Hospitals Joint Venture with Urgent Care: The Why and How

ChallengeThis past week, The Ambulatory M&A Advisor hosted a webinar about various topics surrounding joint ventures between hospital health systems and urgent care businesses.  Some of the main issues addressed were why these joint ventures are happening now, and what the proper structure is for a transaction of this type.

Todd Latz, CEO of GoHealth Urgent Care believes that the current market is seeing health systems looking for access; especially as they continue to consolidate and integrate.

“One of the main ways that they are doing that is trying to meet patient’s needs for care in those patient’s own communities; where they live and where they work,” Latz says.

This method comes in against the more classic method where everything is consolidated into big acute facilities.

“One way to do that is through primary care practices, but that can be very expensive to set up and support.  Also, many health systems have primary care networks that do not support themselves from a financial standpoint and urgent care is a great way to get that access into those communities and do it in a profitable way as well,” Latz says.

Joshua Kaye, partner with the law firm DLA Piper says that his business is working with health systems and other providers that view urgent care as a necessary extension of their outpatient sector strategy.  Kaye explains that urgent care is actually fitting into a broader strategy in which health systems are looking to capture a number of ancillary services that are ancillary to the health system.

“From an urgent care perspective, in many instances, hospitals are establishing them as a defense mechanism to prohibit another health system or another urgent care center operator from considering entering into the market,” Kaye says.

“We also see health systems using urgent care centers to capture greater market share by establishing some sort of a foothold in, perhaps, a competing health systems market as a means to capture a patient population that may otherwise end up in the emergency room of a competing hospital.”

Kaye adds that the urgent care center may serve as a mechanism to bring patients closer and get brand recognition of a health system.

“It can be a big marketing billboard for the system as well, and I think we can never forget the upstream or downstream referral streams that they get for specialties.  Whether that is additional labs, imaging and so forth that come from that access point of an urgent care,” Latz says on the subject.

“I also think that joint venturing with independent urgent care operators can help lead to greater market presence, better ambulatory and ancillary expertise in that particular field, and in some cases true retail business to consumer, business to patient experience.”

Lee Resnick, MD, CMO of WellStreet Urgent Care proceeds to add on some more layers in regards to why these joint ventures are happening now.

“We have talked about capturing market share and downstream referrals.  There is a nuanced way to look at that, and that is when health systems are looking to reduce leakage from their network.  So, the fact of the matter is that in your region, a patient goes to a competing health system to access care; say for acute care they go to the emergency room, or they go to the urgent care.  That patient is likely to get a referral there, and that person is likely to be in a competing health system.  That causes leakage out of the network,” Resnick says adding that once the patient is embedded in this now competing health system, they establish a relationship and the original system might lose that patient due to leakage.

“Also, with the emergence of value based reimbursement, which is on the mind of everybody in the health system world.  Nobody quite knows where it will end up; they just know that it is headed there. With value based reimbursement, you are essentially incentivized to manage the care of your patients.  It is almost like flipping the old managed care base on its head and incentivizing the actual providers to manage the care, instead of having the insurance companies manage the care.  Well, in order to do that, you have to have a closed network to manage care, and urgent care can be seen by hospital health systems as a critical part of keeping it closed and again, preventing leakage,” Resnick says.

As far as the structure of the actual joint venture Kaye says there are multiple ways in which these models are being structured.  Kaye says that the question his firm is most typically asked, or one that they ask the client to focus on is, the patient population that is going to be served.

“That could really impact how a joint venture would be structured.  In our view, often these joint ventures are intended to serve really three or four different types of market segments.  The first being, whether or not the joint venture is intended to serve an underserved secondary market population.  So, is there a lack of access in that area, and is that the driver of the joint venture?” Kaye says.

In the alternative, other questions Kaye addresses include if they are looking at high end, prominently placed retail locations that are probably catering more towards brand recognition and potentially, commercial payor contracting strategies.

“The third could be employer based insurance plans, and is the idea there to service that type of population; such as servicing Disney World’s employee beneficiaries or something along those lines.

All of those need to be taken into account in terms of understanding the population that ultimately could end up driving the way in which the joint venture is structured,” Kaye says.

Once the population is assessed, then the focus is really into the resources that are needed in order for the joint venture to be successful.

This involves examining if the joint venture will work off of the hospital’s EHR system, who will provide the space, who is going to be providing the equipment and who is going to be providing the personnel.

“What the answer to those questions will dictate, is whether joint venture is going to be structured in a true equity joint venture model, in which the hospital and the other party will be joint equity partners in an urgent care platform.  Or, in the alternative, is it going to be operated as an extension of the hospital, and is the hospital simply outsourcing certain components, or a turnkey operation outsource to a turnkey manager for the venture.  In which case, the relationship is much more contractual in nature,” Kaye says.

“The other thing that also needs to be considered is that many states prohibit the corporate practice of medicine, and that can be a driver in terms of how the model will be structured and whether or not the actual entity that is providing the urgent care services will be employing physicians.  If so, does the state in which the model is being operated, require a physician shareholder, or a hospital to be a shareholder of that practice entity.”

Steve Sellars, CEO of Premier Health Urgent Care says that when his group typically structures a joint venture, they start by making sure that the business incorporates the goals of both parties and that the goals are aligned.

“That requires that you assess the suitability of the potential joint venture partnership for fit within the health system strategy and compatibility from the standpoint of being able to work together,” Sellars says.

In terms of structure, Sellars says both parties have to determine the equity ownership structure of the deal.

“Our partnerships are usually 50/50, but that is not to say they all have to be.  These partnerships also require the completion of the appropriate partnership documents.  This is normally an operating agreement completed between the partners that define the geographic region or the non-compete service area; defines governance and general managerial and power of authority, how to create the health systems brand, and the completion of a management agreement that outlines the responsibilities per day to day operations,” Sellars says.

To view the full webinar, click here.

If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.

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