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A. Of these companies, two are in the process of going private. Further, each of the companies have different criteria for acquiring ASCs.

B. There are also two principle private consolidatorsof majority interests of ambulatory surgery centers. These include (i) Meridian Surgical Partners, and (ii) National Surgical Care. Separately, there are a number of purchasers of minority interests in ambulatory surgery centers. Seven of the most prominent include (i) Ambulatory Surgical Centers of America, (ii) Cirrus Health, (iii) HealthMark Partners, (iv) Woodrum ASD, (v) Prexus Health Partners, (vi) Nueterra Healthcare, (vii) Regent Surgical Health and (viii) Foundation Surgical Affiliates. Please feel free to contact me at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or at 312-750-6016 for further information regarding any of these companies.

C. The pricing of surgery centers (majority interests) can be broken down into three different tiers. (1) the first tier of ASCs includes what we consider low risk acquisitions. These typically measure positively with regard to the following five characteristics: (i) certificate of need, (ii) low out of network percentage of business, (iii) limited reimbursement risk, (iv) not overly dependent on too few doctors, and (v) limited non-compete problems. For these types of low risk transactions, we often see prices of 7.5 times EBITDA or higher minus debt. As part of this transaction, parties often acquire 51 to 66% of the units, and the parties enter into a long term management agreement with the buyer. The management agreement is typically at five to six percent of collections. Typically, the buyer, as part of the pricing, acquires the accounts receivable minus the accounts payable. D. A second tier of price deals would include deals that have, of the five characteristics listed in C above, one or two characteristics that pose significant risks. These might be centers in a non certificate of need state or it might be a center with some competition risk or some reimbursement risk or certain other risks. In essence, a situation in which these five factors, a party measures negatively for one to two of these factors, the party might be included in this second tier. Please bear in mind that being completely negative on certain of these factors, can turn a tier one deal into a tier three deal versus a tier two deal. For example, if the center is dependent on one to two physicians, or if many physicians in the venture have significant outside competitive interests, this can make the deal a tier three deal versus a tier two deal. For tier two pricing, we often see pricing of five to seven times EBITDA minus debt. The actual price within that amount depends a great deal on the depth and number of the different risks present.

Finally, we see tier three deals as deals that have several of these risk characteristics. Here, there are typically few buyers for these transactions, and if, in fact, you do find a buyer for these transactions, you are often looking at a price of 3 to 5 1/2 times EBITDA minus debt. Often, for these types of deals, the party will look toward one of the minority buyers with the intent of restructuring the venture to improve it for greater profitability going forward. In essence, instead of attempting to make a capital gain from the transaction, a party may focus on finding a buyer that will buy a minority interest and help manage and improve the center's profitability and stability.

B. The ASC-like entity, rather than selling services to third party payors or directly to patients, sells all of its services to the hospital. The services are usually sold on a "per click" basis.

C. The hospital bills services to third party payors and to the Medicare program at hospital out patient department rates.

D. The hospital does better than it would as a partner in a joint venture surgery center. Here, it bills out at much higher hospital based rates. The surgery center-like entity also often does better than it otherwise would. Here, it provides services to a great variety of payors, and often charges the hospital the same type of rates it would receive from third party payors. The hospital is then able to mark those rates up for Medicare and for third party payors.

E. This strategy has become very popular because it often provides for higher profits for the ASC-like entity and for the hospital.

F. The strategy was developed based on the concept under the Stark Act that services could be provided on a per click basis and still not violate the Stark Act. Here, please note that the services still must be at "fair market value."

G. The arrangement or structure will not meet any safe harbor under the Anti-Kickback Statute. The relevant safe harbors do not permit per click billing.

H. There is a great and evolving question as to the method utilized to set the price that the ASC-like entity sells services to the hospital. For example, should the ASC-like entity simply provide services as though it is a landlord-type of entity? As another example, assuming 10,000 square feet, $1.7 million in total equipment and annual staffing costs of $800,000 to $1,000,000, a lessor of space, equipment and staff may be paid a flat amount of $2,000,000 a year, inclusive of a mark up. The same center under an "under arrangements" structure may earn $4,000,000 to $5,000,000 a year if paid on a per click basis, e.g., 4,000 procedures at $1,000 to $1,250 a procedure. In contrast, some arrangements are structured with a much lower payment per procedure or with a base fixed amount plus supplies or a smaller payment per procedure. Certain questions are critical to assessing this from a legal perspective. Is the higher pay arrangement really driven by risk allocation or, e.g., is the potential for upside a ayment for referrals? Is it proper to be charging the hospital as though the entity is actually operating as an "ASC." If it bills the hospital as though it is operating as an ASC, is there a chance this could be viewed as being paid above fair market value as the ASC is really not an ASC? Can it be viewed as a billing scheme intended to treat ASC services as hospital out patient department services and recoup higher payments for what are really ASC services?

I. We have been very reluctant to structure whole venture "under arrangements" transactions, particularly the ones which pay at the high end per click amount, for concerns that they would be viewed as improper under the Stark Act, the Anti Kickback Statute or that they could be viewed as a means to provide private inurement. There is also the chance that they can be viewed as engaging in improper billing.

We view that there is substantial risk that many of these transactions will have to be restructured or unwound. Of course, if they are found to bein violation of the Anti-Kickback Statute, which has criminal provisions, this could lead to problems that are much greater than simply unwinding a venture.

J. In short, as parties increasingly examine "under arrangements" options, we remain skeptical as to the propriety of this model, particularly certain versions of the model. It is of particular concern where both the ASC and the hospital have the right under the Medicare program to bill for the services. For example, it may be more proper to allow such a structure for a limited service line where there is no other way to bill for the services to the Medicare program. In essence, it can be argued that you are really allowing the hospital to avail itself of a service that otherwise could not be billed by the surgery center and that there is no gaming of the reimbursement system in that situation.