Managing Relations in Physician-Owned ASC Partnerships

Managing Relations in Physician-Owned ASC Partnerships
It’s not rocket science, nor is it as challenging as herding cats!

By Lorin Patterson, JD 

Physician-owned ambulatory surgery centers (ASCs) frequently present real benefits and challenges. On the one hand, physician involvement in an ASC’s operations often results in a warm, patient-friendly and efficient environment. On the other hand, the combination of a considerable number of non-affiliated, strong-willed physicians from a variety of specialties can lead to discord which can cause even the most level-headed administrator or management company representative to turn prematurely gray.

A portion of most of my work days is devoted to addressing physician relations issues in ASC partnerships. This frequent “up to the elbows” immersion in ASC affairs has allowed me to develop several “rules of thumb” which may be useful to those developing or operating surgery center ventures.

1. Consider caps on ownership. Allowing one physician or group of physicians to acquire a disproportionately greater number of shares than others in a venture can often cause serious problems later. A physician’s perception that his efforts will only result in greater returns for a partner who owns more units than he does may cause that physician to take his cases elsewhere even though his own distributions will decrease as a result. “Profession jealousy” is a common cause of ASC failure. Consequently, ASC ventures should consider including in their governing documents reasonable caps on the number of shares which any one physician or physician group may own.

2. Consider a variety of issues when screening investors. I find that considerable effort is devoted to clinical issues as investors are evaluated by an ASC. This is certainly appropriate but difficulties among the physician investor base may often be avoided if other considerations are taken into account before an investor is invited to participate. For example, physicians with a history of waging lawsuits in their business or professional affairs will likely carry this inclination into the confines of a surgery center venture. Legal fees from even a relatively modest lawsuit can easily devour a year or more of a surgery venture’s distributions. Consequently, consider a prospective investor’s prior business record on business and practice relationships before tendering subscription documents. If there is a question in this regard, ask the venture’s counsel to run a simple check of the local courts’ records to ascertain just how “active” a particular prospective investor has been.

3. Don’t expect practice patterns to change following investment. Most ASC ventures now require their participants to meet the ASC Safe Harbor’s requirement for multi-specialty centers that each participant receive one-third of his annual medical practice income from the performance of outpatient procedures and perform one-third of his annual outpatient cases in the ASC in which he is an investor. Failure of some partners to meet these requirements may be the greatest source of “unrest” among the remainder of a partnership’s physician partners.

This problem can often be avoided through realistic screening. ASC ventures should be wary of relying upon assurances from prospective investors who do not perform enough outpatient procedures to satisfy the first one-third test that their practices will somehow change following investment. Accepting such assurances may only result in an unhappy investor base, an unpleasant buy-sell action and possibly expensive litigation at a later date.

4. Avoid gridlock through the selection of the appropriate governance structure. Like any small business, a physician owned ASC will need to be able to respond to its challenges in a nimble fashion. Achieving this can be difficult where an ASC’s investor base consists of 20 or more non-affiliated physicians. Selecting a management structure which fits the particular circumstances can mean the difference between a venture which can quickly take such actions as adding new members, effectively interfacing with a management company and/or payors and one which is dead in the water.

There is no one-size-fits-all approach to selecting the right governance structure. However, most surgical ventures which include 10 or more non-affiliated physicians (i.e., physicians not practicing in the same group practice) will most likely desire to be governed by a small group of managers instead of requiring action by all of the members. In order to more closely align the interests of the physician investors, an ASC may wish to have a representative from each of the significant specialties offered in the surgery center included among the managers.

Participants in ASC projects should also be very reluctant to include provisions in their governing documents which require the approval of all or a very high percentage of a project’s members. For example, the consequences for an ASC could be severe if additional investors could not be added to the project because its operating agreement permits one or two disaffected physician investors to block such action.

5. Develop and apply a strong list of buy-sell events. A physician- owned ASC cannot function smoothly without a comprehensive list of buy-sell events which clearly delineate who can participate at any given time and the terms upon which partners can be removed if they fail for any reason to satisfy these requirements. These “rules” will be the most important portion of any project’s governing documents and should be revisited and “refreshed” periodically.

The federal government has stated that ASCs should operate as extensions of their physician investors’ practices. ASC ventures are advised to reflect this bias toward encouraging clinical involvement. For example, projects can fail because of the “rift” which can develop between older investors who come to view their interest in an ASC more as an asset instead of as a part of their practices, and younger, more clinically involved partners. Those drafting these provisions should prevent such divisions by crafting the provisions in a way which clearly specifies that the ASC is to operate for the benefit of those who are actively involved with it.

6. Manage expectations. Finally, managing the expectation of a project’s physician investor base will greatly aid efforts to maintain positive relations between all parties. Frequently in my dealings with physician investors, I hear, “ . . . but in my practice, we are compensated . . . .” Investors must be regularly reminded that an ASC partnership is fundamentally different from a group practice. It is unlikely that distributions received from an ASC by a physician investor will ever precisely correspond to the volume of business which he generates for the project. Nor would it be desirable for a readjustment in interests to occur periodically to reflect contributions to the project. Rather, physicians should be made to understand that the observance of the “cardinal rule” that distributions be made solely on the basis of the percentage of interests owned in the facility actually acts to protect them from liability. Such a concession is generally a reasonable sacrifice given the clinical and business benefits of ASC ownership.

Lorin Patterson, JD, is partner at Reed Smith, and serves as chair of the today’s surgicenter conference.