The Bank of Texas Sockwell has worked in healthcare banking for 17 years, including 11 at the Bank of America and six at the Bank of Texas. As an investor in physician-owned hospitals, the bank provides working capital, equipment financing and funding for construction. In considering a hospital project, Sockwell says he evaluates revenue per patient day based on the physicians assumptions.
If, for example, a physician says he can attract 20 patients, Bank of Texas will respond by asking the physicians to show us where those patients are going now, Sockwell says. If the physicians can show that they are able to do this, then we might lend more than we would otherwise. Typically, we ask that they bring (a) 20% to 30% range of the investment.
In most cases, Bank of Texas has established a relationship with companies such as Irving, Texas-based USMD, a healthcare services development company that provides management support to physicians in hospitals where both the physicians and USMD are investors. Sockwell says the bank then begins a thorough process of determining which physician-owned hospital projects are worth the risk by evaluating which operators will manage the project, where the hospital will be built, if the managers have contacted area providers to establish an in-network system, and if there is the right mix of physicians.
What keeps me up at night (is) ,Can they execute the strategy, Sockwell says. Are they getting the right physicians? For example, some doctors are very entrepreneurial; some are team-oriented and some are not. Will they work together? More important, is the right assembly of physicians on the ground? he says, adding that he doesnt limit the number of physicians who are involved. He has worked with physician groups as large as 40 for hospitals and as small as five for surgical centers. Bank of Texas works with four operating companies in Texas, where room for growth and the lack of certificate-of-need restrictions have spurred development, according to Sockwell. He also explains why working with an operating company has resulted in an effective business model.
USMD is largely a physician-owned entity with a nonphysician management team, Sockwell says of one of his partnering companies. So even before they build there are physicians and nonphysicians working together. And they have experienced the tough times. How well can that operator run the business office? How good are they at raising capital? Revenue-cycle management?
USMD President Greg Weiss says physicians might not know the nuances of the Joint Commission or the Emergency Medical Treatment and Active Labor Act, so they need people skilled in those areas to work with them. But he is emphatic that physiciansnot the management companymaintain control.
They inherently know and have been trained on whats best for their patients, Weiss says. What is absolutely clear to me: I believe that physicians have to control the facility, the board, purchasing, the staff. Whether I have 1% or 20% interest, the physicians control everything. In America, the only way you can control something is if you own it.
Thats why the ongoing debate on Capitol Hill and the physician-ownership provision in the House version of the Childrens Health and Medicare Protection Act have Weiss concerned. In December, USMD plans to open USMD Hospital at Fort Worth, a new physician-owned facility that is nearly completed. While Weiss says he hopes common sense will prevail in Congress, he also says there are plenty of corporate hospitals that would want to acquire the general, acute-care hospital (which will focus heavily on pediatrics) if the regulatory environment changes. USMD also has three other projects in negotiation, including one in Arkansas and two others in Texas. But the risk for those projects is not nearly has high as it is for the physicians involved in the Fort Worth facility.
Its a much bigger risk because weve committed sizable dollars, Weiss says of the $25 million project. The other ones (have) drawing plans and site work. Its not the end of the world if 30 people lose $1 million. Its pretty catastrophic if 30 people lose $25 million.
The three-legged stool of physicians, operators and bankers is just one model for doctors who want a stake in their own facilities. Others choose joint ventures with hospitals. Thats the case for not-for-profit Texas Health Resources, Arlington. In 2002, the company established TpHR, a partnership between Texas Health Resources and Paragon Health to develop and manage for-profit surgery centers, surgical hospitals and other physician-partnered joint ventures, according to Krystal Mims, chief operating officer and chief financial officer of Addison, Texas-based TpHR.
The company, which is wholly owned by Texas Health Resources, uses two different models. In the first, a developer owns the real estate while the partnership of physicians, Texas Health Resources and TpHR operate the facility but lease the space. In the other model, the partnership also serves as the owner. TpHRs facilities include the Texas Institute for Surgery at Presbyterian Hospital of Dallas, Presbyterian Plano (Texas) Center for Diagnostics & Surgery, Harris Methodist Southlake (Texas) Center for Diagnostics & Surgery, and the Presbyterian Hospital of Rockwall (Texas), which is under construction.
GE Healthcare Financial Services has helped finance joint ventures between hospitals and physicians for decades, according to Randy Waring, who leads the companys hospital markets team. While the majority of projects have been outpatient centers, the division has recently become involved in acute-care projects. Similar to TpHR, GE also works with two models. In the first, the hospital is the majority owner in the joint venture, while the physicians have about a 30% to 40% stake.
The joint venture company owns the facility and they are looking for debt financing to finance that project. We also provide equipment for the facility and working capital to get them (through) the first 12 months, Waring says. The other structure is the operating company-property company model, Waring says. The joint venture company decides they will split the real estate from the ownership of the operating company, whereby the space is leased from a real estate company. The downside to this model is that its more complicated, given that there are two legal organizations, Waring says, while the advantage is that the operating company does not have to provide all of the capital. Instead, it can find another group to provide equity and debt capital for the real estate.
According to Waring, hospitals in most parts of the country are noticing advantages to aligning with physicians. This is because physicians are tied to the bottom-line result, and have an interest in both the facilitys financial success and clinical success. At the same time, there are certain risks and headaches that develop from these partnerships.
As a provider of money, one of the challenges is youre not going to have an investment-grade hospital system for (guaranteeing) the whole debt, Waring says. If we were financing a wholly owned facility, we would generally have the obligated group on the hook. In these models, hospitals dont want to guarantee the whole transaction. As a (financial) provider, it makes it tough for us.
While the type of business model is the variable, the physician-interest component is the constant in this segment of healthcare. And as physicians, bankers, administrators and lobbyists have repeated, interest means more than a financial interest.
John Gill is an orthopedic surgeon and one of the 44 physician owners in the Texas Institute for Surgery at Presbyterian Hospital in Dallas, which includes nine inpatient beds, nine operating rooms and a pain-management center and provides orthopedic, plastic surgery, urology, neurosurgery, gynecology and otolaryngology services. Gill, who has been on staff at Presbyterian since 1988, cites technology as one reason why physicians are drawn to owning part of their hospitals. As partial owners and decisionmakers, they dont have to wrangle with hospitals over equipment purchases. Gill says his greatest satisfaction has been working in a facility that is highly efficientwhere he can complete five to six cases by 1 p.m.
Gill also serves as the hospitals legislative liaison and closely follows the actions of his opponents on Capitol Hill. On a recent visit with Sen. John Cornyn (R-Texas), they discussed recent reports about the number of specialty hospitals that transferred patients for emergency services.
As Gill sees it, large, general acute-care hospitals such as 707-bed Presbyterian Hospital also find themselves in similar situations and must move patients so they receive the right care. In the case of Presbyterian, which has a Level 3 trauma center, the hospital might need to transfer patients with severe head or spinal injuries to Parkland Health & Hospital System, which has a Level 1 trauma center and can provide more appropriate care, according to Gill.
Although he strongly supports the physician-ownership model, he says the ongoing battle with legislators who oppose physician ownership is an ever-present obstacle for physicians. Recently, the CMS made public the revisions to Stark II, which places prohibitions on physician self-referral (Sept. 3, p. 8). Gill says the laws have not completely deterred physicians from becoming owners, but I think you would see more investment from physicians if those laws are not in place.
And the language in the Childrens Health and Medicare Protection Act is especially troubling to physicians like Gill. We could end up a lot worse, he says if the legislation passes. It would basically kill the industry over a period of time. If the industry cant grow and develop, it will eventually whither away.