Some hospitals seek doctors as partners in acute-care facilities

Consultants say such joint ventures are relatively rare but that they might be happening more often because of hospitals' desire to bolster their market positions.

By Katherine Vogt — Posted Jan. 30, 2006

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In the last year or so, Indianapolis-based Clarian Health Partners has opened or made plans to open three acute-care hospitals in conjunction with physician partners. Clarian is one of a smattering of health care entities around the country that believe such joint ventures are the best medicine for what is ailing full-service hospitals.

"We need physician partners in the new world to deal with quality improvement, technology and transparency," said Dan Evans, president and chief executive of Clarian Health, a nonprofit system that operates 11 hospitals across Indiana, including the hospital associated with the Indiana University School of Medicine.

Clarian partnered with physicians to open an acute-care hospital in the Indianapolis suburb of Avon in December 2004. A year later, the organization opened another acute-care hospital with physician partners in the suburb of Carmel.

Also in December 2005, word came that Clarian had a tentative deal to build an acute-care hospital in Lafayette, Ind., with the 125-physician Arnett Health System, a multispecialty group that also runs a health plan. Both sides have been reticent about the project pending a definitive agreement. But Evans said the facility would likely have about 275 beds. Groundbreaking could occur within months.

To maintain its tax exempt status, Evans said the nonprofit Clarian's partnerships with physician groups can be no more than a 60/40 split, giving Clarian the larger ownership stake. Still, the physician stake is large enough to give the physicians a fair amount of say in the business.

Michael Skehan, MD, a rheumatologist who is president and chief executive of Lafayette-based Arnett Health System, said the physicians wanted to pursue the deal because they believe it can help fulfill the practice's mission to provide quality patient care at an appropriate cost.

"Delivering a product that is high-quality and low-cost is imperative. You can't do that in just one aspect of health care. You need the whole continuum of care," he said. "Actually having a financial vested interest in hospitals allows the physicians to try to make the tough decisions of quality and cost."

Dr. Skehan believes such deals can also produce better cost structures for all the parties involved by eliminating duplication of some services such as laboratories.

Arnett had at one time thought about building its own hospital. But Dr. Skehan said that the prospect was "daunting." By partnering with Clarian instead, the physician group is getting help from an entity with experience running hospitals, as well as getting help raising capital and sharing the financial risk.

Other health care organizations have similarly seen some advantages in this model of joint venturing. Dupont Hospital in Fort Wayne, Ind., is owned in partnership between Lutheran Health Network and physicians from several different practices.

And at least one hospital in California is said to be pursuing a joint venture with physicians to restructure the ownership of an existing full service hospital.

Some consultants said they see the possibility of more physicians and hospitals partnering for these facilities as regulatory uncertainty continues to cloud the future of specialty hospitals, and as both groups look for new integration strategies in order to survive growing financial pressures.

"As reimbursement continues to be pressured, you're going to see more hospital-physician joint ventures on everything," said David Charles, a consultant and partner with Katz, Sapper & Miller LLC in Indianapolis.

Charles said that while physician investment in specialty hospitals has been under intense regulatory scrutiny in recent years, physician investment in acute-care hospitals has not been the subject of alarm. That's because full-service hospitals often qualify for an exemption under the so-called Stark law, which governs physician referrals to entities in which they have a financial interest.

Other consultants believe there are disadvantages to the model that will likely prevent it from becoming more widespread. Kevin Forster, a consultant with ECG Management Consultants, Inc., in Seattle, said that physicians may have less control in joint ventures for hospitals than they would in partnerships for smaller facilities.

Additionally, Forster said it may be difficult for physicians in smaller practices to find "the critical mass" they would need to make the large investments necessary for full-service hospitals. And the return on the investment may be less than putting money into other types of health care facilities because the margins on full-service hospitals are so small.

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