Many hospitals see a silver lining in the economic storm clouds: forming beneficial relationships with other healthcare entities. Like many hospitals, nonprofit Chester County Hospital in West Chester, Penn. lost revenue from surgeries as an ambulatory surgery center opened up nearby three years ago and took a bite out of its business.

But unlike some of its peer institutions, CCH has also benefited from the surgery center trend. That’s because CCH got into the action through a partnership with the local physicians who own a majority stake in Turk’s Head Surgery Center and offered the hospital a chance to be co-owners.

Being involved in Turk’s Head hasn’t been a money maker for CCH, according to CFO Ken Flickinger. The project lost money prior to the past year, he said, and the hospital has cut its stake from 25% to 2%. But being involved has paid other dividends, Flickinger said, from preserving relationships with surgeons to effectively designating CCH as the center’s go-to destination for lab tests and other ancillary services.  

The 4,000 annual surgeries that migrated from CCH to Turk’s Head put a dent in the hospital’s $200 million revenue stream. “Those were high-margin services for us,” Flickinger said. “Out of the $6 million we received from those 4,000 cases, we probably earned $2 million in profit. So we felt the pain. But we made the best out of a situation that was going to happen whether we participated or not.”

Making lemonade

Opportunities are ripening for hospitals across America to make lemons into lemonade through partnerships. Since the economic downturn quickened after September 2008, 22% of hospitals have seen an increase in requests from physicians seeking a partner for equipment purchases, according to a March survey of 1,078 hospitals conducted by American Hospital Association. The same survey found that 37% of hospitals are fielding more queries from physicians interested in selling their practices.

In some cases, partnerships help hospitals reverse problematic patterns. Seventy percent of the growth in Medicare services provided by ambulatory surgical centers between 2000 and 2007 came as a result of surgery centers’ taking business away from hospital operating rooms, according to KNG Health Consulting. KNG studied the trend for the Ambulatory Surgery Center Association (an industry advocacy group) and released results in June.

To stem the tide of shrinking revenues and/or grow marketshare, hospitals are forging partnerships to deliver services that would be difficult to provide independently. For instance, the $6 million Lewis County Cancer Center recently opened its doors to offer chemotherapy and radiation treatments under one roof for residents who used to travel some 60 miles to Olympia for such care. 

For Providence Health Services (PHS), partnering with other clinicians to launch the Lewis County facility marks a potentially lucrative opportunity. PHS’ Providence Western Washington Oncology facility, for instance, expects to double its rate of daily chemotherapy infusions from 15 to 30 by offering them through this joint venture in a prominent new location, according to Roy Olpin, an administrative director at Providence Regional Cancer System.

That increase is expected without a lot of risk-taking, Olpin said. One reason: Providence opted not to venture into the capital-intensive radiation niche and instead team up with RadiantCare Radiation Oncology to offer the radiation treatment option that local residents want. 

Think it through

Partnerships among clinician organizations can make a lot of sense when healthcare enterprises get together to meet a significant need in a local community, according to Lawrence Prybil, a former hospital executive and a professor of health management at University of Iowa. However, simply identifying a need that can be tackled cooperatively doesn’t ensure success.

“Partnership is a great concept, but it’s a concept that’s very complicated,” Prybil said. “It’s much easier to be a unitary organization where you have one board and one CEO. For one thing, you have to think out how you’re going to resolve potential conflicts in this partnership. If you’re not prepared to think that out, my advice is don’t do a partnership.”

CCH’s experience underscores the importance of planning and structure, said Flickinger. Turk’s Head Surgery Center met expectations for case volume from inception, but the facility nonetheless lost money. One big factor was an independent consultant’s analysis that was  too optimistic about how much insurers would pay for particular procedures.

Partners in the joint venture responded by reviewing their business plan and bringing in a manager with an equity stake in the project. Those steps helped stabilize an enterprise that had been floundering despite brisk demand and high levels of patient satisfaction.

Ultimately, what made the Turk’s Head venture a prudent one for CCH was a growing population in its suburban Philadelphia area, Flickinger said. He explained that the hospital stands to benefit in the long term as physicians (enticed in part by the surgery center investment opportunity) put down roots in the area, expand their practices over time and perform more surgeries, not only at the center but also at the hospital.

“If we did not have a growing population, we might not have looked at this joint venture as something that could be worked out,” Flickinger said. “But with a growing community and a growing need, one of the key strategic variables was for us to continue to recruit new and younger surgeons. This was a great way for us to make this area more attractive for them.”

Ready to get married?

Structuring partnerships carefully can help increase chances of success, experts say. But not everyone agrees on a set formula to translate into positive results. Prybil recommends having one entity be a majority partner to avoid the power struggles among equals that can unfold in 50-50 ownership arrangements. “Like marriages, 50-50 partnerships are really tough to manage,” Prybil said. “I prefer partnerships with a senior partner so that somebody has the ultimate responsibility.”

But Summa Health Systems, a nonprofit based in Akron, Ohio, hasn’t had trouble with its 50-50 joint ventures, according to CEO Tom Strauss. Summa has an equal say in strategic decisions, Strauss said, but it allows its physician partners to have a majority voice in day-to-day governance affairs. For instance, despite a 50-50 ownership arrangement at Crystal Clinic Orthopaedic Center in Montrose, Ohio, Summa permits physician owners to occupy three of the five seats on the governing board.

“When you empower physicians to run the healthcare system, they make very good, solid decisions,” said Michael Rutherford, Summa’s CFO.

Prybil cautioned that partnerships can create unintended obstacles to securing financing. Prospective investors weighing the risks of a bond issue might worry that co-owners represent an unknown quantity—one that might not be as financially strong as a rated institution.

But Rutherford said investors seem to appreciate when physicians have an ownership stake in a venture. “When your partners are physicians who have control over the way a place operates and make it more conducive to other physicians to practice there, we’ve found that the attractiveness for lenders goes up,” Rutherford said.

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