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.

With all that in mind, why are we not seeing more strong strategic partnerships between radiologists and hospital administrations? The answers to that question are, more often than not, shocking. Many hospital administrators and hospital business-development leaders see radiology as a commodity and treat radiologists as a commodity. Conversely, many radiologists take the relationship with the hospital for granted and fail to get a seat at the leadership table, where they could show the hospital administration how to make money with an integrated inpatient, outpatient, and outreach imaging strategy. After the DRA became law, many hospitals wondered why, given the reimbursement leveling between the Medicare Physician Fee Schedule (MPFS) and the Outpatient Prospective Payment System (OPPS), a hospital would ever consider a JV imaging center. They continued to harbor an ingrained belief that JV imaging centers were really competing with hospitals’ outpatient departments. Seldom did the facts support this philosophy, but nonetheless, we observed this behavior more than one would reasonably expect, resulting in less-than-optimal performance at either site of service, in most cases. The result was the creation of competitors that could have been avoided if the venture partners clearly understood the market with greater objectivity, instead of parochial protectionism. Radiology Leadership Often, before a radiology practice enters into a JV discussion with a hospital, we need to assist the radiology group and the hospital administration in changing their perceptions of each other. Each must come to an understanding of the importance of the other to the success of the contemplated entity and of how the proposed JV fits into a comprehensive, integrated imaging strategy for the community. There is nothing more counterproductive, in a JV meeting with hospital leadership and radiologists, than seeing the primary discussions focus on episodic radiology-department issues, or on each party telling the other that it could have an imaging center without the other party (determined competitors). A JV is not going to happen in this kind of environment. Before embarking on developing a collaborative, integrated imaging strategy, radiology-group clients and hospital clients need to reintroduce themselves to each other, build the case for teaming up, point out the JV opportunities, and begin a new day at the leadership table. The first order of business is to decide which imaging needs to take place, in what setting, to meet defined market-share objectives, defined market needs, competitive considerations, service-level standards, and price-point objectives. If the circumstances do not support the strategy, no amount of wishing and hoping will change the business case and create opportunity where there is none. If the contemplated partners do not see the value of each other’s contributions to the success of the venture, then no amount of market demand will make the venture successful. The venture partners must bring something unique and commanding to the market. Business Models The first decision to make is under which model to proceed. There is no silver-bullet enrollment model. Each option needs to be considered in the bright light of on-the-ground facts and circumstances. The most common JV model, in our experience, is the JV imaging center enrolled as an IDTF. The next most common enrollment is under the physician-clinic model, followed by the provider model. Due to recently implemented IDTF rules and other regulatory matters related to IDTF enrollment, we are seeing a shift to provider-model JVs and physician-clinic–model JVs. Local payor distribution and the goals and objectives of the contemplated center will drive the decision. We strongly suggest retaining the services of an experienced health care attorney familiar with these matters early in the deliberations. First, we suggest building the business case for the JV. Typically, an appointment backlog at the hospital will send a clear picture of the immediate need. For instance, if the hospital’s outpatient MRI or CT schedule is filled a few days, a week, or more ahead, then you can readily depend on the fact that studies are going to someone else. You should be able to pull demographic data easily for the past two years (at a minimum) and track physicians’ referrals by modality. Then, look at the patients by ZIP code and by modality. These data will reveal where the patients are coming from and whether there have been shifts in referral patterns. Second, we recommend looking at the current business another way. What is going on in the hospital that should be moved to the imaging center in order to ease inpatient throughput? Look at new services (not offered in the hospital outpatient setting) that should be offered in the new facility if you, for instance, were to put in a 32-slice CT unit instead of the workhorse 16-slice unit currently in place. Do the same for MRI or any other modality, including PET, ultrasound, and mammography. Third, look at new business. What is going on in the community that you need to anticipate? From these data, you can build a business forecast using actual payor mix and collections per procedure. Determine the number of anticipated studies per day, per month, and per year times the anticipated reimbursement for each modality over time. Forecast the first year month by month, allowing for a buildup of service rather than thinking that you will start out at the maximum. Then, budget expenses for the facility; the rest is a math exercise. Next, perform a CPT® code-by-code utilization-frequency analysis and an analysis of the OPPS value of the business (adjusted by Geographic Practice Cost Index and accommodating actual collections of copayments and deductibles, plus denials). Compare OPPS reimbursement to MPFS reimbursement. This analysis alone may not tell you which organizational model to investigate seriously if the Medicare population is more than 30% to 35% of the total anticipated population. One also needs to assess the hospital’s commercial-payor reimbursement versus the market’s stand-alone–facility reimbursement. Typically, a hospital can negotiate significantly higher reimbursement than an independent imaging center operator or physician group can for outpatient imaging services. There are, however, many third-party payors that place site-of-service differentials into subscriber policies designed to steer patients to lower-cost sites of service. Be very careful to ensure that the assumptions being used to decide which model makes the most financial sense include the ability to attract the most volume to the facility. Diagnostic imaging is predominantly a fixed-cost business. Small increases in volume can pay large dividends and can outstrip higher payments per unit of service. It is not unusual to encounter an imaging center that is proud to have negotiated a high payment rate, only to find that less than 3% of its volume comes from that high-paying patient population. This may not be the case with your JV. The point is that you need to examine the business case in detail and run several different scenarios, using your imaging center’s specific parameters, before you decide on an organizational model. The Provider Model The provider model is an extension of the hospital outpatient department, set up as a separate (but related) entity of the hospital. Accordingly, reimbursement will follow OPPS reimbursement for federal payors and is most likely to follow the commercial contracts in place with the hospital payors. The new organization, a JV between the hospital and the radiology group, will be established as the service provider. Ownership of the venture will be determined by each party’s investment in the corporation. The operating agreement of the new corporation will, of course, contain all of the necessary regulatory provisions related to community benefit; to indigent care; and to ensuring that referrals to the facility by staff physicians are not unduly influenced by the hospital, tracked by the hospital, or found to be rewarded in the staff physicians’ compensation formula in any way. Service agreements are developed between the JV and the radiologists and between the JV and the hospital (if, in fact, the hospital is providing services to the JV). Additional service agreements may be made for companies providing billing, medical supplies, equipment maintenance, and space and equipment (if leased, rather than purchased outright). Employees may be leased from either entity or hired by the JV. A medical director (usually a radiologist from the group) will be retained by the JV. In all cases, the details of the agreements must use fair market value in setting fees for services. It is vitally important to create a detailed scope-of-services requirement for all activity contemplated at the JV. Then, decide who is going to provide the services required by the JV. Determine responsibility for human-resources management; accounting, treasury, and finance functions; risk management, quality assurance, and utilization management; asset management, equipment procurement, and equipment service; training and application services; legal-services coordination; and marketing-management functions. Typically, you will find that a who-does-what list is 12 to 15 pages long. Identify who should provide what, at what fee, to the JV. The challenge will be for each organization to think like a JV owner, not like a parochial owner of its individual organization. Next, move on to the really important relationship part of the equation. It will be vital to the success of the venture to have the leadership of the hospital, from top to bottom, supporting this venture—as an important part of the entire organization, not as a competitor of the hospital’s radiology department. Buy in by the entire organization is imperative. Without such buy in, the JV is likely to fail; at a minimum, the JV board of directors will spend an inordinate amount of time discussing contests, which will be a distraction to effective operations and good results. The relationship will erode immediately. The Physician-clinic Model This JV model is a separate corporation with its own unique tax-identification and provider numbers. 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 the investment of each party in the JV corporation, with 50% each being typical. The JV bills the global fee with new managed care contracts. There are other regulatory matters to be met, but they all revolve around demonstrating that this is, indeed, a physician/hospital clinic 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, the hospital, or other providers of administrative services to the JV. Again, as with the provider model, all fees for services in the agreements must be demonstrably priced at fair market value. Property leases, equipment leases, billing services, personnel leases, medical supplies, equipment maintenance, advertising, marketing, financial services, and legal services, for example, are paid for by the JV. The operating agreement of the JV will contain certain provisions to protect the tax-exempt status of the hospital and will contain clear language concerning staff physicians of the hospital referring patients to the facility. It must be clear that the hospital will communicate to the staff physicians that they are not required to refer patients to the center and that the staff physicians’ compensation will not include compensation for referrals—nor will the entity track such referrals. Your attorney will be sure that these provisions are in the documents. The Physician-practice Model
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.