1 + 1 + 1 = 4: Making the Numbers Add Up for ASC Acquisitions

In his famous book, Good to Great, author-professor Jim Collins implores us to "aim high." He claims that the enemy of great is simply attempting to be good. Well, many analysts and observers view the overall performance record of the ASC industry — with a combined failure and underperformance rate of nearly 50 percent — and see clear signs that our industry is overbuilt.

In some markets, that may be true. However, we see excess capacity at nearly every outpatient surgery center in the country. And that represents new opportunities. Of course, opportunity alone does little to reassure surgeons who find themselves stuck with a center that's not profitable, barely breaking even or failing to meet initial projections.

Over the years, I have talked to many surgeons faced with such situations, and a common theme in our discussions is their sense that the numbers just don't add up. Typically, the first problem is insufficient volume. Some partners may not be meeting their commitments or initial case projections. Others may have become complacent about recruiting colleagues to bring cases or to invest in the center; or perhaps the center was overbuilt, and it's a struggle to make all the square footage and extra ORs productive.

We recognize that this can be an emotionally draining situation — with surgeons all feeling exhausted, overwhelmed and dreading the board meetings. But we also know that efficient, excellent clinical outcomes with fiscal success are within reach for centers that choose a skilled and experienced partner with an effective approach to performance improvement.

At Blue Chip, we apply a relatively simple equation — 1 + 1 + 1 = 4 — in acquiring existing centers and optimizing their performance. While every ASC is unique in terms of its particular case mix, market, payor contracts and culture, this equation can be easily and effectively applied to many types of centers. This particular strategy is not a silver bullet for every business challenge an ASC will face in its lifetime, but it does provide a strong and sturdy foundation for near-term profitability and long-term business growth.

Breaking down the variables

At the risk of sounding like a mathematics professor, I would like to take a closer look at each variable in the equation. The "1's" are as follows:

1. Existing owners,

1. New surgeon-investors and

1. Strong business partner.

The physicians collectively own majority interest, with the existing MD group and new MD investment group adding up to 70 percent, for example, while the operating partner invests for a minority interest of 30 percent. These ownership percentages may be adjusted slightly based on individual circumstances.

What's key, however, is the sum total of all the "1's" — which can be a doubling of case volume, though I've seen it triple in the most successful acquisitions.

Here are some of the main factors which influence whether an ASC can be turned around.

Owner commitment. Effective turnarounds start with a core group of surgeon-owners who remain committed to their center despite its sub-par track record. The group's commitment means finding effective ways to deliver enough cases to support profitable operations; it also means committing time to recruiting other surgeons to operate at the center and letting go of a tendency to control all aspect of the business. Frequently, a few existing owners will decide to divest from the center. Sometimes it may be necessary to ask others to leave.

Reluctance to sell shares. One major obstacle to turnarounds is the reluctance of existing owners to sell ownership shares or reduce their stakes. It's an understandable concern, but a quick study of the numbers confirms how poorly a majority stake in an unprofitable business compares to a minority stake in a thriving one.

Recruitment. Finding new investors for a struggling center can be difficult. Finding new investors who are also clinically distinguished, team players and willing to take on some risk is even more difficult. It can be done, however, and is well worth the considerable effort. Suffice it to say that strong ownership candidates have all these qualities. The operating partner will work closely with existing surgeon-owners to identify prospective new partners, but it is a team effort that should include business and clinical staffs. The entire ASC staff should actively seek out potential surgeons at the local hospitals, country clubs, gyms and social gatherings. They should also consider talking to competitors and surgeons at other ASCs, as we have seen two struggling ASCs merge operations to create a strong venture. As with turnarounds generally, there is more opportunity to find new investors than first meets the eye.

Strong management. Lastly, a strong management partner is a key variable in the equation. Management partners are important because surgeons should not expect to do everything. Consider that elite athletes, like Michael Phelps or Roger Federer, don't negotiate their contracts and endorsement deals. They don't organize their events or take tickets. They simply focus on their games — honing their skills and improving their ability to compete. In a similar vein, surgeons need to recognize that their core mission is providing great care, and that experienced professionals will be more effective at streamlining back-office operations, negotiating contracts with payors and the like. A clear assessment of their skills and needs will allow surgeon-owners to make an informed decision as to the operational partner that best suits them.

Some ASCs may set themselves up for long-term struggles when they decide to work with fee-only consultants to develop their businesses. Sure, they save some money upfront, but they may miss out on distributions over the long term if the consultant lacks expertise. So how do you find the right partner? First and foremost, you should find someone with a proven track record of acquisition success, which means a unique mix of strategic, management, process and hands-on operational expertise. If 30 percent sounds like a big stake to give up, consider what it buys for your center — access to business best practices, proven contract negotiators and day-to-day oversight of critical operational matters. Many back-office activities may seem like insignificant details compared to surgical techniques, but when it comes to the business, these details are difference markers.

Trust matters, too. ASC ownership groups should choose someone they trust to move the surgery center ahead both clinically and financially. Lastly, you should ensure contract terms are structured as a "win-win." Risk and reward should be shared in such a way that everyone has appropriate skin in the game. The partners succeed together.

So, to summarize (as my college math professors always did on the chalkboard):

1 core group of existing owners committed to success

+ 1 group of carefully selected new owners with substantial and validated case volumes

+ 1 experienced, trusted and properly motivated business partner

= 4

Remember, the equation adds up to at least four. We have actually seen it add up to six or eight or ten (proportionally speaking) in that new owners and contract negotiations have led to sudden and exponential growth in case volumes, cash flow and distribution checks (To learn more, read "The Journey to 500% Annual ROI").

Beyond the equation

This turnaround equation is not a silver bullet. It won't magically cure centers that have severe operational or cultural difficulties. However, centers that have committed ownership groups, talented staff and the requisite clinical expertise have huge potential. The equation sets the business up for success, but other hard work is necessary to get the center on track, and keep it on a long-term growth trajectory. Those tasks include:

close analysis of the existing centers' financials, with a clearly defined business plan for the next five years;
standardization of equipment, supplies and processes;
operational discipline and best practices-based processes in billing, claims management and scheduling;
robust recruitment and careful vetting of new partners;
payor contract renegotiation and monitoring.

With the right business partner, ASC ownership groups do not have to take on these important tasks, each of which requires specialized skills and knowledge. It's safe to say that a fair number of ASCs get into trouble because surgeon-owners assume responsibilities for these tasks when they really don't have the capacity or bandwidth to take them on. That's a fundamental element for ASC success — a skilled and trusted operating partner handling financial management and business administration allows surgeons to dedicate more time to patient care. My experience is that when surgeons are properly armed with the right data, they make well-informed decisions.

Learn more about Blue Chip Surgical Center Partners at www.bluechipsurgical.com.