Selling Your Surgery Center? Physicians Alliance Surgery Center's Journey to a "Very Attractive" Offer

Earlier this year, the 16 physician owners of Physicians Alliance Surgery Center in Cape Girardeau, Mo., embarked on a journey to find a partner for their four-operating room ambulatory surgery center. The surgery center, which opened in 2000, had grown to feature several specialties, including ear, nose and throat, general surgery, gynecology, ophthalmology and orthopedics, and the partners hoped to continue to grow the center.

However, according to Brian Schafer, MD, an orthopedic surgeon and partner in the center, the physicians, who operated the center independently along with an administrator, had "grown the center as far as we could given our management abilities and needed some real management expertise to expand it further." Additionally, the partners realized that healthcare reform was guiding healthcare delivery toward more coordinated, consolidated services and they desired to align with a partner who could help them fit into this future model of healthcare delivery.

Attractive center seeking partner
Bringing in an outside partner also allowed the physicians to "take some chips off the table," in regards to their financial stake to the center, says Daniel A. Brown, founder and managing director for Creative Health Capital, the firm PASC hired to help them through the transaction process. Creative Health Capital began working with PASC in January, and helped to develop the center's request for proposal, which received more than 25 responses from potential ASC management company and hospital partners. Based on the RFP responses, PASC brought in a handful of potential partners for interviews and eventually decided to move forward with Cape Girardeau-based Saint Francis Healthcare System, which offered to acquire 51 percent of the center at a "very attractive" multiple, according to Mr. Brown. "Saint Francis was very accommodating and really sold their ability to enhance the profitability of the center by adding more service lines," he said.

The physicians' decision to bring in a local health system as a majority partner was driven by a variety of factors. First, the health system would provide additional management and recruiting resources. Second, making the health system a majority owner could provide access to more favorable managed care and vendor contracts and help the center better manage its costs. Partnering with a hospital also meant the center would not be required to pay a management fee to a surgery center operator, which would have been necessary if they had selected an ASC chain, says Dr. Schafer.

Additionally, the physicians sought a partner that would not erode the physician-oriented culture of the center. "The doctors still have a lot of say in how the center will run. A key consideration for the doctors was ensuring the center wouldn't be run like a hospital," says Mr. Brown. "The hospital provides synergies on both the revenue and cost side and supports the physicians, but [the physicians] still manage the center." According to Dr. Schafer, the day-to-day operations of the center haven't changed much since the deal closed Sept. 15. However, the health system has begun to work with them to develop a strategic plan and perform a "very methodical evaluation" into how to best grow the center, says Dr. Schafer.

The transaction also involved separating the physician-owners' real estate and corporate assets. That is, a separate group of investors, which includes some of the ASC's physician owners, acquired the ASC's real estate and now leases the facility back to the corporate entity. The deal allowed physicians who wanted to continue to own the real estate to buy out the other partners, who wanted to focus their investment on the center's operations.

Key learnings
According to Mr. Brown, the center received such an attractive offer because it committed to analyzing each offer comprehensively. The projected profits distributed to the physician owners for several years down the line were modeled under each proposed offer. Encouraging competition among potential partners is also critical to getting the highest price possible. The value of the offers received by the surgery center increases after it expanded its RFP process, says Aaron Kneas, a managing director for Creative Health Capital who was involved in the deal.

For Dr. Schafer and his partners, a key learning was that despite their deep clinical knowledge, their business acumen, especially around an issue as complex as a transaction was limited. "There's a lot more than meet the eye," he says. "There were a lot of issues that you may not really think twice about unless they're pointed out to you but could really be major sticking points after a deal closes."

More Articles on ASC Transactions:

10 Surgery Center Transactions & Projects Involving Hospitals

Why ASCs Need to Associate With Their Local Hospital: Q&A With Joan Dentler of ASC Strategies

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