David Donaldson is the special assistant to the CEO of Tri-County Hospital, a 350-bed community hospital. Last week, he attended a meeting at which four of the hospital's orthopedic surgeons proposed a joint venture between them and the hospital to establish a freestanding ambulatory surgical center. The proposal they outlined had the following features: Tri-County will contribute 70 percent of the capital needed for construction of the facility and purchase of equipment and initial supplies. The other 30 percent will be financed by the surgeons with a bank loan.

All business issues and questions related to the ambulatory surgical center will be decided by a majority vote of the center's managing directors. Three of the six positions will be occupied by representatives of the surgeons; the other positions will be occupied by representatives of the hospital. The partnership agreement will contain a binding arbitration clause in the event that a decision before the managing directors receives a tie vote.

The surgeons will receive 65 percent of the profits from the ambulatory surgical center. The hospital will receive the remaining 35 percent.

The hospital and surgeons will jointly develop a protocol addressing the types of surgical cases that should be handled on an inpatient basis at the hospital versus those that will be referred to the ambulatory surgical center. The hospital will be expected to promote the ambulatory surgical center and encourage medical staff members to make appropriate referrals. Also, profit margin thresholds will be established in advance for the ambulatory surgical center, and as these thresholds are reached, the division of profits between the hospital and the surgeons will be adjusted in favor of the hospital.

As a next step, David plans to prepare a memorandum for the hospital's CEO regarding the proposed joint venture. David generally believes that the CEO should seriously consider the joint venture. Although the surgeons did not say so explicitly, he suspects that if the CEO declines the deal, the surgeons may very well leave the hospital completely and form the ambulatory surgical center on their own. The four surgeons who have proposed the deal account for a substantial percentage of the income the hospital earns from its surgical department. At the same time, David knows that the formation of such joint ventures is a complicated matter and requires careful planning to comply with legal and regulatory issues. His initial take on the proposal outlined by the surgeons is that some legal problems in fact may arise.

Discuss in-depth

Consider what David should say in his memorandum to the CEO about the joint venture. Which laws or regulations might this joint venture violate?

What changes, if any, in the proposed arrangement might be needed to keep the ambulatory surgical center in compliance with legal and regulatory requirements?

What course of action should David recommend?

Reference

Burns, L. R., Bradley, E. H., & Weiner, B. J. (2020).Shortell and Kaluzny's health care management: Organizational design and behavior (7th ed.).Cengage Learning.