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JOINT VENTURE DEVELOPMENT: PROCESS AND NUANCE |
Sooner or later, every hospital CEO faces a group of physicians ready to walk away with a piece of its business. “We’re going to create a new venture,” they say, “Do it with us or we’ll do it without you.”
Done properly, a joint venture can be a win-win. But it can become a nightmare if the development process is not given the considerable care it requires.
The critical nuance in joint venture development lies in giving the physicians a significant role in shaping the venture, while making sure that the hospital has its own vision from the outset. The hospital needs to guide decision-making—but oh so gently. It’s a delicate balancing act, done with the knowledge that the blame for a failed venture will undoubtedly rest on the hospital’s shoulders.
This article discusses the key elements that DGA Partners has found essential to successful joint venture development.
1. CREATE AN EFFECTIVE PROCESS
Start by establishing a common framework for the development process and what the venture is to achieve. Participants should:
Create a physician steering committee that will be perceived as neutral and objective by all potential participants, to work with the hospital.
Communicate goals and objectives. Even the “obvious” goals of all parties should be stated. The physicians need to understand hospital strategic goals, like integrating services with the physician community. The hospital needs to hear the physicians’ financial expectations and operational goals. (If the venture is a surgicenter, the surgeons’ incomes will be largely dependent upon the efficiency of its operation).
Hospital objectives regarding quality should be explicit. If there are issues related to permitted procedures, be up front about it.
Establish reasonable expectations. The process of communicating goals often uncovers “fish stories” about ROI that potential participants have heard. (“My friend takes home $20,000/month from each of five surgicenters”). These need to be tempered with reality. Physicians need to understand the financial and legal risks and constraints.
Participants should have a common understanding of development time frames, including time for licensing and certification, payer contracting (if necessary), and any construction or renovation.
Illuminate what the hospital brings to the table. Physicians often lose sight of the upside of hospital involvement, such as contracting and access to capital. To maintain a level playing field in the development process, physicians need to be frequently reminded of these advantages.
Maintain momentum. Hold regularly scheduled meetings with the steering committee. Space them to allow for necessary tasks to be completed, but not so far apart that participants perceive that the venture is stalled.
2. DO YOUR ANALYTICAL HOMEWORK
Before detailed analyses are completed, the hospital needs to run preliminary numbers that will help it determine how it wants to see significant decisions play out.
Look at all aspects of the joint venture’s impact on the hospital. What will carving out these services do to existing departmental margins? Will establishing a separate entity create any staffing issues? Develop a sense of the range of outcomes.
Understand the economics of the joint venture before entering into any serious discussions. What are the volume requirements and breakeven points for a joint venture to be financially successful? Will the joint venture need to obtain its own payer contracts? Is there a significant risk of not obtaining those contracts?
Revise and deepen the analysis as the venture evolves. As planning for the venture proceeds, projections and impacts must be reassessed. Be prepared for common issues that arise. For example, surgeons often want to add an extended stay facility to a surgicenter joint venture. “What-if” scenarios will highlight the considerable volume requirements that would be necessary to support the related acute care license.
3. KNOW WHAT THE PHYSICIANS ARE THINKING
To be an effective leader in joint venture development, the hospital should understand as much as possible about the dynamics of involvement by physician participants.
Are there strong leaders involved?Might any be so strong that the venture will be perceived as the “Doctor so-and- so Center?” You’ll need a strategy for handling that kind of situation.
Consider the physicians’ alternatives. If there is a competing venture, what are the dynamics surrounding a physician’s participation in that venture?
Recognize hot buttons. Will the joint venture (including physician investors) need to purchase an existing hospital- owned business to which the physicians currently refer? How will that be received, and what is the “game plan” for handling this issue? Understand all the business valuation dynamics.
4. INVOLVE LAWYERS EARLY
The venture will need to establish ownership structure, capital contributions, governance parameters, non-competes, and other legal compliance issues that will be the platform for the hospital’s participation in a joint venture. It’s critical to have legal counsel with specific experience in joint venture development involved from the beginning of the process.
The end result of this process should be an offering of equity in a joint venture that has been structured collaboratively by the physicians and the hospital. By addressing these four key elements, you greatly increase the likelihood that the venture will successfully meet the goals and expectations of the participants.
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