Imaging JVs: Strategic Partners or Just One More Competitor?
Hospital-radiology group JVs are key to preserving and growing imaging market share, but failure to cement strong relationships and expectations from the start is a prescription for failure Well before legal and operational considerations of contemplated joint ventures (JVs) take place, it is of critical and increasing importance to discuss relationships between and among the JV partners. Equally important are discussions of the strategic and operational imperatives of the contemplated entity. What follows is not a warm and fuzzy couch session on relationships, but a representation of observations from multiple experiences facilitating meetings on JV opportunities. Typically, radiology groups generate JV discussions with hospitals; more recently, hospitals are generating discussions with radiology groups, as well as with other physician imagers in the community. Imaging center operators are also initiating these discussions today. Clearly, the landscape has changed substantially over the past three to five years, but the dominant JV transactions still take place between hospitals and radiology groups. If the relationship between the two parties is strong, each understands the contributions of the other to a contemplated JV. If market demand dictates a new site of service, then a JV imaging center is not only the right thing to do, but is a competitive imperative for growth. Supply and Demand Imaging continues to be one of the most significant growth segments for most hospitals. With the exception of pharmacy, diagnostic imaging crosses all business segments offered by the hospital. It is provided in the inpatient, emergency-department, operating-room (OR), and outpatient settings on and off the hospital campus, as well as in physicians’ offices and centralized medical office buildings. In spite of a number of efforts to reduce the utilization of advanced imaging (CT, MRI, and PET/CT), recent forecasts by analysts continue to point to year-over-year growth in diagnostic imaging. Clearly, growth forecasts will be different and specific to the local market, but make no mistake: Growth in diagnostic imaging will continue. Making room for the predicted increase in volume and conducting a complete, honest analysis of the local competitive landscape present the hospital with a significant challenge and a complex decision matrix. How will the hospital service the inpatient, emergency-department, OR, and outpatient populations plus referring physicians–and provide easy access and a positive, customer-friendly environment to meet demand and to differentiate the organization from its competitors? How will the hospital find the capital necessary for all of these requirements and also find the capital to invest in programs important to the strategic direction of the hospital in a hotly competitive landscape? Access to the capital necessary to growth is quickly becoming a driving force in JV considerations. The current economy has changed the landscape for many hospitals, and it is changing the decision matrix for JV initiatives. The answer that more and more hospitals and radiologists have discovered is to move the outpatient studies to an outpatient imaging center—right now—or risk losing the patient to someone else. We see more and more hospitals taking outpatient services into the community rather than making the community come to the hospital, a historically higher-cost site of service. Those who still don’t get it are seeing the market demand built by the hospital and radiology group taken over by entrepreneurial outside invaders. Many of the outside invaders have been competing hospitals setting up outposts in incumbents’ backyards, raiding parties from company-owned imaging centers that see demand going unfulfilled, or physicians’ offices placing supply in the community to meet demand and to provide the patient-service levels required to meet their own needs. The invader has a ready referring-physician base that is unhappy with anything more than instant turnaround times and one-hour wait times—perhaps an exaggeration, but to make a point. The invader has a patient population unhappy with having to go into the hospital setting, stand around while inpatients get priority, or try in vain to find a place to park. So much for medical-staff, referring-physician, or patient loyalty: It just isn’t there. Another point is the bias that payors are demonstrating in directing patients out of the hospital setting for outpatient imaging as a covered service. With nothing but turf to lose, your strategy should include:
- access, access, and access;
- continuity of care (with the same radiologists for inpatient, outpatient, and outreach services);
- prevention of loss of patients to other providers;
- a high price of entry for future competitors; and
- elimination of current competitors.
Figure 1. The physician-practice organizational model for a joint venture; source: The Barrington Lakes Group.This model (Figure 1) is an extension of the radiology practice. The JV corporation is a management-services organization providing all administrative services to the radiology group. The JV is owned by the radiology group (or a subsidiary of the group) and the hospital (or a subsidiary of the hospital). The percentage of ownership is determined by each party’s investment, typically 50%, in the JV corporation (Figure 2).
Figure 2. Structure of the LLC that owns an imaging center under the physician-practice organizational model for a joint venture; source: The Barrington Lakes Group.The radiology group bills the global fee under its existing managed-care contracts and pays the JV for all of its administrative services. Several provisions must be met for this model to be implemented. The radiologist owners of the radiology group must demonstrate it will provide the majority of the interpretation services at the practice location where the studies are performed. There are other regulatory matters to be met, but they all revolve around demonstrating that this is, indeed, a physician organization performing the medical tasks and billing for the services. Your attorney will ensure that all requirements are met. The JV then enters into service agreements with the physician group to provide administrative services; all fees for services in the agreements must be demonstrably priced at fair market value, as in the physician-clinic model. The IDTF Model Another organizational model for consideration is the IDTF model. The JV, in this case, is a stand-alone corporation in the business of providing diagnostic testing. It will require, and will bill under, its own provider number. Reimbursement comes directly into the facility. Ownership in the JV is determined by the investment of each party. There are a number of regulatory burdens associated with being an IDTF. Additional administrative burdens include registering specific CPT codes with your Medicare administrative contractor (MAC); submitting a complete listing of all equipment in the facility; submitting the names of all supervising radiologists performing services at the facility, of radiologists who will be billing for services at the facility, and of all nonphysician personnel employed by the facility or contracted to provide services at the facility; and stating the requirements relating to the employment of all of those personnel. In addition, there are restrictions on what services can be provided in the facility, beyond diagnostic imaging. If you are planning to provide breast biopsies or other invasive procedures in the future, you may want to reconsider the IDTF model. Your MAC will make an unannounced site visit. Be sure to know what the rules are regarding when you can see patients, and be paid, if patient encounters occur before you pass inspection by CMS. Every time you have a change in personnel, physicians, modalities, or equipment, you will need to file documents with your CMS intermediary before you implement those changes. Contributed Assets We have encountered several potential JV arrangements in which the hospital or the physician group has decided that it wants its current base of business to be assigned a value as a contribution to the JV, rather than merely entering into a 50–50 investment relationship. Although, in certain circumstances, there may be merit to this approach, agreeing on the value of the business being brought into the venture has almost always been a problem. Most often, the valuation has led to chaos and the end of the JV. One or another of the parties inevitably takes issue with the value of the stream of revenues projected for the future, particularly whether the owner of the stream of revenues for diagnostic imaging is its real owner. After all, some argue, don’t the referring physicians, or the patients themselves—not the providers of diagnostic services—really own the patients’ business? One can argue this from several vantage points, but in the end, is this approach worth risking the relationship and the actual new business to be developed by the JV? Each case will need to be examined on its own merit. Generally, we do not recommend going down that path unless the facts of the case are so overwhelmingly apparent that it cannot be avoided. Other Considerations In all cases, no matter which organizational model is chosen, consideration of the avoidance of regulatory constraints must be engaged in and provided for in the JV process. Specific state regulatory matters must be taken into account. Just because a JV in another state implemented one thing does not necessarily mean that your state will allow it. Some states have certificate-of-need (CON) requirements, even for physician organizations, while others have CON requirements for hospitals, but not for physician groups or IDTFs. Anti-kickback statutes, fee-splitting regulations, self-referral bans, antitrust regulations, inurnment issues, corporate-practice-of-medicine regulations, and tax-exempt protection for the hospital all need to be addressed. Do not, however, let anyone tell you that these matters are showstoppers. They are not; they are merely considerations that one has to provide for in the construction and operation of the JV. Gaming the system, however, is not recommended. Organizations developed to game the system caused all of this regulatory oversight in the first place. Keep it simple, and keep it straight and level, and there will be few—if any—restrictions on developing a sound JV built for strategic partners to meet the market’s demand. Get an attorney involved who knows what he or she is doing and is dedicated to making it happen, rather than to finding 11 different ways that it cannot happen. If the JV contemplated also considers the addition of certain nonradiologist physicians as owners of the JV, you really need a great attorney who is experienced in these matters to guide all parties through the process. Remember, a referring physician cannot refer (order) designated health services (imaging) to an entity in which he or she has an ownership interest. Therefore, you will need to decide what is going to be done with Medicare and Medicaid patients of these owners. They cannot come to the JV, so where will they go? What will you need to have in place at the JV to ensure that these patients are not seen at the JV—or, if they are, how do you prevent these encounters from being billed in error? Set up systems, checks, controls, procedures, and audits to ensure that the JV does not come face to face with regulatory issues and their consequences. Conclusion As part of a comprehensive, integrated imaging strategy, the JV is the business model of the future, and one long overdue. We have seen JV imaging centers, effectively managed and collaboratively empowered, run competitors out of town and become significant competitive differentiators for hospitals and their radiology groups on a broad scale. Continuity of care from inpatient to outpatient to physician-office settings—with qualified, credentialed, well-known, and trusted radiologists—is essential to cost-efficient and effective patient care. PACS and other technologies contribute to the opportunity for seamless service across the continuum of care, from the hospital setting to the outpatient setting. When continuity of care is implemented, service to the referring physicians is outstanding, a caring and excellent patient experience is provided, clinical results are delivered and documented, and smart use of smart technology is employed. Then, the strategic partners will definitely have the upper hand in a highly competitive landscape. The JV is another tool to ensure that the health care model of the 21st century is being delivered: right study, right setting, and right price. That combination is a winner in any environment. It is called differentiation, and differentiation trumps price and denies competitors entry, every time. The last ones standing will be the strategic partners—if they both take the challenge and deliver.