Tony Mira: Analyzing Anesthesiologists’ Investments in ASCs

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Editor's note: This article by Tony Mira, president and CEO of Anesthesia Business Consultants, an anesthesia & pain management billing and practice management services company, originally appeared in Anesthesia Business Consultants eAlerts, a free electronic newsletter. Sign-up to receive this newsletter by clicking here.


Many, if not most, anesthesia practices provide services at ambulatory surgical centers as well as at hospitals. Some 11 percent of anesthesiologists have invested in the ASC as part owners, according to Medscape's Anesthesiology Compensation Report: 2011 Results. Others invest their energy in contracts to staff ASCs. In either case, it is important to know the economic condition and value of one's ASC.

One way to approach the matter is to analyze the attractiveness of the ASC to a buyer. Buyers tend to invest in outpatient facilities with room for improvement in performance. Whether you are considering buying (or selling) an ownership share or entering into or renewing an exclusive contract, the ASC's appeal to a potential corporate investor such as an ASC management company is relevant.

Becker's ASC Review e-weekly ran an article with "10 Questions to Evaluate ASC Investment Opportunities" in its June 16, 2012 issue. Outpatient Surgery Magazine alerted subscribers to a 2009 article in its archives entitled "What Is Your Surgery Center Worth?" by email on August 2nd. Together, and combined with other data from Becker's ASC Review, these two articles give us the following indicators by which investors evaluate an ASC purchase:

1. Earnings.
Typical earnings range from 25 percent to 45 percent of revenues, according to Outpatient Surgery Magazine. Companies specializing in ASC turnarounds will look for lower levels, e.g., between 10 percent to 20 percent of revenues. An ASC netting more than 50 percent is going to be proportionately costlier.

• Average net revenues for ASCs across the U.S., based on size, are:

1-2 ORs: $3,648,000
3-4 ORs: $6,695,000
More than 4 ORs:
$9,235,000

From VMG Health's Multi-Specialty ASC Intellimarker 2011.

• Trends in average earnings per case over several years may reveal changing payment and/or case mix patterns as well as changing cost ratios.

2. Cash flow. This is a fundamental measure consisting of earnings before interest, taxes, depreciation and amortization. Lower cash flow may appear to be offset by a greater amount of accounts receivable, but buyers discount the value of long A/Rs because of the uncertainties of collection.

3. Growth potential.
The potential for growth depends partly on the types of procedures performed at the ASC as well as the capacity to add more cases. Spine and other orthopedic surgery are growth specialties. An ASC with good growth potential may command relatively high multiples, e.g., six to eight times EBIDTA.

• What are the caseload projections and how were they derived? Are they mean volumes, perhaps trended forward using regression analysis or other statistical tools? What assumptions are they based on? How certain, for example, is the recruitment of that GI group on whose cases the projections depend? Is the hospital seeking to employ an increasing number of the physicians? If so, the ASC may be at risk of losing its participating surgeons or referring doctors; owner volume is a better bet than non-owner volume.

4. Long-term debt.
ASCs with little long-term debt (outstanding loans and interest on capital equipment purchases) sell for higher multiples than facilities with such debt on the books.

5. Quality earnings and payor mix. Steady and predictable income from payers with whom the ASC participates, at reasonable rates, represents higher quality earnings than income from out-of-network billings. Out-of-network payments may be for greater amounts per case, but the reimbursement and legal landscape makes them appear riskier.

• Medicare is not the relatively poor payer for ASCs and surgeons that it is for anesthesiologists, but having a greater proportion of Medicare patients than other facilities could bring down the ASC's value. The Medicare proportion of ASCs' earnings ranges from 20 percent in the Midwest to 32 percent in the Southeast, according to VMG Health's Multi-Specialty ASC Intellimarker 2011 as reported in Becker's ASC Review e-weekly on July 26, 2012, which also furnished the following statistics on payer mix:

All surgery centers
Medicare: 25 percent
Medicaid: 5 percent
Commercial: 58 percent
Workers' comp: 5 percent
Self-pay: 4 percent
Other: 7 percent

Orthopedic-driven surgery centers
Medicare: 17 percent
Medicaid: 4 percent
Commercial: 67 percent
Workers' comp: 12 percent
Self-pay: 1 percent
Other: 5 percent

6. Medical staff.
Buyers will look at the reputation of the ASC's surgeons in the community, and also at the quality of the other physicians and nurses on staff, including the anesthesiologists, CRNAs and AAs.

Insight into the ASC industry in general plays a role in the decision to invest capital in a facility, above and beyond the assessment of that facility's individual economic situation. In her article "10 Top Reasons to Invest in Surgery Centers Now," which appeared in the July 17 Becker's ASC Review e-weekly, Laura Miller wrote that "The market is prime for investment, and surgeons can position themselves at the forefront of delivering high quality, low cost care through their involvement with an ASC." The same is true for anesthesiologists and pain physicians. Some of the reasons why industry experts believe that this is a good time for surgeons to invest in ASCs, and that also apply to anesthesiologists, include:

• ASCs are still profitable.
• ASCs have a cost advantage that will position them to participate in coordinated care models. "Surgery centers receive a lower reimbursement than hospitals and many boast an infection rate lower than the local hospital. As a result, surgery centers are going to be attractive to accountable care organizations," especially if they feature high-volume services such as pain management, according to one expert quoted in the article.
• The efficiency of ASCs allows surgeons and by extension, anesthesiologists, to do more cases.
• Administrators are easy to access. That access, combined with good physician leadership, allows ASCs to be flexible for innovative technology and ideas.

As we noted at the beginning of this Alert, some 11 percent of anesthesiologists currently hold ownership interests in ASCs. Another five percent are considering investing. Whether an anesthesiologist is a present or future part owner or a member of a practice group who wants to understand the value of the relationship, we hope that the information summarized here will be helpful.

Learn more about Anesthesia Business Consultants.

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