- Independent (100 percent physician ownership);
- Selling a minority stake to a corporate partner (e.g., 70 percent physician-owned; 30 percent corporate-owned),
- Selling a majority stake (e.g., 49 percent physician-owned; 51 percent corporate-owned).
While there are some variations (e.g., joint ventures with hospitals and three-way partnerships), these models predominate for both new ASCs and existing centers that restructure.
In the past, full physician ownership was the rule, but surging growth in the ASC market, ongoing reimbursement issues and increasing regulatory complexity have led more surgeon-investor groups to seek corporate partners. That trend is likely to continue. It's also important to note that more ASCs are evolving their ownership models over time, in line with their needs and objectives, as well as market conditions and a shifting legal landscape.
This article presents six brief case studies exploring the three predominant models, with an emphasis on the criteria and thought processes of ASC investors in weighing their options for ownership.
1. Long-term independent
Lakewalk Surgery Center (Duluth, Minn.)
Ownership model: 100 percent physician-owned and operated since 1998
Facility: Six ORs, three procedure rooms; 90 physicians with privileges; 15 surgeon-investors, 20 regular users (in addition to the owners)
Primary specialties: Orthopedics, plastic surgery, pediatrics, gastroenterology, ENT, general surgery, ophthalmology
President/Medical director: Andrew Baertsch, MD (plastic surgeon)
Physician control is the primary reason why Lakewalk Surgery Center has chosen to remain independent since its founding.
"Our surgeons really like the feeling of being control of everything that goes on," says Andrew Baertsch, MD, a plastic surgeon and Lakewalk's president and medical director.
Though Dr. Baertsch has no advanced business or management training, he has learned on the job. The formation of Lakewalk grew out of his successful experience in developing a single-OR facility for his own practice.
"I carried forward what I learned in syndicating a larger group of surgeons," he says. Lakewalk, which is located on the banks of Lake Superior, has been profitable since inception and undergone several expansions. As of Sept. 30, it has handled a total of 65,000 procedures in its decade of operations.
Other unique factors in this ASC's history of independence include:
- Staff efficiency. Dr. Baertsch credits his staff for Lakewalk's success and ability to remain independent. "We have an excellent team and our center runs efficiently, so it's hard for us to see the advantages in paying a management fee," he says. Lakewalk's administrator plays an especially important role in managing human resources issues, given that there are 55 staff members.
- Control — perception vs. reality. Dr. Baertsch acknowledges that control can be a matter of perceptions and that it's possible for physicians to exert control of ASCs in partnership agreements. However, his group prefers complete freedom and authority. "If we want a new piece of equipment, we don't have to consult with an administrative entity or negotiate for approval," he says.
- Time factor. There is no doubt that hands-on management responsibilities can put pressure on surgeons' schedule, but for Dr. Baertsch it's a matter of striking a balance. Plus, he enjoys attending to both business and clinical matters. "Yes, there are time constraints, but managing the business is an extra dimension that I find gratifying," he said.
- Weighing the options. Lakewalk's owners have received formal offers in the past to sell the ASC to management companies, but so far no deal has been compelling enough. "From time to time, some partners have expressed concerns about staying independent and we've even had serious discussions about selling, but not enough to relinquish control," said Dr. Baertsch. "Independence still works very well for us."
2. Independent to minority partnership to joint venture
Knightsbridge Surgery Center (Columbus, Ohio)
Ownership model: 100 percent physician-owned from 2001-2004; Regent Surgical Health purchased 20 percent stake in 2004; Ohio Health purchased 49 percent stake in 2007
Facility: Four ORs; 65 physician-utilizers
Primary specialties: General surgery, urology, plastics, obstetrics/gynecology
President/Medical director: Philip Taylor, MD (general surgeon)
The surgeon-investors of Knightsbridge Surgery Center have experience with a range of ASC ownership models, according to Philip Taylor, MD, a general surgeon and president of the facility. After starting as 100 percent physician-owned in 2001, Knightsbridge has evolved its ownership model in line with industry trends and its own needs.
The ASC was developed with the help of another corporate partner, who was more effective in launching the business than in managing it. As a result, the center produced only break-even results in the first few years, with periodic cash calls necessary. In 2004, Regent Surgical Health bought a minority stake in the business and took on responsibility for contracting, financial management and other matters. In early 2007, a joint-venture deal was struck with Ohio Health, a large hospital company in the region. Today, Regent and the surgeons own 51 percent, with Ohio Health holding 49 percent. Knightsbridge has consistently made monthly profit distributions since 2004.
The keys to success at this ASC include:
- Embracing change. After the initial struggles to realize a profit, the group weighed all its options. "We did some soul-searching and even considered closing," Dr. Taylor says. In 2004, Regent provided a good match for the center's needs. Knightsbridge embraced change again in 2007, when broader competitive and industry trends — specifically, the need to improve contracts and strengthen case volume and mix — led it to partnering with Ohio Health.
- Complexity and details. Dr. Taylor believes that the main value of a corporate partner is in handling the details. "The complexity and technical aspects of the business, like dealing with insurers and accreditation, can be overwhelming," says Dr. Taylor. "The truth is, we did not have people on staff with the business acumen to run the center." Regent handles all the details of accounting and financial management, freeing the surgeon-investors to focus on patients and the big picture.
- Define the roles. In the three-way ownership model, each partner brings unique expertise and qualities. Ohio Health's most important contribution is increased leverage with payors. Beyond that, however, it has provided valuable legal support, brand recognition and a shared commitment to patient satisfaction and clinical excellence. Proximity is another benefit; Riverside Hospital, an Ohio Health facility, is just two miles away and very convenient when patients need to be transferred.
- Mutual benefits. The merger with Ohio Health was "natural," says Dr. Taylor. "They've been an extraordinary partner, especially in helping with contract negotiations," he says. "For our part, we've helped replace lost revenue and provide a high-quality option for outpatient treatments. We feel this is a very strong team."
3. Minority partnership
The Surgery Center of the Main Line (Bryn Mawr, Pa.)
Ownership model: 80 percent physician-owned; 20 percent owned by Blue Chip Surgical Center Partners
Facility: Three ORs, one procedure room; 15 surgeon-investors and 24 surgeon-utilizers
Primary specialties: Orthopedics, general surgery, gastroenterology, pain management, otolaryngology, vascular surgery, urology
President/Medical director: Anthony Coletta, MD (general surgeon)
When Anthony Coletta, MD, a general surgeon and president of The Surgery Center of the Main Line, and his surgeon colleagues began planning their own multi-specialty ASC, they fully expected to work with a local hospital. But, for a number of reasons, the project followed a different course.
Dr. Coletta and his partners engaged Blue Chip Surgical Center Partners, which owns a 20 percent stake. Blue Chip developed the business plan, provided support during architecture and construction, and today handles financial and business management. The multi-specialty center opened in 2007 and was profitable within a year.
Dr. Coletta and his partners considered the following in seeking the right partner:
- Local market landscape. According to Dr. Coletta, Stark laws, contracts and reimbursement issues in Pennsylvania makes it logical for an ASC business to include the local hospital. Only when discussions with the hospital proved to be "amicable, but not fruitful" did he and his partners turn their attention to evaluating corporate partners.
- ASC goals and culture. The group briefly "kicked the tires" on a proposal where it would be a minority owner, but, again, it didn't make sense. "These were our patients, so we asked ourselves why we shouldn't be majority owners," says Dr. Coletta. Further, when looking closely at their own goals, the surgeon-investors recognized just how much they wanted to establish a new working environment with a healthy culture and different management style.
- Clinical excellence. "Contracts, billing, claims, human resources — as important as these matters are, they are secondary to quality outcomes and patient satisfaction," Dr. Coletta says. That reasoning led to potential partners being evaluated on their commitment to clinical excellence, as well as their business track record.
- "Skin in the game." The surgeon-owners liked Blue Chip's willingness to share the economic risks, as well as the rewards. "They were ready to put skin in the game, and invest in our mutual success," says Dr. Coletta. Delivering the business plan and legal documents on time and on budget also made a difference. "'On-time, on-budget' had not always been our experience in dealing with hospitals and management firms," Dr. Coletta says.
- Achieving synergy and balance. According to Dr. Coletta, it all boils down to finding the right partner — whether a minority or majority owner — who adds value, helps the surgeons meet business and personal goals and is easy to work with. "We feel there's a great balance here, because Blue Chip needs us as much as we need them," he says.
4. Transition to a minority partnership
Adult and Children Surgery Center of Southwest Florida (Ft. Myers)
Ownership model: 70 percent physician-owned; 30 percent owned by ASCOA
Facility: Two ORs, 16 surgeon-investors
Primary specialties: Orthopedics, podiatry, ENT, pain management
President/Medical director: Fletcher Reynolds, MD
Founded by a group of podiatrists, the independently-owned Summerlin Bend Surgery Center (later renamed the Adult and Children Surgery Center) operated unprofitably for several years. After a split in the initial investor group in 2004, Fletcher Reynolds, MD, an orthopedic surgeon, and his practice partners were offered shares at very attractive prices. "It was a leap of faith for us to invest in a struggling center, but a fairly low-risk proposition because of the price," says Dr. Reynolds.
After 18 months of trying to turn around the business on their own, the investors sought a corporate partner. In 2006, Ambulatory Surgical Centers of America (ASCOA) purchased a 30 percent stake. The facility temporarily limited services and re-opened full-time a few months later as the Adult and Children Surgery Center. It achieved profitability within a few months, and remains so today.
The following are the critical factors in the successful turnaround and selection of the management:
- Contracts. Because of low volume, the original owners "would do anything to get a contract," some of which paid only 60 percent of Medicare rates, according to Dr. Reynolds. Thus, the ability to renegotiate contracts and "stop the bleeding" was the primary criteria for management partner. "ASCOA showed strong knowledge of our contracting situation in this market," Dr. Reynolds says. "We also liked their plan to basically shut down, wipe the slate clean and start over."
- Evaluating partners practically. The ownership group received a number of proposals, and evaluated them individually, at face value. It wasn't philosophically opposed to selling a majority stake. "We received an offer to sell a 51 percent stake, but the surgeons were also being asked to invest even more to bail out the original owners," says Dr. Reynolds. Similarly, a local hospital made a very opportunistic offer to buy a majority stake, but it wasn't seriously considered. In the end, ASCOA simply had the most attractive offer.
- Teamwork and hustle. ASCOA's willingness to "pound the pavement" in finding new surgeons to invest in and utilize the newly opened center was another critical factor. The newly energized owners also worked hard to drum up more volume, particularly with local orthopedic and ENT practices. "It really was a group effort," says Dr. Reynolds.
- Flexibility, risk and reward. The new contracts, higher case volume (including more out-of-network cases) and revised ownership structure (with the original podiatrists remaining as owners of the building) helped restore a sense of partnership and generate profitability within a few months. "From a risk-reward perspective, this has been an outstanding partnership and a very successful salvage job," says Dr. Reynolds.
5. Independent ASC sells majority stake
Laurel Surgical Center (Greensburg, Pa.)
Ownership model: 100 percent physician-owned 2004-2007; Meridian buys 56 percent stake in 2007;
Facility: Three ORs, two procedure rooms, 11 surgeon-investors, used by additional 35-40 surgeons
Primary specialties: Orthopedic, general surgery, gastroenterology, ENT, general surgery, urology, pain management
President/Medical director: Gregory Lauro, MD (orthopedic surgeon)
The history of Laurel Surgical Center illustrates both the advantages of challenges of operating independently. It took several attempts for Gregory Lauro, MD, an orthopedic surgeon, to assemble the right group of surgeon-investors. The planning process involved plenty of "trial and error," according to Dr. Lauro, partly because a development consultant offered incomplete information about initial costs. "Anyone considering a start-up should be aware of the considerable investment of time, energy and political capital involved," he says.
Opening in 2004, the center initially handled only 25 cases per week. But, after more than a year of steady effort to attract more volume, the center achieved profitability. Today, volume can be 140 cases per week. "It's a matter of creative disruption when you ask physicians to change their practice patterns and referral habits," says Dr. Lauro. "But, the upside is, if you have an attractive and efficient ASC, non-partner surgeons will want to bring patients there, and that leads to more revenue."
In 2007, Meridian Surgical Partners purchased a 56 percent stake in the facility. Here are just a few of the most significant factors considered by the Laurel ownership group when it was evaluating its options for a partner and some of the benefits the ASC has experienced by working with Meridian:
- ROI and succession planning. The owners had two goals in taking on a partner - an equity event for the original investors and long-term succession planning. Meridian’s purchase represented a significant payout, but the increased ability to attract new investors and sell shares was just as important. "Today, we are better prepared for retirements or if one of our surgeons moves away," says Dr. Lauro.
- Hospital vs. corporate partner. Laurel’s owners also considered a proposal from a local hospital, but its valuation of the center was far too low. That, along with the hospital’s competitive attitude, made a corporate partner an easy choice.
- Productivity. Operationally, Meridian has been most helpful with financial matters, negotiating more favorable reimbursement and helping the center save money on supplies.
- Keeping the focus. "Building an independent ASC isn’t easy, but as long as you have patients coming in the door and having good experiences, you can make it," he says. "The community acceptance has been wonderful because doctors and patients love coming here."
6. Independent ASC sells majority stake
Cypress Surgery Center (Wichita, Kan.)
Ownership model: 100 percent physician-owned 2000-2006; Symbion purchased 51 percent in 2006
Facility: Six ORs; Two pain rooms; two endoscopy rooms; 34 surgeon-investors
Primary specialties: ENT, orthopedics, general surgery, urology, obstetrics/gynecology
President/Medical director: David Grainger, MD (obstetrics/gynecology)
The Cypress Surgery Center was founded with a very specific need in mind. David Grainger, MD, and his partners in an in-vitro fertilization practice wanted more clinical control and a calmer environment for their patients. But after completing initial designs and sharing their plans with friends and colleagues in other specialties, they realized a full surgery center made more sense. Cypress Surgery Center opened in late 2000, with 20 surgeon-owners, two ORs and a "shell" to be completed if case volume warranted, which it soon did.
Cypress was profitable within six months of opening and by 2004 had expanded to six ORs. One key to success at Cypress has been its ability to operate lean. According to Dr. Grainger, the center is one of the most productive and efficient in Wichita, treating a high number of patients with a relatively small staff of full-time employees – approximately 50. The facility uses many part-time staff for both clinical and business operations, and the whole team recognizes the value of efficiency. "Everybody at our center will tell you how important it is to stay on schedule," says Dr. Grainger.
Endoscopy rooms were added in 2006 and, in that same year, Symbion Healthcare bought a majority stake of the business. The ownership group was motivated by the opportunity to enjoy an equity event and the favorable business conditions. "It was a very good time to sell," Dr. Grainger says.
In deciding to sell a majority stake in their business, the surgeons at Cypress weighed the following factors:
- Timing is everything. "We had the business operating smoothly and it was a seller's market," Dr. Grainger says. "And, frankly, taking equity out of the deal was attractive to many of the partners."
- Partner relationships. Cypress received proposals from three different entities, and Symbion's offered the most attractive terms. But it was the mutual comfort level that sealed the deal. "You have to live with the people you partner with, so being comfortable matters a great deal," says Dr. Grainger. "We have a lot of autonomy and there's no need for Symbion to micromanage since we've been profitable from the start. The relationship has gone very well."
- Front-office management. The biggest challenge at Cypress, as at many ASCs, is keeping the front-office running smoothly. Though Dr. Grainger says the center has a "truly outstanding clinical director," who has been with Cypress since the beginning, turnover has been an issue. "Symbion's expertise in human resources, staffing and front-office administration was another reason their offer was attractive to us," he says. "They've also brought a lot of value in financial management."
-- Cole Ollinger (cole@ollingercreative.com) is a freelance writer based out of Cincinnati.