10 Characteristics That Increase Surgery Center Risk

As merger and acquisition trends continue to ramp up in the ASC industry, many surgery center owners are asking themselves the critical question: "What is my ASC worth?" According to VMG Health's Value Driver 2011 Survey, surgery center value is impacted by a laundry list of factors, including physician ownership, managed care contracts, market characteristics, legal structures and physical plant. Here are 10 characteristics that increase surgery center risk, according to the survey.

1. High level of ownership by physicians in competing centers.
According to VMG Health's Value Driver 2011 Survey, physicians with ownership in competing centers pose a "very high" risk to the center's EBITDA multiple, defined as an impact on EBITDA of > 1.0X. Many ASC experts recommend asking physicians to sign a non-compete that prevents ownership in other surgery centers; this ensures that a higher percentage of the physician's ASC-appropriate cases will come to your ASC. A physician with interest in two centers must think about how to keep his distributions robust in both facilities, rather than concentrating on yours.

2. Significant number of active physicians nearing retirement age. A high percentage of older physicians was also thought to be a "very high" risk for ASCs, according to VMG Health's survey. If a physician is a major driver of volume in your surgery center, his or her retirement could pose a threat to profitability. If you have a significant number of physicians nearing retirement, it's a good strategy to also bring in younger physicians to prepare for their departure. In many cases, older physicians will look within their own practice to find younger physicians to purchase their shares.

3. High reliance on out-of-network payors.
Out-of-network was one of the biggest risk factors cited in the VMG Health survey, with 93 percent of respondents calling it a "very high" risk. Out-of-network used to be a very lucrative strategy for surgery centers, as they could generally receive much higher reimbursement rates than those contracted with payors. However, as payors attempt to push surgery centers to negotiate contracts, the strategy is becoming less viable in many areas of the country. If you do pursue out-of-network, make sure you have a qualified staff member who understands the appeals process and when to push the payor for a more money on a case.

4. High concentration of revenue from a single payor. This factor was rated either "high" or "very high" risk by 33 percent and 40 percent of respondents, respectively.  If a high percentage of your revenue comes from one payor, you are at the mercy of their reimbursement changes. If the payor decides to cut rates on a certain specialty that dominates your facility, you may see your revenue decline significantly. Payor diversity is a good way to ensure that your money is coming from several strong sources, rather than one that could weaken at a moment's notice.

5. Aging facility/poor layout of facility.
This risk factor was rated "high" by 42 percent of respondents. An aging facility will generally require significant capital investment to attract new physicians and patients and excite the community, making it a riskier investment. A facility with a poor layout may pose an even greater problem: If a facility is built without the capacity to expand, the surgery center may find that it can't add specialties or additional case volume because the building is simply too small. In designing an ASC, owners should always think about whether the building is capable of adding extra operating rooms, which may be necessary in the future.

6. Facility location (patient/physician convenience). Facility location posed medium risk to most respondents, with the most popular answer weighing in at 40 percent. A facility in an inconvenient location may stymy additional case volume, as new physicians will hesitate to drive to a surgery center miles away from their practice location. Patients may also be put off by an inconvenient location.

7. Expected growth in future periods.
Expected growth was rated a "very high" risk factor by 47 percent of respondents, and it's a key factor that valuation companies examine in determining the price of an ASC. Expected growth may involve factors such as physicians available for recruitment in the community; new procedures that could be added with limited capital expenditure; patient volumes that have not been accessed yet; and possible increases in managed care contracts.

8. Rate of growth of prior two to three year period. Prior growth rate poses a "high" risk to ASC value; in looking to the future, ASC investors often evaluate the past several years to determine if growth has steadily inclined. If growth has plummeted over the last several years, they don't have as much reason to believe it will suddenly shoot up (barring a significant change in the market or the ASC's operations or strategic plan).

9. Lack of consistent, reliable financial & operational data reporting.
Data is becoming critical to surgery center success, and all surgery centers are wondering how and what they should be benchmarking. In payor contract negotiations, vendor discussions, valuation conversations, partnership opportunities and day-to-day operations, data is key to determining how the center is doing and where it could go. Because of this, most respondents rated lack of data as a medium, high or very high risk to value.

10. Active hospital employment in the local area.
Hospital employment was divided in its impact; 40 percent called it a high risk, while 27 percent said medium and 20 percent said very high. The level of hospital employment varies by region, but most experts agree that markets saturated with aggressively-employing hospitals are dangerous for ASCs. Physicians employed by hospitals generally are not allowed to hold investments in outside facilities, limiting their engagement in an ASC. If your ASC is in an area with hospitals that employ physicians, you also run the risk of losing your current physicians to the hospital for good.

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