Preparing your ASC for a transaction – Valuation 101

Over the years I have given numerous discussions on valuation and valuation trends within the ASC industry.

One question that commonly arises is "What can I do in advance of a transaction to enhance my center's value?" Accordingly, and to the extent that you are one of those centers holding out from an affiliation or transaction, this article will provide helpful tips, which if implemented now, can enhance a center's value down the road. As the article will describe, these steps will take time to accomplish, so, better to start sooner than later.

In summary, and in my experience, some key steps include the following:

1.    Do your homework — plan carefully before opening your center;
2.    Don't attempt to be everything to everybody — develop core competencies;
3.    Don't be shortsighted with equity — (continue to) offer equity to those active, quality surgeons who will enhance value and extend center lifecycle;
4.    Hire competent management; and
5.    Make customer service a priority and continually solicit feedback and measure performance.

1.    Do Your Homework Carefully Before You Decide to Build

Many centers fail even before they open. That's typically the case when centers are overbuilt. Overbuilding leads to excessive fixed costs, heavier debt burdens, and more pressure to achieve budgeted case volume estimates. If you aren't already aware, ASCs are fixed-cost intensive. Once fixed costs are covered, incremental case volume becomes significantly more profitable. Typically, adequate case volume is required to achieve this. Accordingly, in your planning stages, take MD case estimates with a degree of conservatism. For example, if only 50 percent of expected volume is achieved, what happens to projected earnings and the center's ability to make debt service payments? If you are not too comfortable with financial modeling and the selection of the appropriate level of debt to incur, I would highly recommend engaging the assistance of a qualified, knowledgeable consultant.

2.    Don't Attempt to be Everything to Everyone

While multispecialty centers generally attract higher valuation multiples than their single-specialty cousins (remember — just like your financial planner tells you, diversification is prudent), there is a risk in trying to accommodate too many specialties; hospitals routinely make this mistake in developing outpatient centers. The reason relates in part to higher fixed costs, as set forth above, and also to lack of ability to gain necessary efficiencies. With respect to fixed costs, I have seen too many centers over the years purchase excessive equipment in an attempt to attract each and every available surgeon, regardless of whether it makes financial sense to do so. For example, it likely doesn't make economic sense to purchase a $500,000 piece of equipment for a surgeon who only does a handful of cases per year.
Similarly, room turnover times are materially adversely affected when trying to accommodate a wide variety of specialties. Some of the more efficient orthopaedic centers I have seen set up their ORs to do all left knees in one room and "rights" in another to minimize equipment relocation. All other things equal, speeding up room turnover times allows a center to perform more cases in a given day.

3.    Don't Be Short-Sighted and Stingy with Equity

While a center needs to be careful in admitting a new owner surgeon, I have seen too many centers who fail over time because they refuse to offer new surgeons the ability to enjoy the same ownership rights and privileges which the incumbents enjoy. All other things being equal, Centers where the bulk of the cases are performed by the owners are less risky than those who depend on the on-going kindness of non-owning surgeons to continue to bring cases. It's not rocket science. Since valuation is a forward- looking exercise, existing owners need to continue to monitor opportunities to "lock in" case volume over time. If a qualified, active surgeon is not given the opportunity, he (she) will leave and take their cases with them. Eventually, the existing owners slow down, and in the absence of new talent, revenue and earnings will trail off. The highest multiples are paid for those centers which exhibit the strongest likelihood of growth. A center cannot grow over time if it fails to extend its life cycle by adding additional surgeon owners.

4.    Hire Competent Management

The smartest people I have met in business generally know where their strengths lie and recognize their limitations. While physicians are very intelligent, they are not often afforded the necessary training and experience in business. As set forth above, poor planning can have disastrous implications on business value, and the center is essentially doomed from inception. Competent management will increase the likelihood of success. In valuing ASCs, we can routinely assess the depth and competency of management merely by the center's ability to produce the necessary financial and operational data required in connection with the valuation. Centers who are able to produce the necessary "slices and dices" of data tend to be more sophisticated, and it generally indicates that management and the physicians are routinely monitoring a center's performance. On the other hand, when centers are unable to produce what we deem to be basic management information, such as case volume by specialty, by physician, by payer and reimbursement by specialty by payer, etc., it speaks to a lack of management depth and often information system capabilities. Another example relates to payer contracts. When is the last time these were thoroughly reviewed to make certain that a) the center is getting paid according to the contract; and b) that the bread and butter cases that constitute the bulk of the revenue of the center are getting reimbursed competitively?

While competent management, either via employment or through a contractual relationship, may not be cheap, generally it's a worthy investment.

5.    Customer Service – Focus on Delivering a High-Quality, Cost-Effective Product/Service

And the money will follow. Not the other way around. Put yourself in the patient's gown, even for a minute. Quality healthcare is as much grounded in patient perception as it is in statistical benchmarks. While there are numerous benefits to having a procedure done in an ASC, one of the most compelling is the patient experience. And while I love my many hospital clients, having an outpatient procedure done in a hospital OR setting, where there are not dedicated outpatient ORs, can be a very stressful and inconvenient experience. Try to find parking. Try to quickly and efficiently get checked in. Try not to get too angry if your case is continually delayed because a more urgent case once again bumped you. And finally, enjoy what could be a much higher patient copay and/or coinsurance. And like the domestic airline experience, try not to get too annoyed with oftentimes less than accommodating staff.
Enough said. Focusing on providing a quality patient experience and actively monitoring and measuring same will provide economic returns down the road.

This article is sponsored by HealthCare Appraisers.

More articles on surgery centers:
3 innovative quality improvement project ideas for ASCs

4 smartest things ASC owners do today: Preparing for sale

How ASCs can take advantage of local partnerships

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