What happens in Vegas
In its 10 years, Regent Surgical Health has invested in and managed 21 surgical centers. All but the last 2 went well.

Tom Mallon, Regent's cordial and cerebral co-founder and CEO, has nurtured the company's reputation as "the ASC turnaround specialists," the corporate partner for troubled ASCs to turn to. Part of the currency Regent deals in is goodwill.

"When you get into a turnaround project, doctors are looking at funding personal guarantees and capital calls," says Mr. Mallon, a Harvard Business School MBA. "When we're successful at turning them around, the goodwill lasts for years."

Typically, Regent contracts with a distressed center for 5 to 10 years, buys between 10% and 30% of the equity and charges a management fee of around 5% of collections, says Mr. Mallon. That model, so reliable and repeatable for Regent, crapped out for the first time when Regent's relationship with a group of surgeons it partnered with to build and operate 2 ASCs in Las Vegas went, in Mr. Mallon's word, "sideways." Regent sold back its 22% stake in the Surgery Center of Southern Nevada in June 2008 and filed a wrongful termination suit against West Las Vegas Surgery Center in February 2010.

The ironic thing, says Mr. Mallon, is that West Las Vegas was doing exceptionally well. "One of the most successful centers we've ever done," he says.

Regent, which held a 7.8% interest in the center, filed suit against West Las Vegas Surgery Center after the ASC board voted to end its management agreement with Regent and remove it from the board. The stakes were huge: The suit says the ASC stood to save $1 million a year in distributions and management fees if it could shed Regent, whose management agreement was to run until September 2012.

West Las Vegas and Mr. Mallon declined to comment on the suit, but Mr. Mallon spoke in general about what can ruin a partnership. "When [the partnership] far outpaces anybody's wildest expectations, then you have a greed factor that is extraordinary," says Mr. Mallon. "Partnerships are only as good as the people. If you have a situation where people don't want to honor the documents that they've signed, one of two things can happen. You negotiate a buyout or you unilaterally break the agreement and that leaves us with the alternative of litigating." The suit is filled with eye-popping allegations and accusations from both parties, a catalog of what can go wrong with a corporate partner. Among them:

• Sexual harassment. Besides financial gain, the suit alleges that West wanted to squeeze Regent out after Regent confronted a surgeon, the board president, about allegations of inappropriate sexual touching of staff in the workplace and inappropriate sexual comments made in the presence of ASC staff.
• Diverting cases. West accuses Regent of diverting cases away from West to the Surgery Center of Southern Nevada, about 5 miles away, because Regent had a larger financial interest in SCSN (22% vs. 7.8%) and charged them a higher management fee (5% vs. 3.5%), according to a source who spoke on the condition of anonymity. "On $10 million in collections, that's $150,000 a year," says the source. In a memo to the West board, Mr. Mallon says an outside investigator and an accountant found no evidence of diversion. Many of the same surgeons own both facilities.
• Self-dealing. West claims that Regent had an undisclosed ownership interest in a company called MedHQ that negotiated insurance premiums for West's employees. Regent denies that it secretly profited from the professional employer organizations contract West signed with MedHQ, but its relationship with MedHQ is cozy. MedHQ's founder Bill Carr owns 3% of Regent (but Regent doesn't own any of MedHQ, says Mr. Mallon), the 2 companies have shared office space in Westchester, Ill., for 8 years and Regent is MedHQ's largest customer, responsible for more than 50% of its business, says Mr. Mallon, adding that about half of Regent's centers use MedHQ. "We can consolidate many of the employees of our small ventures in a large group to negotiate healthcare benefits," he says.
• Patient deaths. Regent blames 3 patient deaths on West's administrator's "failure to adhere to Medicare Standards of Care in critical areas and/or [his] efforts to under-staff West in order to save money."

There could be more fireworks to come. Robert Schumacher, West's attorney, says West plans to file a counterclaim against Regent for economic damages. At press time, Outpatient Surgery hadn't seen a copy of the counterclaim.

One thing more: If you look closely, you can see lawyer Scott Becker's fingerprints all over this deal (see "Scott Becker's 0.83% Stake in West Las Vegas Surgery Center").

For his part, Mr. Mallon views his problems in Vegas as an anomaly. "Are we seeing a trend of doctors being hostile towards their corporate partners? Absolutely not," he says. "We see great partnerships in the vast majority of our situations."

Raider or crusader?
It's estimated that between 1,000 and 1,200 ASCs have a corporate partner, a team of MBAs and RNs there to negotiate good managed care contracts, syndicate shares to new physician-recruits and let them participate in better purchasing contracts. It's the old adage: Let physicians do what they do best — treat patients — and leave the business side of things to the experts. But if only about 15% of ASCs have a partner, how are the other 85% surviving? Do you really need a partner? No, not always.

"We don't believe a corporate partner is appropriate in every case," says Mr. Mallon. "We turn down deals where we don't think we can provide value." For example, he'd pass on an ASC with just one physician group or on a single-specialty GI, orthopedic or ophthalmology facility. "Those are simple enough businesses that they don't need a corporate partner," he says.

As with any other business, Mr. Mallon says not all corporate partners are created equal. "We know there are bad corporate partners out there," he says. "We tend to see those deals after they've crashed."

Ophthalmologist Robert Baratta, MD, would classify his corporate partner as bad. So dissatisfied was he with his corporate partner that be bought them out after 1 year and started his own "doctor-friendly" ambulatory surgery center development and management company called Ascent Surgical Partners, which he says has an equity position or management agreement with 16 centers.

"The biggest issue, over and above extracting fees and minimizing the return to the physicians, that I find onerous with the big [corporate partners] is their insistence on control," says Dr. Baratta, the medical director and president of the Surgery Center of Stuart in Stuart, Fla.

It's not that Dr. Baratta is anti-corporate partner. Quite the contrary: He thinks every ASC should have one. He's just against those partners that insist on majority ownership (he calls them and their hidden fees "profit skimmers") and strict management agreements that hamstring doctors.

"Doctors are very sensitive to style," he says. "[Ascent] has grown by accepting minority interests (20% to 35%, he says). Doctors find it much more attractive. We give doctors the majority of the board seats and we don't get in their way. We find we can govern by letting doctors themselves make good decisions. We don't do any of the things that the big guys do."

Sometimes it's a point of view. "The biggest issue is that physicians become resentful that the corporate partners are not providing value," says Jerry Sokol, healthcare business attorney at McDermott Will & Emery in Miami, Fla. At the same time, the physicians forget that they sold part of their business to the corporate partner and were paid cash up front, says Mr. Sokol.

The corporate partner should add value to the center by working to recruit physicians, managing and negotiating managed care contracts and, if needed, running the center. If you're not seeing these things happen — or if your partner visits your center only a few times a year and manages from afar — then there could be trouble brewing.

Corporate partners should spend more time visiting and spending whole days in the centers they manage in order to get a hands-on idea of the challenges and needs of their partners, says Stuart Katz, FACHE, CASC, executive director of the Tucson Orthopaedic Surgery Center in Arizona. "There are some very good people in some corporate offices but they all seem to have forgotten the day-to-day toil of the administrator," says Mr. Katz. "They fail to adequately communicate and fail to listen to their clients, which is why more ASCs are becoming independent."

Airing of dirty laundry
As these court cases show, at the center of most disputes between surgeons and the companies that try to tell them what to do are the things that nations go to war over: money and power.

• Fraud and embezzlement. By the end of 2009 the physician owners of the Dearborn (Mich.) Surgery Center were on such bad terms with their corporate partner that they blocked the company's access to the surgery center's bank account and threatened to call the police if its employees set foot in the building.

The physicians cited "gross accounting errors" and "acts of dishonesty, theft, fraud and embezzlement" in a lawsuit that alleges that their partner, VEI, based in Indianapolis, Ind., used the surgery center's money to pay the center's administrator, Linda Prister, RN, a $37,588 bonus to sign a non-compete document forbidding her from working for any VEI competitor for 2 years. In return, VEI said the bonus was an accounting error and countersued the physicians for a breach of the operating agreement, according to court documents. The case is still in state court in Michigan.

Attorneys for VEI did not respond to a request for comment for this article. Paul Asker, the attorney for the Dearborn Surgery Center and the physician-investors, declined to comment on the ongoing litigation. Ms. Prister, the administrator of the surgery center, did not return a request for comment.

• When doctors go rogue. If physician-investors are not satisfied with their situation, sometimes they split and start again. That's what happened in Naples, Fla., when the investors in the Naples Endoscopy ASC became dissatisfied with the partnership agreement with Amsurg, which purchased a 60% share of the center for about $4.8 million. The surgeons invested about $3 million in the center, according to court documents.

Over a 4-year period beginning in 2004, physicians exited the investor group one by one and opened a new surgery center, Premier Endoscopy Center, nearby. Amsurg sued the physicians group for breach of contract and fraud in federal court in Tennessee, where the company is based. Amsurg, in court documents, alleged that the physician-investors "conspired to circumvent the non-compete." The contract with Amsurg had a non-compete clause that kept the surgeons from developing or investing in a competing center within 25 miles for a year after leaving the partnership. "Given the time required to develop and build-out a new surgery center, [the physicians] had to have developed the Premier Center during the non-compete period," said Amsurg in court documents.

The federal judge dismissed the case because most of the business between the parties took place in Florida, not Tennessee. Neither the new ASC nor Amsurg responded to requests for comment.

End of the relationship
Just like nobody who gets married plans on getting divorced, most parties that enter corporate partnerships don't plan on the relationship falling apart. However, it happens. The operating agreement should have a clause that thoroughly explains termination of the partnership. When agreements don't have a well-defined termination clause, the partners end up in court, says Jon Vick, president of ASCs Inc., a Valley Center, Calif., company that finds ASCs compatible corporate partners.

Participating in the drawing up of your agreements and understanding them can help avoid problems later down the line. Unfortunately, it's sometimes hard to tell when a corporate partnership is taking a turn for the worse, until it's too late, says Mr. Sokol. "When things go well, everyone's happy."