Restructuring: The Way JVs Get Done
After Congress passed the DRA, reducing Medicare reimbursements for imaging services, the radiology landscape has never been the same. This is especially true for joint ventures between radiology groups and hospitals to provide outpatient imaging, according to Richard Townley, MBA, president and CEO of AGI Healthcare Group, a consultancy headquartered in San Ramon, California.
Richard Townley, MBAPrior to the DRA, hospitals and radiology groups often entered into joint ventures for the ownership of OICs simply to increase market share. This is not the case anymore, Townley says. These days, the market is saturated with providers, and the joint-venture incentives have changed.
“There has been a big post-DRA drop in building new OICs or annexes on the hospital campus,” Townley says. “Now, it’s more about restructuring existing centers. In 2005, we might have seen 10 new centers and one restructuring; now, it’s 10 restructurings to one new center.”The focus today is on bringing in money. “The big move now is to better reimbursement,” Townley explains. “The big effort is going to be joint ventures that are restructured or structured to enable the parties to grow revenues through higher reimbursement, as opposed to joint ventures being formed to meet a market need.” Hospital Clout Because hospitals can bill Medicare under more lucrative Ambulatory Payment Classification rates, as opposed to the Medicare Physician Fee Schedule rates that freestanding imaging centers use, the incentive is to bring joint ventures in under the hospital wing, Townley says. “It’s important to have the transaction structured so the hospital can bill under its Medicare rates,” he says, “and most important, so the hospital can bill the commercial rates for the commercial payors.” Insurance companies still pay hospitals (as acute-care providers) contracted rates that can be, Townley says, “double and sometimes more” the rates that imaging centers can charge for the same exam. As a result, the hospitals are most often the ones seeking joint ventures with OICs, Townley adds. The hospitals might want to buy into imaging centers as equal partners, or perhaps to buy them outright. The incentive is to expand the hospital reimbursement pool for outpatient imaging—and to capture revenue streams for surgery (and other hospital services) that naturally flow from diagnostic tests performed at outpatient centers. Townley also notes that hospitals often face space constraints that prevent adding high-end imaging on campus, and they might be able to use joint ventures to add capacity “in a more capital-efficient way,” he says. Pressure on Radiologists While hospitals might have strong incentives to seek joint ventures, this doesn’t mean that radiology groups with targeted imaging centers are in positions of strength to negotiate, Townley says. The opposite is more often the case. “In most markets, there’s enough capacity,” he says. “There aren’t a lot of new imaging centers being built. What we see now, in light of the current economic uncertainty, is centers extending hours and staying open on weekends, rather than buying new magnets—doing more with less capital investment. Hospitals are looking at this and saying, in light of this uncertainty for radiologists, ‘We want to be bigger players in this.’” Other factors also work to the advantage of hospitals, Townley says. For instance, a hospital can argue that forming a joint venture with the radiology group that interprets for it removes competition between them and achieves a strategic realignment beneficial to both parties. “It eliminates the perception of competition; it eliminates the competitive capital-formation need. The radiologists can grow revenues with the cachet of the hospital’s name, and the hospital has the benefit of radiologists managing the center on a day-to-day basis,” he says. Moreover, a joint venture with its hospital client works to cement a radiology group’s hospital contract at a time when some hospitals are turning to radiologist-employment models or bringing on teleradiologists to handle interpretation remotely. “If the local radiology group has 100% of a center, then the hospital may say, ‘We won’t renew the contract; we’ll bring in a teleradiology group that provides some on-site work and complement that with specialty readings,’” Townley says. “That is also a factor to prompt radiology groups to form joint ventures with hospitals that they might otherwise not want to do. For most groups, the hospital contract is still the bulk of the radiology group’s income.” Townley also notes that a lot of radiologists are approaching retirement age and might want to form a joint venture with a client hospital to “solidify relationships and revenue streams,” he says. Overall, “Radiologists now are more willing to consider a hospital joint venture than they would have been four or five years ago,” Townley says. Stark Laws Laws against physician self-referral—the Stark laws—don’t really impede the formation of joint ventures, with one big exception, Townley says: when the physician ordering the imaging services is an owner or co-owner of the joint venture. “We never have ordering physicians involved in a center’s ownership,” Townley says. He says that some deals where ordering physicians were part of the ownership were unwound as changes in Stark laws closed loopholes, but he adds that those have been rare. In cases where interventional radiologists in a joint venture refer patients for MRI and CT exams, that can get complicated, Townley acknowledges, even requiring setting up separate entities, but he says that those situations are also rare. Overall, he says, the Stark laws have helped radiology groups and hospitals avoid competition from nonradiologist physicians who might otherwise purchase imaging equipment and self-refer. “We view the changes, from the radiology and hospital perspective, as being good,” he says. Even so, meeting Stark provisions is a key part of forming a joint venture. “The CMS stipulations are very detailed, and there are many of them. The joint venture has to be structured to meet those operational elements. We try to get CMS testation before we start up—to make sure the local fiscal intermediary has signed off,” Townley says. Expertise Helps It’s also important to design joint ventures in light of Medicare IDTF designations, Townley says. A center owned by radiologists would typically operate under an IDTF designation and would have to be enrolled with CMS and other payors as such, but an IDTF designation might not suit a hospital in a joint venture and might, in fact, delay reimbursements for hospitals while IDTF registration takes place. “Typically, we don’t want to be an IDTF, so we maintain the contracts under the radiology group’s name and form an LLC jointly owned with the hospital. The LLC owns all the equipment and leases everything to the radiology group under a technical-services agreement. That’s fine, even under the new Stark rules, because there are no ordering physicians in the LLC jointly owned by the radiology group and the hospital. The joint venture doesn’t have to enroll as an IDTF,” Townley says, “but some hospitals feel this gives radiology groups too much power.” Another hurdle in forming joint ventures might be satisfying hospitals’ need to maintain not-for-profit status, since 85% of hospitals have that designation, Townley says. If hospitals contract to shift imaging to radiologist-owned outpatient centers without properly forming joint ventures, the hospitals would have to be compensated; otherwise, there could be an inurement issue, from the point of view of the IRS, because both parties did not benefit in the exchange, Townley says. On the other hand, if hospitals were compensated too much, there could be Stark anti-kickback alarm bells going off, he adds. That’s why most joint ventures in which a hospital assumes all or part of a radiology group’s interest in an imaging center are structured as asset purchases and don’t involve shares in the radiology group itself. Expertise in the form of legal and consulting assistance is highly recommended by Townley when joint ventures are formed. “No joint venture is better than a bad joint venture,” he says. With health reform on the ropes, legislative changes that might affect joint ventures in the future are hard to decipher, Townley adds. “Everything is a crapshoot,” he says. “What we believe will happen now is a more orderly discussion of what health reform encompasses,” he says, “but we’re not structuring anticipating a difference. We always have legalese about changing things if they need to be changed. We all believe reimbursement pressures will favor hospitals. There could be whiplash from the Aetnas because they pay double on campus, as opposed to freestanding, but there’s no movement on the part of commercial payors to have freestanding imaging done because of the higher rates at hospitals.” Advice for Practices What should a radiology group do to maximize success in a joint venture with a hospital? Townley says that the group first needs to understand the objective. “The main benefit for the radiology group is often the strategic alignment of interest with the hospital,” he says. “It has nothing to do with the joint venture per se, but with the bigger relationship on the campus.” Struggling freestanding centers might also see joint ventures as financially lucrative, he adds. Whatever the motive is, it needs to be delineated clearly within the radiology group, Townley emphasizes. “Make sure there is cohesiveness, within the group, on what it wants to achieve,” he says. Then, the radiology group has to pay close attention to the joint-venture contract and what is included. “Make sure leverage retention is in the business elements or contractual, such as buy-back arrangements,” Townley says, “like a prenuptial agreement where you come back to where you entered. It’s important that the radiology group is strategically positioned to ensure the continuity of the joint venture 5 to 10 years from now.” Slowness of governance on the hospital side often frustrates radiologists wanting to expand or add equipment to a joint venture, he notes. “You want a partner who thinks like you on service.” In negotiations with hospitals, conduct talks without burning bridges. “The valuation of what the hospital is buying is very subjective, and there’s no shortage of places where talks can get derailed. We strongly recommend using a nonbinding memorandum of understanding (MOU) so that the parties know the path on which they’re embarking. The MOU or term sheet enables the hospital to take it to the board, and the same with the radiology group. It’s better to break talks off then than to have to do it later on,” Townley says. George Wiley is a contributing writer for ImagingBiz.com.
—Richard Townley, MBA, president and CEO
AGI Healthcare Group , San Ramon, California