5 Factors That May Decrease an ASC's Value

Valuation leaders discuss five factors that can decrease an ASC's value for a potential buyer.

1. Ineffective partnership agreement.
A partnership agreement in an ASC should include items like mandating physicians to sell all or part of their shares when they reach a certain age or if their volume drops, according to Vincent Kickirillo, a partner at valuation firm VMG Health in Dallas. Including these provisions will ameliorate risks to the buyer. The agreement should also have a strong non-compete covenant, stipulating that physicians cannot invest in another center within a certain radius. It should also require surgeons to bring at least one-third of their cases to the ASC, though this is also a legal safe-harbor requirement.

2. Majority of physicians nearing retirement.
Todd Mello, principal and co-founder of HealthCare Appraisers, says an ASC should ideally present a diverse group of physicians by age, including a good percentage of younger physicians who are excited about growing the center. "I'd rather have my physicians be in the early to middle phases of their career," he says. "That way, they're hungry, and they're at the point of their life that they're trying to accumulate assets and support a family. They may be more concerned about doing cases and making sure things run well." Physicians nearing retirement are by no means a deal-breaker, but Mr. Mello says a center is a more risky investment if the majority of its physicians are of retirement age. "You want to continually bring in new talent," he says. "If everybody is near retirement and those physicians leave without having adequately planned over time to extend the life cycle of the center by syndicating to new physicians, the earnings of the center will basically drop off a cliff."

3. Lack of recruitment activity within the physician-owner's private practices. According to Kevin McDonough, senior manager at VMG Health, as the availability of new physician recruits in many markets becomes increasingly scarce, ASCs rely more than ever upon the recruitment efforts of existing physician-owners within their private practices. In recent years, sophisticated buyers in the ASC market have turned their focus to identifying ASCs that are affiliated with self-sustaining group practices (i.e., those that are active in backfilling retiring physicians and pursuing growth with new recruits). Recruiting independent physicians or physician groups to an ASC can be an extremely time-consuming, expensive and often fruitless endeavor. As such, there is a desire by buyers and management companies to align themselves with physician groups that already pursue such activities.

4. Competing facilities in the nearby area. Specific characteristics of the area in which an ASC is located can directly impact the center's value, according to VMG Health's ValueDriver ASC Risk Assessment Survey. Here is the relative importance of the level of competition from other ASCs/surgical hospitals in the area, according to the survey:

•    Very low — 0 percent
•    Low — 0 percent
•    Medium — 41 percent
•    High — 32 percent
•    Very high — 27 percent

5. Neglected payor contracts. Special attention should be paid to payor contracts during the historical financial review and preparation of the financial forecast, according to Jason L. Ruchaber, CFA, ASA, principal with HealthCare Appraisers. He says he routinely values centers that cannot tell him the last time they had a conversation with major payors about their contractual rates. "In many cases, revenue is being left on the table that may readily be obtained," he says. "Getting paid more for the same case volume is a surefire way to increase the value of your center." He says centers with significant out-of-network revenue should evaluate the potential implication of going in-network with one or more of their payors, as the risk associated with sustaining OON reimbursement is very high.

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