The following article is contributed by Matt Lau, corporate controller for Regent Surgical Health.
We hear the term "value" used quite often these days, usually when a commercial comes on the television trying to convince us to purchase a particular product or service. For example, we should buy this brand of car because it holds its value better than a different brand of car. Or perhaps buying your morning coffee from the gas station for 99 cents is a better value than spending $4 at Starbucks, but is the quality of Starbucks worth the additional $3 you would spend?
So, what does "value" really mean? From a financial point of view, economic value is the worth of a good or service as determined by the market. The worth of a product or service can differ greatly depending on whether you are the buyer or the seller, which is the reason both sides are needed to establish a single value. Typically, value is linked to the price of a good or service through an exchange or transaction. For a relatively inexpensive product such as a cup of coffee, the seller will assign a specific price and the potential buyer will choose whether or not that cup of coffee is worth the cost. In the case of a more expensive item such as an entire business, an independent 3rd party may be asked to estimate value. A business valuation is a service provided by an independent entity that does not have any ties to either the buyer or the seller, and is often needed to determine the worth of an entire business or the value of a fractional ownership interest in that business for various purposes. For an ambulatory surgery center, a valuation may be needed for any number of reasons (i.e., establishing the purchase price of ownership units for a potential physician owner, establishing the selling price of ownership units for a retiring physician owner, establishing the purchase price to a hospital for a potential joint venture, etc.).
From the perspective of a manager and owner of ASCs, one of Regent's primary goals is to help drive an increase in the value of our surgery centers. What can we all do to increase an ASC's value? Here are four key areas which can greatly affect the value of an ASC in the eyes of a business valuation service provider and potential new investors:
Profitability
Perhaps the most important driver of an ASC's value is profitability. In general, the more profits an ASC generates, the more that business is worth. In order to increase profits, we must focus on both the revenues and the expenses of the business. For example, case volumes affect both revenues and expenses, but profits will increase if we can increase the number of profitable cases performed at the center. Additionally, profits will increase if we identify and eliminate cases that lose money for the facility. On the revenue side, renegotiating our payor contracts for increased reimbursement rates will increase profits and, in turn, increase value. On the expense side, obtaining lower pricing on supplies and implants, switching to less expensive implants, and being able to efficiently flex staff with the ebbs and flows of the surgery schedule can reduce costs and increase profits.
Physicians
In estimating the value of an ASC, a valuation company uses various forecasting tools in an attempt to predict the future of the business over the next few years. One of its primary areas of focus is the future productivity of physicians currently performing cases at the center. Are there any physicians at the center approaching retirement age? If so, how many cases and how much revenue do those physicians represent for the center? The valuation company will factor the future loss of cases from those physicians approaching retirement, thereby decreasing the ASC's value. So, we make sure we identify those physicians who may be thinking about retirement within the next couple of years. Will those cases stay in the physician practice? If so, we come up with a plan to retain as many of those cases at the center as we can. And, as always, recruit, recruit, recruit! The best way to counteract the possible loss of cases (and corresponding decrease in ASC value) is to bring on new physicians and additional cases, thereby increasing the value of the center and lessening the negative impact of a retiring physician.
In-network vs. out-of-network
When estimating the worth of an ASC, another important factor is the level of stability in reimbursement rates. Specifically, the valuation company will take into account the proportion of the center's revenues coming from out-of-network payors. Only a few years ago, many ASCs could choose not to sign contracts with payors and instead collect significantly higher reimbursements from out of network insurance carriers. While those OON opportunities are now few and far between, there are still areas of the country where an out of network strategy is viable. However, a valuation company considers the OON strategy as a significant risk. Revenues and profits may be at high levels now, but the valuation company looks at the large OON reimbursements as a short-term phenomenon, as there is no guarantee that the high reimbursements we receive today won't be gone tomorrow.
As a result, the valuation company will reduce the value of that center. If the center is currently benefiting from an OON strategy, it is a good idea to start planning for the day when those large reimbursements will be significantly reduced. Be proactive instead of reactive by starting the contract negotiation process with the large insurance payors. While we may not be in a rush to go in network, it is better for the center to negotiate contract terms now than be forced into a potentially bad contract later after the OON cash dwindles. Furthermore, the valuation company will look at those payor contracts as a sign of stability, which will help the value of the center.
Long-term debt
The amount of debt that the center has also affects its value. As an example, let's assume we are selling a house that has a mortgage balance. If we had been paying the monthly mortgage payment according to schedule, let's say the balance of the debt would be $50,000. So, when we agree to sell that house for $200,000, the first $50,000 will be used to pay off the existing mortgage balance, and the remaining $150,000 would be paid to us. However, if we were able to make a few extra payments on the mortgage over the years, perhaps the balance of the debt would be only $20,000. In this case, the first $20,000 of the sale price would be used to pay off the existing mortgage, and the remaining $180,000 would be paid to us. Just as the balance of a mortgage decreases the equity value of a house dollar for dollar, the balance of long term debt on the books of an ASC decreases the equity value of the business for its owners. While debt is not necessarily a bad thing for a business, one way to increase the value of an ASC is to make additional payments on its long term debt if the center has a strong cash position. Each additional dollar paid against the center's principal balance will add a dollar to the equity value of the center.
ASCs allow us to provide excellent service and patient care. In addition, an ASC can be a profitable business and a valuable investment. By focusing our efforts on the key areas listed above, we can expand the scope of our services, drive up the worth of our business, and increase the value of our investment.
Learn more about Regent Surgical Health.
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