Selling a center is typically driven by the desire to take “cash off the table” or because you need help in managing or turning the center around. In simple terms, there are both mathematical and personal comfort answers to this question. Remember, after one sells a majority interest in the center, for the remainder of his career, he will receive a lesser amount of distributions because he will own a smaller percentage of the center after the sale. This is typically the case. Further, when one finally sells the remainder of his interest, he will sell those interests at 3 to 4 times earnings as opposed to the 6 to 8 multiple that he might receive when selling a majority of the equity in a transaction.
So, from mathematical and economic perspectives, note the following: If you sell your interest in a surgery center at about 7 times earnings, you typically receive mostly capital gains tax treatment on that sale. This essentially means that if you held the same interest in the center rather than selling such interest, it would take you about 10 to 11 years after taxes to receive the same amount of money for that interest as you would receive in a sale transaction. Then, at the end of 10 to 11 years, you still own the interest in the center. Given that one cannot forecast the future of a surgery centers for this length of time, one might argue that it is always time to consider selling your center if you can receive 6, 7 or 8 times earnings for the center.
With that stated, when you reinvest the money that you receive from the sale, it is unlikely that you can receive anywhere near the return on investment month to month from other investment opportunities as you would receive from your surgery center investment. Thus, you are gaining a certain amount of comfort and financial security by selling a center but giving up current and ongoing cash flow. If your operational perspective is very long term, there is a strong argument that you should hold on to your equity in the center. The closer you are to retirement, the stronger the incentive to sell the center and to be part of a selling group because that is the only time you will have a chance to receive 6 to 8 times EBITDA.
The only time that you should always consider selling is if you see the center projected to go in a downward direction. However, one of the challenges is that many buyers will also sense the same concern. An increase in the capital gains tax rate would lessen the amount of time it takes to receive the amount of after-tax income from simply holding on to the center. For example, if it takes about 10 to 11 years to receive what someone received in a 7-times-EBITDA transaction if he just held his equity, then if the capital gains tax rate were to go up significantly, the length of this holding period starts to decrease, closer to the multiple that you have received in a sale transaction. For example, if you get paid 7 times earnings and the capital gains tax rates are close to ordinary income tax rates, then the hold period to break even with a sale transaction is about seven years.
2. What are the benefits of a minority-equity acquisition versus the historical majority-equity model?
The core benefit of a minority-equity acquisition is that it allows the physicians to continue to hold a majority of the interests in the venture, which is good for the longevity of the venture. The core downside to the physicians is one receives less in pricing in a minority-interest transaction than in a majority-interest transaction (i.e., 6 to 8 times earnings). Thus, there is a disadvantage in pricing when selling a minority-equity position versus a majority position. Also, it is the only time you can ever sell for 6 to 8 times interest. A minority-investment option does not provide the same amount or liquidity in exit value.
3. Is there an increased interest in ASC management arrangements between physicians and hospitals? If so, what are the benefits and/or risks involved?
There is muted increased interest in ASC management agreements. These are often driven by the built-in reimbursement advantage that hospitals enjoy. In essence, hospitals have a lot more cash to play with in order to pay management agreements and pay medical director fees in order to retain physicians and prevent them from developing their own centers. At the same time, very negative comments from the government on these types of arrangements have muted the increased interest in the growth of these arrangements. However, the reduced reimbursement for some specialties due to CMS’s updated ASC payment system is also leading more surgeons to be more interested in looking at options other than their own ASCs.
4. What changes have you seen in the physician/hospital joint-venture over the past few years that will impact these relationships in the future?
The largest change that we see in physician/hospital joint-ventures relates to physician/hospital relationships as a whole. Essentially, we are seeing a greater number of situations in which physicians are being employed by hospitals than we have seen in several years. This lessens the pool of available physicians and surgeons for ASCs or other types of ventures and also gives the hospital additional control over case flow.
