Jon Vick, president of ASCs, Inc., discusses five key steps to selecting the best corporate partner for your ambulatory surgery center.
1. Determine the surgery center's position in the industry. "In the life cycle of the surgery center industry, we're approaching what's considered to be a mature industry, meaning there aren't a great deal of new centers being developed," says Mr. Vick. He says in 1982, when Medicare approved facility fees for certain procedures, ASCs began developing rapidly, attracting many physician and non-physician investors. Now that the market is mature, there are fewer facilities being developed, and already-opened facilities are competing for surgeons, patients and contracts with payors. "In a mature market, it's a very competitive situation — much more competitive than in the early days, when it was a growing market, almost anyone could open a center and be successful," he says. In order to run a flourishing ASC today, Mr. Vick says center leaders must have a solid business plan and a competitive position in the marketplace.
Due to the competition in the ASC industry, he says surgery centers looking for a corporate partner generally fall into three categories:
1. Surgery centers that have been open for a while and are doing well.
2. Surgery centers that are surviving but could be doing better.
3. Surgery centers that have to perform better or will go out of business.
Mr. Vick says the position of the ASC should be relatively obvious to its owners, based on profits, market share, local reputation and other factors.
2. Outline the physician owners' goals. Once a center has figured out where it lies in the market, Mr. Vick says the physician-owners need to determine their goals. "Depending on how their center is doing, their goals will be different," he says. "They need to decide, for instance, what they want to do with their center — whether they want to continue to make it grow, or sell as much as they can, or partner with a hospital or an ASC management company."
He says outlining these goals will involve deciding how much of the center they are willing to sell. "Centers that are doing very well probably don't feel they need a management partner, but they might need a strategic partner in order to maintain or improve their position in the marketplace," he says. "They may want to take some money off the table, especially for older doctors who want to retire." For a center that's doing "okay," he says the physician-owners might want a management partner that will help the center grow and improve performance. In that case, he says, the center may want to sell a minority interest.
A center that is performing poorly might also be interested in selling a minority interest now, with the option to sell more when the center is doing better. He says this applies to both centers that are doing "okay" and centers that are performing poorly. "The center could be worth more, but it needs somebody to help manage it and make it more valuable," he says. "For both groups, the minority interest makes more sense than the majority. It's more business-oriented than it is about taking money off the table."
3. Narrow down the possible companies. Mr. Vick recommends that ASCs looking for a corporate partner choose a management company first, then pursue a hospital partner once the relationship with the management company is solidified. For that reason, he says the next step is to narrow down the possible companies from around 40 to around 5-6.
He says the biggest mistake physician-owners make in selecting a company is simply picking companies they've heard of without taking into account the company's market position and areas of expertise. "There are over 40 companies, and a certain group of them will only buy minority interest, a certain group will only buy majority and a certain group will only buy interest if there's a hospital partner," he says. "Depending on the doctors' goals, there might be anywhere from 5-10 companies that are interested in a specific ASC’s particular situation." From those 5-10 companies, there might be 2-3 excellent "fits" that have the expertise necessary to achieve the center's particular goals. These 2-3 are the companies that should be professionally solicited.
Mr. Vick gives an example: A group of physicians from a very successful orthopedic center called him recently for advice. The center has 20 physicians on staff and is completely out-of-network, and the ASC is having trouble growing because payors are reacting negatively to OON centers. The physicians went out on their own and contacted five companies and quickly became frustrated because none of the companies fit their criteria. He says a little additional up-front research would have indicated which companies would be a good fit and would be interested in the center.
Once the center's physicians have outlined their goals, they should research companies to determine which will be most interested in their type of center. Different companies will also have different areas of expertise — syndicating physicians, contracting, creating relationships with hospitals or focusing on a particular specialty, for example.
4. Put together a package of information on the center. Once the physicians have narrowed down the companies, Mr. Vick says they should put together a packet of information or a "sales prospectus" that details the center's financial performance, medical staff, scope of procedures, floor plan, market position, website and ownership. "Once the companies are identified, get them to sign a confidentiality agreement and provide the sales prospectus to the companies," he says. "By the time we get to this stage of the process, the [companies] are almost always interested because we have carefully selected those companies that would be interested in the center."
According to Mr. Vick, an ASC that wants to receive a competitive offer will research the center's market position and growth opportunities prior to submitting the sales prospectus. "It's important for doctors to have a good understanding of the growth opportunities for their center," he says. "Who are the doctors who could be considered prospects, what are the growth opportunities as far as bringing in new procedures and is there an opportunity to renegotiate payor contracts?" He says knowing what you have to sell will give you leverage in negotiating with companies.
5. Receive and review company offers. Once the companies have received the center's sales prospectus, each company will meet with physicians, tour the center and make a presentation, then provide the physicians with a letter of intent. "Ideally, the doctors will end up with two or three letters of intent so they can see how different companies have performed, talk to the references that the companies provide and compare how those companies value the center."
He says because centers are valued on a multiple of EBITDA, the offers from the companies will likely be relatively similar. The ASC's decision to choose a particular company should be based on a combination of factors, including the reputation of the company, the company's offer, references and history with other centers and the rapport between the physicians and company leaders. Physicians can also take into account the company's flexibility in structuring a deal. "Big companies are less flexible but may offer more," he says. "There are also subjective elements to making a decision, such as the chemistry between the physicians and the company executives."
Once the physicians have reviewed the offers, they can make a decision on the company that will best meet their needs. Starting a relationship with a management company does not preclude a relationship with a hospital partner, Mr. Vick says. "The most successful ASCs are those that first have an ASC management company running the business and that then brings in a hospital as a minority partner to gain access to the hospital contracts," he says.
Learn more about ASCs Inc.
1. Determine the surgery center's position in the industry. "In the life cycle of the surgery center industry, we're approaching what's considered to be a mature industry, meaning there aren't a great deal of new centers being developed," says Mr. Vick. He says in 1982, when Medicare approved facility fees for certain procedures, ASCs began developing rapidly, attracting many physician and non-physician investors. Now that the market is mature, there are fewer facilities being developed, and already-opened facilities are competing for surgeons, patients and contracts with payors. "In a mature market, it's a very competitive situation — much more competitive than in the early days, when it was a growing market, almost anyone could open a center and be successful," he says. In order to run a flourishing ASC today, Mr. Vick says center leaders must have a solid business plan and a competitive position in the marketplace.
Due to the competition in the ASC industry, he says surgery centers looking for a corporate partner generally fall into three categories:
1. Surgery centers that have been open for a while and are doing well.
2. Surgery centers that are surviving but could be doing better.
3. Surgery centers that have to perform better or will go out of business.
Mr. Vick says the position of the ASC should be relatively obvious to its owners, based on profits, market share, local reputation and other factors.
2. Outline the physician owners' goals. Once a center has figured out where it lies in the market, Mr. Vick says the physician-owners need to determine their goals. "Depending on how their center is doing, their goals will be different," he says. "They need to decide, for instance, what they want to do with their center — whether they want to continue to make it grow, or sell as much as they can, or partner with a hospital or an ASC management company."
He says outlining these goals will involve deciding how much of the center they are willing to sell. "Centers that are doing very well probably don't feel they need a management partner, but they might need a strategic partner in order to maintain or improve their position in the marketplace," he says. "They may want to take some money off the table, especially for older doctors who want to retire." For a center that's doing "okay," he says the physician-owners might want a management partner that will help the center grow and improve performance. In that case, he says, the center may want to sell a minority interest.
A center that is performing poorly might also be interested in selling a minority interest now, with the option to sell more when the center is doing better. He says this applies to both centers that are doing "okay" and centers that are performing poorly. "The center could be worth more, but it needs somebody to help manage it and make it more valuable," he says. "For both groups, the minority interest makes more sense than the majority. It's more business-oriented than it is about taking money off the table."
3. Narrow down the possible companies. Mr. Vick recommends that ASCs looking for a corporate partner choose a management company first, then pursue a hospital partner once the relationship with the management company is solidified. For that reason, he says the next step is to narrow down the possible companies from around 40 to around 5-6.
He says the biggest mistake physician-owners make in selecting a company is simply picking companies they've heard of without taking into account the company's market position and areas of expertise. "There are over 40 companies, and a certain group of them will only buy minority interest, a certain group will only buy majority and a certain group will only buy interest if there's a hospital partner," he says. "Depending on the doctors' goals, there might be anywhere from 5-10 companies that are interested in a specific ASC’s particular situation." From those 5-10 companies, there might be 2-3 excellent "fits" that have the expertise necessary to achieve the center's particular goals. These 2-3 are the companies that should be professionally solicited.
Mr. Vick gives an example: A group of physicians from a very successful orthopedic center called him recently for advice. The center has 20 physicians on staff and is completely out-of-network, and the ASC is having trouble growing because payors are reacting negatively to OON centers. The physicians went out on their own and contacted five companies and quickly became frustrated because none of the companies fit their criteria. He says a little additional up-front research would have indicated which companies would be a good fit and would be interested in the center.
Once the center's physicians have outlined their goals, they should research companies to determine which will be most interested in their type of center. Different companies will also have different areas of expertise — syndicating physicians, contracting, creating relationships with hospitals or focusing on a particular specialty, for example.
4. Put together a package of information on the center. Once the physicians have narrowed down the companies, Mr. Vick says they should put together a packet of information or a "sales prospectus" that details the center's financial performance, medical staff, scope of procedures, floor plan, market position, website and ownership. "Once the companies are identified, get them to sign a confidentiality agreement and provide the sales prospectus to the companies," he says. "By the time we get to this stage of the process, the [companies] are almost always interested because we have carefully selected those companies that would be interested in the center."
According to Mr. Vick, an ASC that wants to receive a competitive offer will research the center's market position and growth opportunities prior to submitting the sales prospectus. "It's important for doctors to have a good understanding of the growth opportunities for their center," he says. "Who are the doctors who could be considered prospects, what are the growth opportunities as far as bringing in new procedures and is there an opportunity to renegotiate payor contracts?" He says knowing what you have to sell will give you leverage in negotiating with companies.
5. Receive and review company offers. Once the companies have received the center's sales prospectus, each company will meet with physicians, tour the center and make a presentation, then provide the physicians with a letter of intent. "Ideally, the doctors will end up with two or three letters of intent so they can see how different companies have performed, talk to the references that the companies provide and compare how those companies value the center."
He says because centers are valued on a multiple of EBITDA, the offers from the companies will likely be relatively similar. The ASC's decision to choose a particular company should be based on a combination of factors, including the reputation of the company, the company's offer, references and history with other centers and the rapport between the physicians and company leaders. Physicians can also take into account the company's flexibility in structuring a deal. "Big companies are less flexible but may offer more," he says. "There are also subjective elements to making a decision, such as the chemistry between the physicians and the company executives."
Once the physicians have reviewed the offers, they can make a decision on the company that will best meet their needs. Starting a relationship with a management company does not preclude a relationship with a hospital partner, Mr. Vick says. "The most successful ASCs are those that first have an ASC management company running the business and that then brings in a hospital as a minority partner to gain access to the hospital contracts," he says.
Learn more about ASCs Inc.