Beth Kase, business and regulatory healthcare attorney and partner at Fenton Nelson, discusses eight key considerations for surgery center physicians during ownership transitions.
1. Foster an attractive working environment for recruiting new physicians. From a business line point of view, surgery centers want happy and efficient staff to keep the processes running on time. It's also important that the physician partners have a good relationship amongst themselves and the staff. These positive relationships are important to attract potential new partners.
"Sometimes physicians who are working together at a surgery center will have disagreements," says Ms. Kase. "Generally, you want a fairly cohesive group that doesn't have a toxic environment. You want to have a congenial atmosphere so that other surgeons in the community feel like this is a place they want to go. The relationship of physicians in terms of recruiting new physicians is crucial to the lifeblood of the surgery center."
2. Build a solid mix of senior and junior physicians. One of the core aspects impacting the value of a surgery center is the physician mix. If the majority of the caseload is done by senior physicians who are a few years away from retirement, purchasing entities will be concerned about where the cases will come from in the future. However, if a majority of the physician partners are junior partners, the purchasing entity will have concerns about whether the surgeons will stay with the surgery center and build and sustain caseload successfully.
3. Consider the advantages of selling majority and minority shares. Know what the difference will be if you are selling a majority interest in the ASC versus minority shares. "If you sell a majority interest to the hospital or other corporate acquirer, you are going to get higher multiples than if you sell a minority interest," says Ms. Kase.
During the transition, you will be looking at the accounts receivable and the ASC's liability at the time of sale and factor those into the price as well.
4. Understand special circumstances of joint venturing with a tax-exempt entity. If you are becoming involved with a tax-exempt hospital, there are special considerations for going through with the deal. Tax exempt entities are exempt from income taxes, which could present complications since your surgery center is for-profit.
"If you are having a joint venture between a tax-exempt hospital entity and a for-profit entity, the hospital still wants to show that it is working for the benefit of the public and community," says Ms. Kase. "If it has 51 percent ownership control, it is more easily able to comply with tax exempt requirements."
This means the purchasing entity would have at least 51 percent of the board of directors and control of the center. "Not every hospital is tax exempt, but you are still going to get a higher multiple and higher sale price if you are selling a controlling interest than if you are selling a minority interest," Ms. Kase says."
5. Take the opportunity to reallocate ownership. When selling ownership in the ASC to a hospital or corporate purchaser, you might have the opportunity to restructure the ownership deal among the physicians as well. "If you have a surgery center that has been in existence for a while, some physicians might have more ownership than others, which can cause jealousies or appear unfair," says Ms. Kase. "At times, not in all situations, but I have seen a situation where the sale of the units to a new buyer presented itself as an opportunity to restructure the ownership. This created a healthier mix and a happier place."
However, surgery centers risk violating anti-kickback laws if they sell more interest to a physician who is a high referrer or try to require a physician who is a low referrer to sell back shares, says Ms. Kase. Surgery centers should seek guidance from experienced healthcare counsel in this regard.
6. Take care of prior personal guarantees. In some cases, physician owners may have signed leases as a personal guarantor for the facility, and that could be a significant exposure. During a transaction, pay attention to where the personal guarantees are and see whether the new hospital or corporate partner can take on some of those responsibilities as well.
"Either have the creditor or landlord agree to have a reduction in the amount of the liability or personal exposure of the original existing guarantors, or if possible let the buyer take over those guarantees," says Ms. Kase. "I did have a situation in which the whole deal at the final end was controlled by the lease because the original majority shareholder was a guarantor but other physician investors weren't guarantors. In that situation, the single physician was responsible for the payments while the others were not. He wanted contribution from the other investors."
7. Stay updated with licensing and compliance issues. There are several issues that must be resolved to maintain compliance with key licensing and regulatory issues. "Look at licensing requirements and make sure you are in full compliance with the state when you have a change of ownership," says Ms. Kase. "You also want to make sure your medical records will be safely and securely maintained by the new owner. You still have a responsibility to keep those safe."
8. Highlight value a hospital could bring to the center. Potential hospital partners will be focused on the future potential for success, so analyze what value the hospital partner could bring to the ASC. "You can help the hospital see some of the efficiencies or enhanced revenue growth it might expect," says Ms. Kase.
For example, with the additional capital hospitals bring to the center, you could offer a new service line or procedure that isn't currently offered at the ASC. "It's good to look at your physicians and have a pulse to see under which circumstances they could bring additional cases," says Ms. Kase. "Hospitals can help you with contracting and other matters. Figure out where there is synergy between the two groups."
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1. Foster an attractive working environment for recruiting new physicians. From a business line point of view, surgery centers want happy and efficient staff to keep the processes running on time. It's also important that the physician partners have a good relationship amongst themselves and the staff. These positive relationships are important to attract potential new partners.
"Sometimes physicians who are working together at a surgery center will have disagreements," says Ms. Kase. "Generally, you want a fairly cohesive group that doesn't have a toxic environment. You want to have a congenial atmosphere so that other surgeons in the community feel like this is a place they want to go. The relationship of physicians in terms of recruiting new physicians is crucial to the lifeblood of the surgery center."
2. Build a solid mix of senior and junior physicians. One of the core aspects impacting the value of a surgery center is the physician mix. If the majority of the caseload is done by senior physicians who are a few years away from retirement, purchasing entities will be concerned about where the cases will come from in the future. However, if a majority of the physician partners are junior partners, the purchasing entity will have concerns about whether the surgeons will stay with the surgery center and build and sustain caseload successfully.
3. Consider the advantages of selling majority and minority shares. Know what the difference will be if you are selling a majority interest in the ASC versus minority shares. "If you sell a majority interest to the hospital or other corporate acquirer, you are going to get higher multiples than if you sell a minority interest," says Ms. Kase.
During the transition, you will be looking at the accounts receivable and the ASC's liability at the time of sale and factor those into the price as well.
4. Understand special circumstances of joint venturing with a tax-exempt entity. If you are becoming involved with a tax-exempt hospital, there are special considerations for going through with the deal. Tax exempt entities are exempt from income taxes, which could present complications since your surgery center is for-profit.
"If you are having a joint venture between a tax-exempt hospital entity and a for-profit entity, the hospital still wants to show that it is working for the benefit of the public and community," says Ms. Kase. "If it has 51 percent ownership control, it is more easily able to comply with tax exempt requirements."
This means the purchasing entity would have at least 51 percent of the board of directors and control of the center. "Not every hospital is tax exempt, but you are still going to get a higher multiple and higher sale price if you are selling a controlling interest than if you are selling a minority interest," Ms. Kase says."
5. Take the opportunity to reallocate ownership. When selling ownership in the ASC to a hospital or corporate purchaser, you might have the opportunity to restructure the ownership deal among the physicians as well. "If you have a surgery center that has been in existence for a while, some physicians might have more ownership than others, which can cause jealousies or appear unfair," says Ms. Kase. "At times, not in all situations, but I have seen a situation where the sale of the units to a new buyer presented itself as an opportunity to restructure the ownership. This created a healthier mix and a happier place."
However, surgery centers risk violating anti-kickback laws if they sell more interest to a physician who is a high referrer or try to require a physician who is a low referrer to sell back shares, says Ms. Kase. Surgery centers should seek guidance from experienced healthcare counsel in this regard.
6. Take care of prior personal guarantees. In some cases, physician owners may have signed leases as a personal guarantor for the facility, and that could be a significant exposure. During a transaction, pay attention to where the personal guarantees are and see whether the new hospital or corporate partner can take on some of those responsibilities as well.
"Either have the creditor or landlord agree to have a reduction in the amount of the liability or personal exposure of the original existing guarantors, or if possible let the buyer take over those guarantees," says Ms. Kase. "I did have a situation in which the whole deal at the final end was controlled by the lease because the original majority shareholder was a guarantor but other physician investors weren't guarantors. In that situation, the single physician was responsible for the payments while the others were not. He wanted contribution from the other investors."
7. Stay updated with licensing and compliance issues. There are several issues that must be resolved to maintain compliance with key licensing and regulatory issues. "Look at licensing requirements and make sure you are in full compliance with the state when you have a change of ownership," says Ms. Kase. "You also want to make sure your medical records will be safely and securely maintained by the new owner. You still have a responsibility to keep those safe."
8. Highlight value a hospital could bring to the center. Potential hospital partners will be focused on the future potential for success, so analyze what value the hospital partner could bring to the ASC. "You can help the hospital see some of the efficiencies or enhanced revenue growth it might expect," says Ms. Kase.
For example, with the additional capital hospitals bring to the center, you could offer a new service line or procedure that isn't currently offered at the ASC. "It's good to look at your physicians and have a pulse to see under which circumstances they could bring additional cases," says Ms. Kase. "Hospitals can help you with contracting and other matters. Figure out where there is synergy between the two groups."
More Articles on ASCs:
ASC PPO Out-of-Network Payments Survive: Thoughts From ASC Billing Specialists' Kelly Webb
7 Core Concepts to Leverage ASC Data in Payor Negotiations
6 Points on Medicare Reimbursement Trends in Surgery Centers