5 Ways Physician Employment Affects Surgery Center Valuation

Hospitals are increasingly employing physicians to gain market share and integrate providers into hospital operations, creating a problem for surgery centers that depend on surgical case volume from independent practitioners. Jason Ruchaber, CFA, ASA, partner at HealthCare Appraisers, discusses six ways physician employment by hospitals affects pricing for ASCs.

1. Physician employment creates downward pressure on pricing multiples for surgery centers. While predicting the impact of physician employment on ASC values is not an exact science, Mr. Ruchaber says the trend does create downward pressure on multiples. With hospital employment, freestanding surgery centers are more likely to struggle for business and case volume as their referral sources become hospital employees, he says. "The two key factors that go into a valuation multiple are anticipated growth and risk," he says. "Physician employment negatively affects both factors."

This means that when a company like HealthCare Appraisers assesses the value of a surgery center, they look at physician participation and overall case volume trends. If a hospital in the community is employing physicians and acquiring practices, the surgery center may be at risk to lose its participating surgeons or referring providers (e.g. primary care).

2. Hospitals are increasingly looking to fully acquire their joint venture ASCs. Mr. Ruchaber says while valuation multiples may be lower due to the employment of physicians, this may be partially offset by the increased demand by hospitals to buy the facility outright. "Hospitals are actively looking to acquire surgery centers outright, particularly those where they currently have an interest," he says. He says in the past, hospitals looked to partner with surgery centers to align with physicians and mitigate some of the financial loss associated with surgical case volume moving to the free-standing setting.  

Though hospital/physician ASC joint venture models were and continue to be successful, as more physicians opt for hospital employment, Mr. Ruchaber says hospitals are increasingly incentivized to buy their joint venture centers outright and convert them to hospital outpatient departments. By purchasing the centers in full, the hospitals can increase their OR capacity to support employed physicians and often increase reimbursement by converting the surgery center to a HOPD.

3. Physicians cannot receive higher ASC pricing because of the potential for HOPD conversion. When determining fair market value for a surgery center, Mr. Ruchaber says the potential for conversion to a HOPD cannot be factored into the pricing. "When a hospital buys a surgery center outright, their intent may be to convert it into a HOPD to receive that immediate uptick in reimbursement," he says.

In this situations, physician owners generally want to see the uptick factored into the price they are paid for the surgery center. They believe if the hospital is going to make more money off the surgery center than they are currently making, they should receive compensation for that increase. Unfortunately, Mr. Ruchaber says, this is an economic benefit available only to a specific buyer (i.e., the hospital), and consideration of this uptick would be inconsistent with the requirements of fair market value.

4. Physician employment is becoming more flexible. In the past, employed physicians were generally required to divest their ownership interest in surgery centers as part of their hospital employment contract. But Mr. Ruchaber says as hospital employment becomes more common, hospital compensation and employment arrangements are also becoming more flexible. For example, if a physician is interested in employment but has ownership in a surgery center, the hospital may allow the investment to continue. "It's not the norm, but it's certainly an option on the table," he says.  If a surgeon is not required to divest of his or her interest as a condition of employment, the downward pressure on multiples in that community may be lessened.

He says physicians are also increasingly compensated for their participation in co-management and other arrangements, meaning employed physicians could remain economically incentivized to participate in the in the clinical and operational success of hospital's outpatient surgery department.

5. Significant participation by non-owners can pose substantial risk. Physician employment may disproportionately affect centers with high non-owner case volumes, Mr. Ruchaber says. If the surgery center's case volume is heavily dependent on non-owners, the ASC's pricing may be depressed because of the risk that the physicians will cease to participate without notice. "Owners tend to have more stable surgical volumes because they're invested and have a financial stake in the business," says Mr. Ruchaber. "Non-owner physicians are easier targets for employment, and if there's no tie to that center, the case volume could disappear overnight."


Mr. Ruchaber says while physician employment is currently very active, the trend may unravel in the coming years as hospitals realize they can't afford hospital employment or physicians desire a return to independence. "I think there are already a number of deals where hospitals have received bad advice from consultants involving exceptionally robust compensation models," he says. "In some cases the hospital may have rushed to the table in a competitive acquisition, and they get the deal done and suddenly they're losing $2 million a year to physician employment." These deals are not likely to be renewed after the initial employment period.

He says in other cases, hospitals are discovering that their employed physicians do not enjoy the bureaucratic structure of the hospital or its control over their clinical decisions. "It's not just about having clinical expertise — some physicians are great clinicians, but they're not great employees," he says. He believes that as two- and three-year physician contracts come up for renewal, the industry may see a rethinking of hospital employment strategies.  

Learn more about HealthCare Appraisers.

Related Articles on Surgery Center Transactions & Valuation:
NJ's Jersey Shore Ambulatory Surgery Center Forms Joint Venture With Virtua
NY's Endoscopy Center of Niagara Plans New Surgery Center
12 New Surgery Centers in the Works

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