Jon Vick, president of ASCs Inc. in Valley Center, Calif., makes five points on calculating the impact of out-of-network status on valuation multiples for selling ambulatory surgery centers.
1. Value of OON centers is declining. As it becomes more difficult to bill for out-of-network claims, the value of ASCs with a high proportion of OON cases has been sinking. "Buyers are assuming that out-of-network centers will have to go in-network in the future," Mr. Vick says. Going in-network means accepting a substantially lower reimbursement than was possible out-of-network. For example, a case that is paid $15,000-$20,000 at an OON center might get only $8,000-$10,000, or even less, at a contracted in-network rate.
2. Buyers highly wary of OON status. Buyers see reliance on out-of-network volume as one of the most important risk factors for perceived ASC value. In a recent survey of buyers by VMG Health, 93 percent said heavy reliance on out-of-network payors had a "very high" impact on the ASC's value, resulting in a reduction in the multiple, and 7 percent said it had a "high" impact. "In other words, fully 100 percent of buyers thought out-of-network had at least a high impact on value," Mr. Vick says.
3. Example of the OON effect. Mr. Vick is collecting examples of the effect of out-of-network status on recent ASC transactions. In one example, an orthopedic and pain center that was close to 100 percent out-of-network was recently sold at 50 percent of the valuation multiple that the center would otherwise have received. Due to the high OON burden, the multiple fell from more than six times EBITDA to just over three. "The drop could be even greater for other specialties, because orthopedics is very much in demand," Mr. Vick says.
4. Scale of reductions. Based on concrete examples and anecdotal information on such sales, Mr. Vick has compiled a scale on the predicted effect of OON, depending on its share of total ASC volume. If 75-100 percent of volume were out-of-network, the multiple would fall by approximately 40-50 percent; if 50-75 percent were OON, it would fall by 20-30 percent; and if 25-50 percent were OON, it would fall by 15-20 percent.
However, if OON cases make up less than 25 percent of total volume, Mr. Vick does not think reducing the multiple would be necessarily warranted. "The buyer could mitigate the loss of higher reimbursements under OON by recruiting additional volume to make up for lower per-case reimbursements of in-network cases," he says. Moreover, a certain number of OON cases often cannot be avoided because many payors will not yet allow some cases, such as certain spine procedures, to be brought in-network.
5. Strategies to boost multiples. "ASCs with substantial OON business have successfully used several strategies to increase multiples they are offered," Mr. Vick says. These include:
- Going in-network with one or more major payors. This will begin to dilute out-of-network volume, making the purchase less risky for the buyer.
- Recruiting new physicians to increase overall volume. The growth in volume will warrant a higher multiple.
- Accepting a portion of the purchase price in stock options. "This will increase the multiple and total return when the stock options are exercised at a higher price in the future," Mr. Vick says.
Learn more about ASCs Inc.
Read more about VMG Health's ValueDriver ASC Survey.
Read other articles featuring expertise from Jon Vick:
5 Tips for Surgery Centers Considering a Merger or Acquisition
5 Steps to Choosing a Corporate Partners for Your Surgery Center
7 Best Practices on Selling Shares in an ASC