Health Inventures: Sustaining Partnerships - Health Executive - RedCoat Publishing - Inside Healthcare

In the 13 years since opening its doors, the focus of Health Inventures has been the same: help health systems and hospitals succeed in their ambulatory service ventures. But three years ago, something changed. Rather than presenting its development and management services in a purely consultative way, Health Inventures evolved to be in an ownership position, partnering with its hospital clients and physicians rather than continuing exclusively as a service vendor.

Dick Hanley, President and CEO

The change didn’t occur because the previous business model was failing. With more than 30 clinically and financially successful centers under its belt, Health Inventures was in a solid place. The impetus to change was multifaceted but primarily came from a desire to be more hands-on. “We’ll always be a service vendor; it’s our core competency,” said Dick Hanley, president and CEO. “But we want to share in the project risk and join our clients as partners.”

Multifaceted impact
According to Hanley, the ambulatory surgery industry has been, and continues to be, a growth industry, but the majority of that growth has been at the cost of hospitals and health systems that have lost significant marketshare to physician- and corporate-owned surgery centers. Another major factor in deciding to change a primarily consulting company to an owner/operator structure was the strategic nature of the partner relationship, rather than the client/vendor relationship.

According to Hanley, the long-term commitment is a value-add, creating stability in the relationship and giving Health Inventures greater success in being a more effective operator and manager. “If it’s our center, we’re a partner, we’re on the board, and our capital is also at risk,” he said. “We’ll be more effective in influencing decisions and imbibing change, but our primary focus is to help hospitals and health systems partner with their physicians and regain that lost marketshare.”

The greatest challenge in the conversion, however, was adapting to the pace by changing the company culture. Previously, the majority of Health Inventures’ employees spent hours advising and collaborating with clients, which included writing reports. The accuracy and expertise attained in the process developed the company’s stellar reputation, but it also meant it took a long time for the team to get anything done. “We wrote the reports, waited for the client to read it and make decisions, and then took action,” Hanley said. “It often took up to three years for a project to reach completion.”

While following the hospital or health system’s lead worked for a while, when Hanley began looking at the business models of competing companies, he realized the sense of urgency inherent to maintaining a competitive edge was missing. If it takes 18 months to get a business operational, he said, the businesses revenue stream should begin at 18 months. “You don’t want to give competitors a chance to create a competitive response,” he said. “If you take three years, you defer revenue, giving your competitors an edge in their pursuit of counteracting your initiatives. It also substantially increases the cost of the project.”

The centers Health Inventures designs, develops, builds, and manages for hospitals and physician partnerships have been extremely successful and the financial returns to the owners significant. Although the biggest proponent to the business model change benefits the hospitals and health systems and their physician partners, Hanley admits the financial success his company will share is also nice. “As we do our provider services and are paid our fees, if we can share in the profits of the business, along with our service revenue, it strengthens our financial model,” he said.

Although the short-term impact of the transition has resulted in flat revenue for Health Inventures, EBIDTA (earnings before interest, depreciation, taxes and amortization) for the managed network of surgical centers has increased by 40% each year for the past two. In addition, for 2008, the company is already entrenched in the partnership-based development of eight centers nationwide, each with an average cost of $6.5 million.

Capital partner
Hanley’s ability to position the company from following the hospital to making decisions and creating urgency came from two areas, the first of which was the commitment of his staff. Although some change was required, including revamping the business development team and adding an acquisition director and marketing director, the cohesive teamwork mentality did not die away, making new clients comfortable jumping onboard. Providing leadership and entrepreneurial perspectives for large hospitals and health systems puts the ambulatory surgery center projects in a positive competitive position against the for-profit companies either in their markets or attempting to enter the hospital market.

“We don’t consult for new clients unless there is a reasonable opportunity for a long-term commitment,” Hanley said. “Making ownership a requirement of our business slows new business sales, but when we do close a relationship, it’s long term.”

Health Inventures continues to have strong relationships with eight or nine health systems and numerous hospitals across the country on a service-only basis. Most of these health systems have worked with Health Inventures for many years and routinely engage the company for new project planning and management. According to Hanley, the health systems and hospitals that are long-term clients can continue with the similar service-only engagements or enter into an ownership agreement with Health Inventures. “We’re not exclusively an ownership model, but for new clients, we do require minority ownership.”

The second element is the partnership Health Inventures developed at the end of 2006 with Brookfield, Wis.-based Hammes Company. Both companies share a similar business model, with Hammes working in healthcare real estate and project planning and Health Inventures working on the operations side. The two companies had worked on roughly eight projects in the past, and when Hanley was looking for an investment capital and partner, Hammes stepped up to the plate.

If 2007 was a year of integration, learning to take advantage of each other’s strengths, 2008, he said, will be the year to grow. “We’re excited to build out with our new partner and our new model,” Hanley said. “With Hammes as our partner, we’ll scale and grow our business in a significant way.”

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