John Newman, Senior Vice President and General Counsel with Constitution Surgery Centers, has experienced the gamut of major ambulatory surgery center ownership transactions and provides insight into the factors ASC leaders should consider before undertaking any sale transaction.
Strategic assessment
ASC leaders considering an ownership sale should first undertake a careful strategic assessment. This involves clearly defining what your objectives are in any transaction. ASC owners then need to need to define their center's position in the market. A SWOT analysis identifies a center's strengths, weaknesses, opportunities and threats.
Strengths could include case volume, payer contracting profile, profitability, good succession planning, physician age profiles, good management, regulatory insulation from competition and strong physician leadership, to name a few. The absence of any of these factors, or other problematic issues for a facility, could be weaknesses. You need to be mindful of what your objectives are and as to what your facility's strengths and weaknesses are in pursuing any transaction. These factors will dictate who the right prospects for you might be and how to structure you undertakings. For example, selling to additional physician investors probably won't address third party payer contracting issues for a facility, while bringing in a hospital partner won't necessarily correct case volume issues for a facility.
As for opportunities, these could include adding physician investors and case volume to a facility or developing a new service line. Threats to a facility often include a high number of physicians nearing retirement age or a facility's payer contracting terms or out-of-network status.
It is important for a facility to have a clear sense of its objectives, strengths and weaknesses before entering into discussions with third parties. In part, this is because the very strengths and weaknesses you identify will also be topics of discussion in your negotiations with potential buyers
Total sale vs. joint venture
An ownership sale, whether in part or in whole, is a major capital transaction. Understanding the ramifications of each type of transaction is an important step in finding what makes sense for each center. In a total sale, the physicians retain no ongoing equity and cash flow, but would obviously receive the maximum purchase price for the totality of the center's ownership. In these transactions the buyer will almost certainly be a hospital.
Management companies and other potential buyers typically do not want the physicians to fully divest of ownership. "A total sale of a center may makes sense if you have a significant Medicare patient population, such as often the case with ophthalmology or when the hospital's outpatient rates will be much greater than those received by the center as a freestanding ASC. This type of transaction may be further attractive to centers in cases in which the facility has generational issues, with a large number of physicians approaching retirement without the facility being able to fund their buyouts," says Mr. Newman. Full hospital ownership will most likely lead to the center's conversion to a hospital outpatient department.
Higher reimbursement often results from HOPD conversion. Indeed, ASC reimbursement as a percentage of HOPD reimbursement has been steadily declining for years. In January, the Medicare Payment Advisory Commission recommended a 0 percent pay increase for ASCs, but a 3.25 percent increase for HOPDs in the absence of sequestration cuts for 2015.
While physicians would no longer be owners of an HOPD, they still can derive some economic benefit from the HOPD operations by entering into a co-management agreement with the new hospital owner. These, however, need to be carefully structured with experienced legal and financial advisors to satisfy regulatory requirements.
Hospital-physician joint ventures are growing in popularity. In these transactions, the hospital doesn't convert the facility into a hospital department. Rather, the facility remains independent with physician ownership. A hospital or health system has the potential to lend a hand in managed care contracting and boost reimbursement rates. At the same time, the physicians maintain an equity position and a seat at the table for governance purposes.
In another scenario, struggling centers may find a new partner can help with day-to-day operations. "If a center has weak management or a limited infrastructure in support of its clinical activities, its leaders may want to consider a corporate partner," says Mr. Newman. A number of ASC management companies offer turnaround services and these parties can lend efficiency to ongoing operations. .
Minority vs. majority ownership sale
For ASCs preparing to enter a joint venture the question becomes one of balance and control. Who holds the majority stake? Only 32 percent of ASC management and development companies prefer a 51 percent or greater ownership stake, according to the HealthCare Appraisers 2014 ASC Valuation Survey. On the other hand, a hospital partner may prefer a larger controlling share of the center, and will need to have sufficient control in order for the center to be deemed a "controlled affiliate" on whose behalf the hospital can negotiate with payers under antitrust law.
"A majority ownership sale will command a premium price, but on the downside you are limiting the opportunities for future physician investment," says Mr. Newman. If ASC leaders see the opportunity for future syndication, a minority ownership sale may make the most sense. If a center needs to rely heavily on a hospital's clout with payers, a majority ownership sale could be the answer. Again, the charge to ASC leaders is to define their objectives and the strengths and weaknesses of a center to be addressed.
Out-of-network strategy and moving forward
Out-of-network has been an effective ASC strategy, but many in the industry are predicting the dwindling of OON volume. "If you are an exclusively OON provider, you will see a significant discount to your valuation," says Mr. Newman. A majority of ASC management and development companies, 93 percent, consider a high reliance on out-of-network payers to be a very high risk to ASC valuation, according to VMG Health's 2011 ValueDriver ASC Survey. With the advent of narrowing networks and the push for clinical integration, physicians should carefully evaluate the benefits and consequences of an OON strategy.
"If you're looking to position your facility for success, determine what the critical issues are to promote success. Then evaluate the options before you in terms of addressing those issues. Finally, but just as importantly, work with your advisors to prepare a financial comparison of both potential sales prices and future cash flows stemming from any transaction. Of course, one needs to discount any future revenues for risks inherent in the market place," says Mr. Newman. "If you can't readily define how a transaction is consistent with your core strategic goals and model the transaction five years out, you probably shouldn't do it."
More Articles on Transactions and Valuation Issues:
20 Surgery Centers Expected to Open in 2014
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Strategic assessment
ASC leaders considering an ownership sale should first undertake a careful strategic assessment. This involves clearly defining what your objectives are in any transaction. ASC owners then need to need to define their center's position in the market. A SWOT analysis identifies a center's strengths, weaknesses, opportunities and threats.
Strengths could include case volume, payer contracting profile, profitability, good succession planning, physician age profiles, good management, regulatory insulation from competition and strong physician leadership, to name a few. The absence of any of these factors, or other problematic issues for a facility, could be weaknesses. You need to be mindful of what your objectives are and as to what your facility's strengths and weaknesses are in pursuing any transaction. These factors will dictate who the right prospects for you might be and how to structure you undertakings. For example, selling to additional physician investors probably won't address third party payer contracting issues for a facility, while bringing in a hospital partner won't necessarily correct case volume issues for a facility.
As for opportunities, these could include adding physician investors and case volume to a facility or developing a new service line. Threats to a facility often include a high number of physicians nearing retirement age or a facility's payer contracting terms or out-of-network status.
It is important for a facility to have a clear sense of its objectives, strengths and weaknesses before entering into discussions with third parties. In part, this is because the very strengths and weaknesses you identify will also be topics of discussion in your negotiations with potential buyers
Total sale vs. joint venture
An ownership sale, whether in part or in whole, is a major capital transaction. Understanding the ramifications of each type of transaction is an important step in finding what makes sense for each center. In a total sale, the physicians retain no ongoing equity and cash flow, but would obviously receive the maximum purchase price for the totality of the center's ownership. In these transactions the buyer will almost certainly be a hospital.
Management companies and other potential buyers typically do not want the physicians to fully divest of ownership. "A total sale of a center may makes sense if you have a significant Medicare patient population, such as often the case with ophthalmology or when the hospital's outpatient rates will be much greater than those received by the center as a freestanding ASC. This type of transaction may be further attractive to centers in cases in which the facility has generational issues, with a large number of physicians approaching retirement without the facility being able to fund their buyouts," says Mr. Newman. Full hospital ownership will most likely lead to the center's conversion to a hospital outpatient department.
Higher reimbursement often results from HOPD conversion. Indeed, ASC reimbursement as a percentage of HOPD reimbursement has been steadily declining for years. In January, the Medicare Payment Advisory Commission recommended a 0 percent pay increase for ASCs, but a 3.25 percent increase for HOPDs in the absence of sequestration cuts for 2015.
While physicians would no longer be owners of an HOPD, they still can derive some economic benefit from the HOPD operations by entering into a co-management agreement with the new hospital owner. These, however, need to be carefully structured with experienced legal and financial advisors to satisfy regulatory requirements.
Hospital-physician joint ventures are growing in popularity. In these transactions, the hospital doesn't convert the facility into a hospital department. Rather, the facility remains independent with physician ownership. A hospital or health system has the potential to lend a hand in managed care contracting and boost reimbursement rates. At the same time, the physicians maintain an equity position and a seat at the table for governance purposes.
In another scenario, struggling centers may find a new partner can help with day-to-day operations. "If a center has weak management or a limited infrastructure in support of its clinical activities, its leaders may want to consider a corporate partner," says Mr. Newman. A number of ASC management companies offer turnaround services and these parties can lend efficiency to ongoing operations. .
Minority vs. majority ownership sale
For ASCs preparing to enter a joint venture the question becomes one of balance and control. Who holds the majority stake? Only 32 percent of ASC management and development companies prefer a 51 percent or greater ownership stake, according to the HealthCare Appraisers 2014 ASC Valuation Survey. On the other hand, a hospital partner may prefer a larger controlling share of the center, and will need to have sufficient control in order for the center to be deemed a "controlled affiliate" on whose behalf the hospital can negotiate with payers under antitrust law.
"A majority ownership sale will command a premium price, but on the downside you are limiting the opportunities for future physician investment," says Mr. Newman. If ASC leaders see the opportunity for future syndication, a minority ownership sale may make the most sense. If a center needs to rely heavily on a hospital's clout with payers, a majority ownership sale could be the answer. Again, the charge to ASC leaders is to define their objectives and the strengths and weaknesses of a center to be addressed.
Out-of-network strategy and moving forward
Out-of-network has been an effective ASC strategy, but many in the industry are predicting the dwindling of OON volume. "If you are an exclusively OON provider, you will see a significant discount to your valuation," says Mr. Newman. A majority of ASC management and development companies, 93 percent, consider a high reliance on out-of-network payers to be a very high risk to ASC valuation, according to VMG Health's 2011 ValueDriver ASC Survey. With the advent of narrowing networks and the push for clinical integration, physicians should carefully evaluate the benefits and consequences of an OON strategy.
"If you're looking to position your facility for success, determine what the critical issues are to promote success. Then evaluate the options before you in terms of addressing those issues. Finally, but just as importantly, work with your advisors to prepare a financial comparison of both potential sales prices and future cash flows stemming from any transaction. Of course, one needs to discount any future revenues for risks inherent in the market place," says Mr. Newman. "If you can't readily define how a transaction is consistent with your core strategic goals and model the transaction five years out, you probably shouldn't do it."
More Articles on Transactions and Valuation Issues:
20 Surgery Centers Expected to Open in 2014
6 Things to Know About the Current ASC Market
8 Top Challenges for ASC Physician Recruitment & Case Volume Growth