Is There 'Hidden Value' in a Poorly Performing ASC?

Struggling ASCs come in all shapes and sizes. Some ASCs have enjoyed success in the past and now find their prosperity has taken a significant hit due to the many headwinds confronting the ASC industry. Others have struggled from day one due to inadequate volume levels, high fixed costs, too much debt or altogether mismanagement.

Regardless of their method of arrival, these ASC owners find themselves in a position where decisive action must be taken to right the ship. Often, in an effort to accomplish this, existing owners make the choice to sell a controlling interest in their ASC to a third-party investment group, management company, hospital or some combination thereof. When pursuing such action, it is crucial for existing owners to realize where the value in their center may reside and fully comprehend what can, and cannot, be considered by acquiring entities when determining purchase price.

The first thing to note is it is highly likely that the acquiring entity will not legally have the ability to pay an amount that exceeds fair market value (FMV). Without going into great detail, when determining FMV, an accurate and reliable appraisal should analyze your ASC from a "hypothetical" or "typical" buyer's perspective. Approached from this perspective, there very well may be hidden value in your center that is not readily apparent by analyzing historical financial performance. The following are some discussion points to consider:  

A valuation may consider reasonable improvements in reimbursement …
A valuation can be consistent with FMV and also assume an improvement in financial performance that a "typical buyer" could help the ASC realize.

Here's a question that we often receive: "Once we sell to the hospital, we all know that reimbursement will increase dramatically. Can we consider that in the valuation?" The straightforward answer to that is: No. That would take into consideration the value that could be realized by that one specific buyer, not the value realized by a universe of typical buyers which could include management companies or other physician groups that will not have the pricing power of a hospital.

With this said, when analyzing the FMV of an unprofitable or break-even ASC, an accurate appraisal should consider the level of reimbursement currently received by the center and whether those rates are equal to, below or consistent with market averages for other freestanding ASCs. If rates are considerably below market averages, it is most often reasonable for a FMV opinion to assume that a typical buyer would enable the ASC to obtain (albeit gradually) managed care/commercial contracts that are on par with market norms. A source of information regarding average reimbursement rates can be found in the Intellimarker benchmarking analysis published by VMG Health.

… and may include reasonable improvements in operating efficiency
In addition to poor reimbursement, struggling ASCs may be hampered by an inefficient cost structure or high levels of non-recurring expenses. Consistent with the point made above, an accurate FMV opinion should include an analysis of current expenses and benchmark those against marketplace averages. Doing such may unearth significant inefficiencies or wasteful costs that a typical buyer could help to eliminate. Similar to analyzing reimbursement levels, any assumed improvement in expense levels must be conservative and supportable. Again, the thought here is that an opinion of value is only consistent with FMV if any adjustments or improvements that are made could be realized by a typical buyer as opposed to one specific buyer.

Final thoughts
Although admittedly oversimplified, I have attempted to provide some pertinent discussion points above that should help to educate prospective sellers. It is important to note that many poorly performing ASCs do not have significantly below average reimbursement or glaring inefficiencies in expense structure. Many ASCs struggle due to low levels of physician support and case volume, oppressive debt levels or high fixed costs. For such ASCs, the "hidden value" discussed above may not be applicable however it is nonetheless important for these areas to be explored to ensure you are making every effort to maximize existing shareholder value.

Contact Kevin McDonough at kevinm@vmghealth.com. Learn more about VMG Health.

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