Experts from the ASC industry discuss eight things to know about developing and investing in an ASC.
Ownership models
1. Independent ASCs can survive with a strong managing partner and a focus on sustainability. According to Keith Metz, MD, medical director of Great Lakes Surgical Center in Southfield, Mich., physician-owned ASCs are still a viable ownership model if the ASC focuses on sustainability and strong management. Physician-owned ASCs still represent 60 percent of all ASCs. Dr. Metz said the success of an independent ASC depends on appointing a physician-owner to the role of managing partner. "You can't impose this job on anyone," Dr. Metz says. "It involves a great deal of commitment." He said the managing partner should spend a significant amount of time in the operation, away from clinical work.
Dr. Metz adds that while corporate partners may focus on achieving growth, freestanding ASCs can function well just by sustaining themselves. "As long as I have an ASC that is functioning well, it's not so important that it grow," he said.
2. Understand the difference in partnering with a corporate entity versus a hospital. Jon Vick, president of ASCs Inc., says ASCs partner with managing companies to grow business in a way envisioned by the physician-owners. Partnering with a management company does not mean sacrificing control of the ASC, as opposed to partnering with a hospital. "Hospitals … typically want to control all aspects of an ASC if they require a majority interest," he says.
He says with any partnership, ASC leaders must define a thorough operating agreement to determine how the ASC will be operated, managed and governed. Within these agreements, parties can specify management processes, how new medical staff will be added, how the board will be structured and many other factors.
Investment and development
3. Physician-owners need personal attention. According to Theresa Mazzitti, administrator of Eastside Surgery Center in Columbus, Ohio, one of the main duties of an ASC administrator is to pay attention to the priorities of the center's investors. She says while most investors have similar reasons for investing in a particular ASC — quality care, friendly staff, good equipment, timely starts, good distribution and scheduling flexibility, among others — ASCs that go "from good to great" will take the time to figure out what the investor cares about most.
She says this can differ from investor to investor. "One investor may care primarily about the bottom line, so you offer him or her scheduling availability and equipment use accordingly," she says. "Another investor may 'bring the house' if you trial a new piece of equipment the hospital won't." She says this process takes time on the part of the administrator, but it helps keep investors happy.
4. Investing in an existing ASC is less risky than building a new one. With declining reimbursements and a more competitive market, it's a risky time to develop a new ASC, says Christian Ellison, vice president of business development for Health Inventures. Before you decide to build a new center, he recommends considering whether you could get the same benefits from a less risky strategy, such as investing in an existing center.
"The market is much more competitive than it used to be and there's much more risk than there's been historically, mainly around achieving patient volume," he says. Lori Ramirez, president and CEO of Elite Surgical Affiliates, recommends taking over a failed surgery center rather than developing a new one. "You may pay the same [to take over a center as to develop a new one], but you're looking at cash flow for a center that's ready in four months versus more than a year."
5. Ensure case volume first. Case volume is critical to the success of any center, and Ms. Ramirez says physicians often overestimate how much volume they can bring to a center. "All too often, physicians and administrators will overestimate the number of cases a physician can bring to a center and therefore build an operating room that stays empty most of the time," she says.
She says a new ASC should estimate around 100 cases per OR per month, meaning a center that schedules 200 cases per month will need two ORs. "Whatever the physician tells us [he or she can bring], we plan for half that amount," she says.
6. Involve your leadership team in ACO development now. According to Luke Lambert of ASCOA, your ASC's strategic plan should involve communication with local hospitals and healthcare facilities on their plans for future development. "If there's effort underway in your community to form an accountable care organization, you want to make sure you are at the table in those discussions," he says. He says when the facilities move forward with ACO development, you want your center to be involved.
Legal issues
7. Distribution of profits should be based on percentage of ownership. While your ASC should track physician productivity to watch for lags, it is generally not legal to split the profits of an ASC based on the value of business generated instead of the ownership. "It is also highly suspect to split up to reallocate the ownership either based on expectations of referrals or past history of referrals," says Scott Becker, JD, CPA, healthcare attorney and partner with McGuireWoods. He says facility profits should be based on the percentage of ownership the owners have in the facility.
8. Fair market value for ASC shares can be determined several ways. If an investor is looking to purchase shares in an ASC, the shares should be sold at fair market value. In simple terms, if the physician is buying a minority interest in the ASC, typically the fair market value is 3-5 times EBITDA minus debt, which provides the value of the equity of the center. Then the price is determined by the number of shares times fair market value.
However, if the ASC has not established a regular cash flow, the valuation is typically based on the physician paying the same amount per share as other investors. That amount would be based on the equity needs of the center, according to Mr. Becker. According to Greg Koonsman, senior partner of VMG Health, several factors could impact the price per share for physician investors. "Physicians approaching retirement are liable to leave the ASC soon, putting the center's future into question," he says. He adds that an ASC with few physician-owners would be more of a risk because "if something happened to these investors, it would have grave repercussions for the fate of the ASC."
Read more advice on developing a successful ASC:
-Critical ASC Mistake: Physician Owners Lacking Financial Understand of Their ASC Investment
-10 Steps to Recruit a Great ASC Physician
Ownership models
1. Independent ASCs can survive with a strong managing partner and a focus on sustainability. According to Keith Metz, MD, medical director of Great Lakes Surgical Center in Southfield, Mich., physician-owned ASCs are still a viable ownership model if the ASC focuses on sustainability and strong management. Physician-owned ASCs still represent 60 percent of all ASCs. Dr. Metz said the success of an independent ASC depends on appointing a physician-owner to the role of managing partner. "You can't impose this job on anyone," Dr. Metz says. "It involves a great deal of commitment." He said the managing partner should spend a significant amount of time in the operation, away from clinical work.
Dr. Metz adds that while corporate partners may focus on achieving growth, freestanding ASCs can function well just by sustaining themselves. "As long as I have an ASC that is functioning well, it's not so important that it grow," he said.
2. Understand the difference in partnering with a corporate entity versus a hospital. Jon Vick, president of ASCs Inc., says ASCs partner with managing companies to grow business in a way envisioned by the physician-owners. Partnering with a management company does not mean sacrificing control of the ASC, as opposed to partnering with a hospital. "Hospitals … typically want to control all aspects of an ASC if they require a majority interest," he says.
He says with any partnership, ASC leaders must define a thorough operating agreement to determine how the ASC will be operated, managed and governed. Within these agreements, parties can specify management processes, how new medical staff will be added, how the board will be structured and many other factors.
Investment and development
3. Physician-owners need personal attention. According to Theresa Mazzitti, administrator of Eastside Surgery Center in Columbus, Ohio, one of the main duties of an ASC administrator is to pay attention to the priorities of the center's investors. She says while most investors have similar reasons for investing in a particular ASC — quality care, friendly staff, good equipment, timely starts, good distribution and scheduling flexibility, among others — ASCs that go "from good to great" will take the time to figure out what the investor cares about most.
She says this can differ from investor to investor. "One investor may care primarily about the bottom line, so you offer him or her scheduling availability and equipment use accordingly," she says. "Another investor may 'bring the house' if you trial a new piece of equipment the hospital won't." She says this process takes time on the part of the administrator, but it helps keep investors happy.
4. Investing in an existing ASC is less risky than building a new one. With declining reimbursements and a more competitive market, it's a risky time to develop a new ASC, says Christian Ellison, vice president of business development for Health Inventures. Before you decide to build a new center, he recommends considering whether you could get the same benefits from a less risky strategy, such as investing in an existing center.
"The market is much more competitive than it used to be and there's much more risk than there's been historically, mainly around achieving patient volume," he says. Lori Ramirez, president and CEO of Elite Surgical Affiliates, recommends taking over a failed surgery center rather than developing a new one. "You may pay the same [to take over a center as to develop a new one], but you're looking at cash flow for a center that's ready in four months versus more than a year."
5. Ensure case volume first. Case volume is critical to the success of any center, and Ms. Ramirez says physicians often overestimate how much volume they can bring to a center. "All too often, physicians and administrators will overestimate the number of cases a physician can bring to a center and therefore build an operating room that stays empty most of the time," she says.
She says a new ASC should estimate around 100 cases per OR per month, meaning a center that schedules 200 cases per month will need two ORs. "Whatever the physician tells us [he or she can bring], we plan for half that amount," she says.
6. Involve your leadership team in ACO development now. According to Luke Lambert of ASCOA, your ASC's strategic plan should involve communication with local hospitals and healthcare facilities on their plans for future development. "If there's effort underway in your community to form an accountable care organization, you want to make sure you are at the table in those discussions," he says. He says when the facilities move forward with ACO development, you want your center to be involved.
Legal issues
7. Distribution of profits should be based on percentage of ownership. While your ASC should track physician productivity to watch for lags, it is generally not legal to split the profits of an ASC based on the value of business generated instead of the ownership. "It is also highly suspect to split up to reallocate the ownership either based on expectations of referrals or past history of referrals," says Scott Becker, JD, CPA, healthcare attorney and partner with McGuireWoods. He says facility profits should be based on the percentage of ownership the owners have in the facility.
8. Fair market value for ASC shares can be determined several ways. If an investor is looking to purchase shares in an ASC, the shares should be sold at fair market value. In simple terms, if the physician is buying a minority interest in the ASC, typically the fair market value is 3-5 times EBITDA minus debt, which provides the value of the equity of the center. Then the price is determined by the number of shares times fair market value.
However, if the ASC has not established a regular cash flow, the valuation is typically based on the physician paying the same amount per share as other investors. That amount would be based on the equity needs of the center, according to Mr. Becker. According to Greg Koonsman, senior partner of VMG Health, several factors could impact the price per share for physician investors. "Physicians approaching retirement are liable to leave the ASC soon, putting the center's future into question," he says. He adds that an ASC with few physician-owners would be more of a risk because "if something happened to these investors, it would have grave repercussions for the fate of the ASC."
Read more advice on developing a successful ASC:
-Critical ASC Mistake: Physician Owners Lacking Financial Understand of Their ASC Investment
-10 Steps to Recruit a Great ASC Physician