The 3 Tiers of Surgery Center Deals

At the 9th Annual Orthopedic, Spine and Pain Management-Driven ASC Conference in Chicago, Scott Downing, JD, Scott Becker, JD, and Amber Walsh, JD, partners with McGuireWoods LLP, gave a presentation on current market trends affecting the purchase and sale of surgery centers.

Mr. Downing, Ms. Walsh and Mr. Becker discussed three 'tiers' of surgery center deals, which can determine the offered price for a facility.

Top-tier deal: According to the presenters, a "top tier deal" will command multiples of 6-8x EBITDA and present a low reimbursement risk. This means the center will be situated in a market with a good payor mix, and the center will not depend on one payor for the majority of its revenue. Payor contracts will be profitable and well-negotiated, and the center will have a limited dependence on out-of-network reimbursement.

The presenters also said that top-tier surgery centers will have an attractive mix of physicians — enough to decrease the risk involved in one physician leaving, but not enough to significantly dilute physician shares and decrease engagement. The center should also have limited non-compete problems, with few physicians investing in multiple centers. The center should have a good or neutral relationship with the local hospital, rather than a relationship where the center is constantly trying to drive the ASC out of business.

In these situations, the buyer usually wants to purchase a controlling interest in the center (51 percent or more), the presenters said. Buyers also generally want long-term management agreements.

Second-tier deal: Second-tier deal surgery centers are those that meet most "top tier" characteristics but have weaknesses in two or three areas. For instance, a surgery center might have a good physician mix and strong payor contracts but issues with non-compete contracts or significant local growth in physician employment. For second-tier deals, the presenters said surgery centers are generally priced at multiples of 4-6x EBITDA.

Second-tier status also depends on the potential for growth. A second-tier center will have problems but the potential for growth and improvement, whereas a saturated market and limited potential for growth could push the center down into tier three.

Third-tier deal: Third-tier surgery centers are those with a high number of risk characteristics: poor payor contracts, huge physician employment and reliance on few physicians to drive case volume, for example. These types of deals will generally be of interest to minority owners, who want to purchase 20-30 percent to turn the center around. The buyer might want to improve the facility's profits and turn it into a tier one deal before "flipping" the center several years later and enjoying the profits from that sale. The presenters said these centers will typically be priced at multiples of 2x EBITDA.

Related Articles on Surgery Center Transactions and Valuation:
Insights Into Business and Financial Relationships Between Surgery Centers and Hospitals
Houston Public Hospital District to Build Surgery Centers Rather Than Add Hospital Beds
Given the Economic Downturn, Why Now is Actually a Great Time to Develop a Facility

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