ASC physician succession planning in uncertain times: critical thoughts for the future
In response to shifting network models and declining reimbursement, many physicians have sought stability from employment with larger providers. This most often has involved hospitals. "The growth of hospital employment of physicians is really limiting the pool of independent physicians that could be investors in a center," says John Newman, Senior Vice President and General Counsel of Constitution Surgery Centers.
"This migration towards employment versus remaining in private practice is creating havoc in many ASCs' succession planning since physicians are now frequently leaving their practices before retirement age," says Arthur E. Casey, CASC, senior vice president of business development for Outpatient Healthcare Strategies. Yet, independent physicians remain, and the surge towards hospital employment may swing back the other way. The industry's future is not set in stone, but physicians can make preparations in spite of all this uncertainty.
Forming a plan
Succession, especially for an ASC that has just opened its doors, is a distant thought. But, it needs to be brought to the fore. "Decisions made by the partnership as it is forming or still in its infancy stages will go a long way to alleviate problems and pressure later in the lifecycle of the ASC," says Mr. Casey.
Here are six questions that Mr. Casey recommends ASC physician leaders ask and answer when creating a solid succession plan:
• How much notice is required before retirement?
• How will the divestiture of ownership from a retiring physician be funded and over what length of time?
• Where will capital to repurchase shares come from? Operating cash? Financed loan?
• What will happen if two or more physicians retire and divest their ownership at the same time?
• How will retiring physicians' shares be valued?
• Will retiring physicians be allowed to sell their shares to a junior partner?
The pressure coming from increased hospital employment can make it difficult to find the physicians to replace retiring owners, which places an increased burden on the center and existing owners to buy-out retirees. Rather than searching from scratch, ASCs can use existing relationships to prepare for the inevitable retirement.
"Align the surgical facility with the professional practices of the individual physicians," says Mr. Newman. "The retiring physician can sell his interest in the center to a new physician coming into the retiring physician's practice." This can benefit both the retiring physician and the center. Recruitment of successor physicians is a real challenge for many solo or small practices today, and the price paid for a private practice often is modest at best. By contrast, a new physician may be attracted to an investment in a center and willing to pay a higher price for such an ownership interest The retiring physician is able to reap the benefits of his or her investment in the center, the ASC has a fresh physician and the center does not have to shoulder the cost of the retiree's shares.
Cultivating ASC-practice alignment, as well as establishing the necessary buy-out guidelines, is not completed overnight. "You have to plan for future growth in any business and ASCs are no different," says Mr. Newman. "If you don't, you will not see value on a back-end sale."
Sidestepping the pitfalls
Planning for a distant, unclear future is a difficult process with plenty of room for error. Fortunately, some mistakes are well-known and easily avoided.
Even though succession planning is a forward-thinking exercise, it can be plagued by short sightedness. Physicians may consider an ASC nothing more than a personal retirement vehicle. When buy-out prices are set generously high, the first few physicians may benefit but the ASC is saddled with high levels of debt or unsustainable impacts on cash flow, says Mr. Newman.
Physician-owners may also be unwilling to dilute their own ownership to bring on new physician partners. "Excessive conservatism when it comes to pursuing additional physician investors is a mistake," says Mr. Newman. "There is a reluctance to share the pie, but the idea is to make the pie bigger." More physicians and volume equate to more business and more profit.
Buy-out provisions are an essential part of a formalized operating agreement. A simple discussion of retirement terms is not enough to ensure the process goes smoothly. "Once a decision is made to retire, the roles reverse and become an 'us and them' scenario. This can create a source of tension in the ASC, which often could have been avoided had the center negotiated and resolved those issues beforehand," says Mr. Casey.
Lack of communication and transparency is perhaps the largest mistake. Business partners cannot plan for the future of their enterprise if they are not open with one another. "If you have concerns about sharing all of your information, particularly concerning financials, then do so under a non-disclosure agreement, with your prospective successor agreeing to keep the information you share confidential," says Mr. Casey.
Joint venture or going solo?
Rather than passing the torch to a new generation of physicians, some ASC owners have decided majority sale to a hospital or management company is the answer to the succession riddle. While larger partners can offer resources and stability, they are looking for something in return.
"A joint venture is a default option for a lot of centers," says Mr. Newman. "But, a joint venture partner will ask the same question — where is the center's future growth?" If physician-owners cannot answer that question, their ASC has decreased value in the eyes of a potential hospital or management company partner. Whether planning to partner up or remain independent, physicians need to lay out a plan for their ASC's future.
More Articles on Transactions and Valuation Issues:
3 Recent ASC Acquisitions
22 Physician-Owned ASCs Opening or Announced in 2014
Industry Mega Mergers: What Do the AmSurg-Sheridan & Surgery Partners-Symbion Deals Mean for ASCs?
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