Changes sweeping the healthcare industry have paved the way for an increasing number of joint venture ambulatory surgery centers.
"We have recently observed supply and demand factors driving joint venture activity that wasn’t present several years ago," says Nicholas Janiga, ASA, partner at HealthCare Appraisers. "There is more recognition among hospitals that a freestanding ASC with lower reimbursement may be more beneficial than a hospital outpatient department. There may be opportunities to share in greater profits with a joint venture ASC than their current sinking ship [HOPD]."
Recent structures of joint ventures shaping the industry include:
• De novo centers
• HOPDs and freestanding ASCs becoming new entities
• Existing ASCs becoming part of larger joint operating agreement that involves inpatient care
• Single and multispecialty ASCs adding new specialties to leverage cost
• Joint ventures with different market participants
In a webinar titled "Valuation Considerations in ASC Joint Ventures," Mr. Janiga detailed the various macro and micro factors driving ASC joint ventures, and key mistakes to avoid when valuating surgery centers.
Here are three considerations for joint venture ASCs:
1. Evaluate the factors at play to ensure a joint venture is successful. Healthcare will continue to trend toward value-based care, making ASCs an attractive option for health systems and other entities looking to reduce costs. Various factors are driving joint ventures, including:
• Legislation pushing providers to truncate expenses. "We need joint venture ASCs in the industry to make sure spending doesn't spiral out of control," Mr. Janiga said.
• A widening payment gap in hospital outpatient department versus ASCs. ASCs are paid a fraction of what Medicare reimburses HOPDs for the same procedure. The gap has been expanding with ASCs receiving 158 percent less in 2008, with that figure increasing to 179 percent less in 2015.
• Rising hospital employment. The number of family medicine physicians employed by hospitals hit 76 percent last year as reported in select surveys, which contributed to more hospitals seeking to align with independent surgeons.
• Stagnant growth of Medicare-certified ASCs. While the number of Medicare-certified ASCs increased significantly from 2008 to 2014, the number of ASCs only increased from 5,343 ASCs in 2013 to 5,466 ASCs the following year, representing relatively stagnant growth. "With a maturing marketplace, we are seeing more creative joint venture alignment options being considered," Mr. Janiga said, "I suspect we will see this number stay stagnant or grow at a nominal rate."
• The size of primary service area & existing market players. A rural area may have only one freestanding ASC, which may be a more suitable joint venture environment.
• State-specific factors & demographic conditions.
2. Use the right valuation approach. ASCs can employ three different approaches when valuating their joint venture — income approach, market approach and asset approach.
An income approach is comprised of single-period and multi-period models. A single-period model may be used to value a surgery center with relatively stable operations, while a multi-period model would be used to value a surgery center experiencing substantial growth or contraction.
Under a market approach, ASCs can be valued using comparable transaction and guideline public company methods. While not always directly comparable, valuation multiples from three publicly traded ASC management companies can serve as a sanity check for assumptions used in both the income approach and comparable transaction method.
Lastly, under an asset approach the appraiser adjusts the book value of assets and liabilities to fair market value to determine the value of an ASC. "It is important to note the asset approach is commonly used in valuing de novo surgery centers, as main task is evaluating capital contributed to get a surgery center up and running. An income approach may be used to sanity check the results of the asset approach when valuing a de novo center, while it would be very rare to consider the results of a market approach when valuing a de novo center," Mr. Janiga explained.
3. Avoid common pitfalls that compromise a joint venture. Joint ventures have various challenges when conducting a fair market value analysis. Some common pitfalls Mr. Janiga outlined include:
• Failing to normalize revenue
• Not accounting for appropriate expenses such as management fees
• Employing the wrong valuation approaches
• Failing to appropriately assess risk
• Forgetting to account for secondary discounts such as lack of control
• Not adjusting for a stock versus an asset deal.