs.”

Blayne Rush: “In my experience hospital health systems are not great at starting up a new line of business but they are now recognizing the value that urgent care centers bring not only to the continuum of care chain, but also to the patients in the area of increased access and lower cost. We have seen it with more mature outpatient centers such as Ambulatory Surgery and Radiation Oncology and now we are seeing it (joint ventures) increasingly with walk-in clinics. Hospitals see urgent care centers as an access point into their care chain and want to be that access point. Some systems are even buying chains of these immediate care clinics that have centers that are not even in their services area. The trend is growing and we will see different joint venture models as well as other strategic alliances.”

Q: Why should a hospital partner with a UCC?

SS: “Reasons why hospitals are interested in this are that it enables them to streamline the referral process among their affiliated providers. We are seeing activity where hospitals are acquiring a lot of practices, a lot of consolidation in most markets. Having that Urgent Care component as part of their affiliated network of providers certainly enhances and enables the hospital to streamline the referral process among those providers. It also provides a coordinated approach to after-hours care. Having that UCC that’s open seven days a week provides better access to care within the hospital affiliated network and it eases pressure for on-call physicians. Often times, physicians who are on-call after hours and on weekends can refer patients to the UCC, when appropriate. Lastly, there’s a lot of interest for hospitals to expand their brand-name recognition within their community. Having a multi-site Urgent Care model enables hospitals to get their name out in the community better.”

BR: “As I stated before, hospitals should partner with urgent care in order to obtain access to patients that enter the system through UCCs. These centers also are typically open after hours, on the weekends and during holidays that the majority of primary care is not. This helps in alleviating the cost of an emergency room visit as well as alleviating the hospital ER through put issues that we often hear about. Additionally, UCCs are a less expensive entry into a community than other types of facilities, and that helps hospitals with branding and expanding their services region. Hospitals also obtain the benefit of experienced operators of UCCs which a great deal of health systems lack.”

Q: From the other side of things, why should an UCC partner with a hospital?

SS: “From an Urgent Care operator’s standpoint, a hospital partnership provides access to capital. Having a partner will certainly help from the standpoint of having more capital to expand the model faster. This is very important if you have a plan for a multi-site model within a market. Cost savings is another advantage. If you have a partner, it reduces financial risk. And when I say that, there’s no guarantee that the Urgent Care model is going to be profitable. If run properly with the right locations, it should be, but there’s no guarantee of that. In that case, a partnership helps to offset those loses. Some other possible reasons that an Urgent Care operator might want to partner with a hospital are that economies of scale are created relevant to management services, there may be more access to physicians to staff centers, and hospitals may have well-established relationships with vendors, enabling the UCC to tap into those relationships. And, I would also mention access to new markets. A hospital partnership may enable an Urgent Care operator to potentially grow and expand into new markets faster.”

BR: “Hospitals tend to be the big gorilla and typically have a community brand. This helps the stand-alone UCCs in that some patients tend to associate better care with some of the health systems and their brand. Urgent care can also benefit from other physicians that are associated with the hospital through referrals and by those doctors carrying the UCC’s flag.”

Q: What are hospitals looking for in the UCCs they partner with? 

MN: “It would be a center wherein a hospital has a controlling interest. This is so that the value is preserved for the hospital. Because hospitals now realize that a lot of their patients will be diverted away from ERs and into UCCs, they want to consolidate their power and influence over UCCs so that UCCs in the hospital’s service area are still controlled by the hospital and not relinquished to a competitor hospital coming into that hospital’s service area, because that’s a real risk. You’ll definitely see UCC joint ventures that are dominated by the hospital. Under these terms, the hospital will infuse cash into the UCC and potentially develop the UCC, because it views it as part of its portfolio of investments.”

DF: “The first thing hospitals look for is to partner with doctors who comprise their referral base. At this time, healthcare is extremely competitive and hospitals are trying to capture the physicians who refer business to them. Hospitals are aggressively entering into the service areas of other hospitals in order to do that. Also, hospitals are facing competition not only by other hospitals, but also by physicians and outpatient facilities. UCCs are posing a significant threat to hospitals because hospitals are losing a tremendous amount of ER volume to UCCs. Hospital care is the most expensive type of care in the system, and expense has become a huge issue in the healthcare industry. Reducing cost by transitioning care from hospitals to outpatient facilities, such as UCC, threatens hospitals, but is also an opportunity for hospitals that enter into joint ventures with the owners of UCCs.   Hospitals have had to expand beyond the brick and mortar that has traditionally defined who they are into areas that even ten years ago they would not have considered. Hospitals are looking for more sources of revenue, but, even more importantly, they are looking for market share. They are looking to secure their footprint in the area, and many believe that hospital ownership of UCCs will ultimately drive volume to the hospital.”

Q: Do you see hospitals pursuing ‘turnaround’ opportunities, or are they only looking for centers with significant patient flow?

MN: “Hospitals we’ve been involved with are not looking really for turnaround opportunities. It’s more of a feverish race right now to try to acquire as many provider organizations as possible to prevent other competitor hospitals from encroaching upon their service area. It’s not really about buying a center and selling it two years later at a profit. It’s more about preserving the doctors involved in that UCC as loyalists to the hospital to prevent competitors from soliciting them.”

BR: “Hospitals will pursue turnaround opportunities if the center is in a premium location or if it is located close to their campus or other ancillary facilities that they controls. Additionally, they would pursue a turnaround if they see an opportunity where the talents and assets that they can lend to the center would turn it around. So they would if the situation is good for them.”

Q: If a UCC is in a community with several competing hospitals, how can the owner(s) go about deciding which to partner with?

DF: “One way is you send out an RFP (Request For Proposal) to the various hospitals with very specific criteria, and essentially have the hospitals fight it out. It may be a question of money; it may be a question of services, or ownership percentage. There are some hospitals that will only enter into joint ventures if they obtain a majority interest. Other hospitals will tolerate having a minority interest. A not-for-profit hospital has certain constraints in terms of doing business with for-profit businesses. They can’t do anything that contradicts their charitable missions. If there is a for-profit hospital in the region, there may be fewer constraints and that may be a consideration. In terms of ownership, when I represent physicians, I obviously prefer that the hospital obtain a minority interest, but at the very least, I typically recommend a 50/50 structure rather than one in which the hospital makes all of the decisions. I also recommend partnering with a hospital that has demonstrated a reasonable level of business sophistication with a staff that can help add to the dialogue that needs to happen for the UCC to be successful.”

BR: “We are advocates of a broad auction approach. We believe that to really understand what the best fit for you is, you must prepare your center for the process then proactively pursue each potential buyer at the same point in time. We would go to all the hospitals and all the non-hospital buyers and present the center and then work through the process. This will allow you to know exactly what is available as far as what a certain buyer can do for your, what the joint ventures would look like, because they vary greatly from one to the other within the marketplace, and who can best help your grow.” 

Q: What are some of the benefits that UCCs gain from hospital joint ventures? Do UCCs benefit an increase in reimbursement from commercial payers if they JV with a hospital?

SS: “Not necessarily. It really depends on the structure of the relationship, if the legal relationship of the partnership is such that it allows the Urgent Care operating company to fall under the hospital’s manage-care agreements. What I see most often is when these partnerships are put together, it requires that the new entity negotiate and execute new contracts on behalf of the new venture. But, it goes back to what the legal structure is, what the ownership structure of the partnership is.”

MN: “If the UCC is under the Hospital Outpatient Prospective Payment System and if the UCC is being billed under an HOPD, then potentially yes, it may avail itself of higher reimbursements. If the UCC is a free-standing UCC that isn’t billing under the Hospital Outpatient Prospective Payment System, then the UCC may realize an increase in reimbursement if it has a hospital partner by virtue of the fact that the hospital may be able to bring these payers to the table and negotiate a higher rate for the center. It’s not a plug-and-play concept; it’s more of a leverage increase that the UCC may enjoy if it has a hospital provider as one of its owners.”

Q: How does a joint venture with a hospital affect potential exit strategies for the non-hospital owners?

DF: “When you partner with a hospital, what you’re doing is giving yourself a potential built-in purchaser. If it’s purely physician owned and someone wants to get bought out, you have to look for a third party to buy out the owner, or look to existing owners to buy out the withdrawing owner. With a hospital partner, negotiations can occur that result in a contractual provision that requires the hospital to buy out a certain portion of the remaining interest at an agreed-upon price. The reality though is that the amount that most hospitals are willing to commit in terms of a buyout is limited. Again, they are limited by their charitable mission, they are limited by the fact that they can’t pay more than fair market value if they are going into business with physicians who refer to the hospital. In my experience, hospitals are not the best solution to an exit strategy because they can’t commit to the kind of financial security that the doctors typically want.”

BR: “It sometimes does limit your exit strategies, but it does not have to. You can structure the venter where you have the right to sell your company, and that is what we advocate. For instance, say you are a company that owns centers in multiple markets. You could have a two-way non-compete with the hospitals and them with you in that the two are required to work together on any new centers in a certain geography, but not in geographies that the hospital is not in. In this scenario you would want to not limit your ability to sell your side of the business. But then again, it really comes down who has the most leverage, and that is one of the questions you would want answered throughout the broad auction approach that we mentioned prior. If you have other buyers and the hospital really wants to partner with you, you are in a better position to get close to what you want.”

Q: Could you describe the set-up of some of the most successful JVs you’ve seen?

MN: “The most successful models are the ones that are physician owned and controlled, with the hospital having a minority ownership interest, and those models would typically be included under an ACO umbrella where the ACO participants are utilizing the UCC in lieu of the hospital’s ER. So that constantly feeds the UCC. It’s not uncommon for a UCC to have a non-physician, non-hospital partner, such as a management company. These are able to effectively manage healthcare entities, and they can really infuse them with a lot of intelligence that’s not typically available to physician practices or UCCs. Management companies can be an enhancement to an UCC.”

Q: What is the role of a management company in this sort of process?

SS: “The management company’s role is to execute the business plan, to have the know-how to manage all aspects of the Urgent Care business model. Everything from site selection, market analysis, human resources, marketing, IT, all of that plus ongoing management, including financial management, is really how I see the role of the management company. I think it’s very important for hospitals to work with a company that has a proven track record and one that has the resources to execute. It’s also important to have a management company with committed physician involvement. There aren’t many companies with what I call a well-developed administrative infrastructure. I think a lot of times hospitals that are looking at getting into the Urgent Care business aren’t always talking to the right people about it.”

MN: “It’s really the organization of the UCC and their ability to spread certain costs across numerous providers. So a management company, for example, has other clients and has various accounts with vendors. In that case, the management company is buying in bulk and is able to pass on these savings to the UCC, whereas if the UCC were to contract with a vendor alone it’s likely not going to be able to negotiate the lowest price. Management companies also have the infrastructure to effectively bill and collect reimbursements. Also, they have the technology, their practice management systems, the EMR systems that they have perfected over the years. We are talking about sophisticated management companies, not about companies simply formed for the purpose of managing the captive UCC. A management company does a have a lot to bring to the table. It has the ability to recruit other doctors. It’s always good to have a business person at the table when you’re sitting down with other doctors to really lay out the benefits of joining your organization.”

Q:What are the typical buyouts and restrictive covenants?

DF: “It definitely varies. UCCs can fall into two separate categories: they can be medical practices that provide urgent care services, or they can fall into the category of licenced facilities, which brings them outside the private practice of medicine. The difference often dictates the buyout, and here’s why: typically, a medical practice may only be owned by physicians; therefore, the only people that can buy the UCC or practice are physicians. That means there’s a limited pool of buyers, and therefore limited demand, which reduces the price. Typically in those situations, the price would not be based on the same formula you would see in a typical business transaction, such as a multiple of earnings (EBIDTA). If the UCC is licenced as a facility that can be owned by non-physicians then the potential pool of buyers expands exponentially. The value may be calculated based upon a multiple of earnings. The value also depends on whether the UCC is in-network or out-of-network. An out-of-network center is usually more lucrative, but presents greater risk because of the uncertainty concerning out-of network fees. The multiple is usually lower for out-of network centers than it is for their in-network counterparts.

“In terms of restrictive covenants, they are difficult to enforce in most states, however, most hospitals look to restrict their physician partners from entering similar joint ventures with competing hospitals.” 

Q: What are some potential joint venture models?

SS: “There’s a number of different ways of structuring these relationships. When I think of joint venture relationships, the things that are important to nail down are what are the ownership percentages going to look like? Those may vary. What’s important is defining the equity percentages and the roles and responsibilities of each partner. I see a lot of different structures or models out there.”

Q: What makes the difference between a decent JV and a great one? 

MN: “It depends on whose side you’re on. Hospitals joint venture with physicians for three reasons. One could be to eliminate the competition so that the organization they are joint venturing with is not a threat to them, so it doesn’t grow legs and become unmanageable. Number two is to prevent competitor hospitals from encroaching upon their service area and joint venturing with some physicians who traditionally referred their patients to the hospital. Three is to actually make money directly from the venture. From a hospital perspective, if any one of these is satisfied, then it would be a great joint venture.

“From a physician’s perspective, a successful joint venture would be one that generates additional ancillary income for the physician and allows them to capture ancillary referrals. For example, you may have physicians that own certain surgery centers, and their surgery centers could be fed by the UCC. The physician has control over the providers, the physicians who are actually treating patients at the UCC, they can potentially capture some of the business that’s emanating from the UCC, provided that it is in compliance with applicable self-referral anti-kickback laws. That to me is a very successful and exciting project for a physician because it enables them to capture ancillary revenue both from the UCC services and additional income from the referrals that are generated by the UCC.

“A mediocre one, or decent one would be one where it’s just simply to generate additional income and not to generate ancillary referrals. I think at the end of the day the money is not necessarily going to be in the actual revenues from the UCC service for many physicians. The money is going to be in the referrals that the UCC is going to generate. Also, to go back to the ‘excellent’ UCC scenario, I think that UCC would be one that is part of an ACO that would actually benefit the physician by generating savings under the shared savings program as well. That to me is the perfect recipe for a successful UCC project for a physician.”

Q: What kind of ownership structures and percentages are you seeing? What do you recommend for an UCC a JV?

SS: “Some are 50-50 relationships; some models have one partner owning a larger percentage than another. And I’m seeing it both ways, where the hospital is the majority partner, and I’ve seen partnerships where the Urgent Care operator is the majority owner. I think it goes back to what the goals of the relationship are. There are a lot of factors that play into that, including capital requirements. How big is this model going to be, how many centers, and what kind of capital is going to be required to build the model?”

DF: “I think they should consult with their legal and accounting professionals. They should consider obtaining a knowledgeable broker. Brokers aren’t always necessary, but if you can find one who is knowledgeable and experienced, not only may he or she help you find a potential partner, but they may help structure the relationship from a business standpoint. I think that before any serious attempt is made to find a partner, the most important thing is for the center to ask itself, ‘Why are we doing this? Are there other way to achieve the goals we have?’ For example, financing, merging with another UCC… My personal feeling is that physician joint ventures with hospitals can work, but they may not be the best solution, and are often done for reasons that are not the best reasons.”
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