Financing the Future II, Report 4: joint ventures with physicians and other partners executive summary

Healthcare Financial Management, Feb, 2006

HFMA's Financing the Future series began a process of highlighting strategies hospitals and other healthcare providers could use to improve access to capital. HFMA's Financing the Future II project continues this process.

By providing practical how-to information in the form of concrete strategies, tools, timelines, and other materials, the second Financing the Future series seeks to help healthcare organizations of all sizes "raise the bar" on financial performance and capital management strategies.

The six reports in Financing the Future II are being released over an 18-month period. HFMA's partners for this series are GE Commercial Finance Healthcare Financial Services and Kaufman, Hall & Associates, Inc. The first report in the series named seven guiding principles for best practice financial management and contained details on the application of the first three principles. The second report focused on the fourth principle, and the third report addressed integrated strategic financial planning and capital allocation, covered in Principles 5, 6, and 7. With the release of the fourth report, summarized below, focus shifts to joint ventures with physicians and other partners, the exploration of which involves all of the principles.

WHY JOINT VENTURES?

In an environment characterized by continued revenue constraints and cost increases, hospitals and health systems must simultaneously pursue all strategies offering the potential for improved market and financial performance. Among the numerous growth strategies that exist, joint ventures represent an increasingly important option, particularly when the initiative to be pursued is large, competition is intense, capital is limited, and the risk of failure is significant.

In a joint venture, the hospital or health system and one or more entity(ies) or individual(s) form and operate a common enterprise for a new or existing purpose while sharing risk and benefit. Hospital-physician alignment is a key joint venture pursuit, fed largely through trends such as transfer of the provision of health services from acute care settings to outpatient facilities, declining physician income, and increased competition as high-profit inpatient service lines, such as cardiology and orthopedics, shift to specialty facilities. Joint ventures with physicians can be especially helpful in strengthening relationships with this key constituency and aligning economic incentives to enhance market position and ultimately financial success.

HOW DO YOU KNOW WHETHER A JOINT VENTURE IS RIGHT FOR YOU?

A corporate-finance-based framework for evaluating and pursuing joint ventures with physicians and other partners provides a best-practice evaluation process and guiding principles and policy. This framework includes integrated planning that aligns the joint venture with the organization's long-range strategic, financial, and related operating plans.

Typically, the evaluation process begins with asking what the hospital wants to accomplish and how the joint venture might contribute to the overall objectives. Like other growth strategies, joint venture exploration requires an assessment of the hospital's current position in the market and projections related to future market and market position conditions.

WILL IT MAKE GOOD BUSINESS SENSE7

A preliminary business assessment of a specific joint venture provides a sense for whether the venture is going to be successful based on industry, market, financial, and organization-specific factors. Yet considerations need to go beyond business opportunity assessment and plan development. The issues of joint venture structure and control can make or break a hospital's ability to achieve a strategic-financial target, such as expanded market share and volume in a particular geographic region or service line. Buyout provisions should be considered and developed early in the joint venture evaluation process; buy-in provisions and noncompete restrictions are equally important.

WHAT KEY FINANCIAL PROVISIONS WILL YOU NEED TO KEEP IN MIND?

Issues related to capitalization of the joint venture, such as debt policies, reserve powers, and valuation of majority and minority interests, require thorough planning. In addition, joint ventures frequently utilize financing to acquire needed property and equipment, or provide working capital.

Randy Fuller, manager of market intelligence for GE Healthcare Financial Services, notes that those participating in joint ventures often utilize bank debt and leasing for financing the facility, and the financing is normally secured by the accounts receivable, plant, and equipment of the joint venture, with additional pro-rata guarantees from the hospital and the physicians. Financial and legal advisers can provide the critically needed expertise to afford the organization greatest financial flexibility given existing legal and regulatory requirements while maintaining the lowest overall cost for the risk of the asset and liability portfolio and allowing for future financing needs.