This letter discusses the current market pricing of transactions for ambulatory surgery centers and “under arrangements” models – are they legal or illegal? It also touches on a few other issues.
1. Buying and Selling of Ambulatory Surgery Centers – Pricing By Tier in the Current Market.
This section focuses on buyers of majority interests in ASCs. Currently, there are five public company buyers of ambulatory surgery centers. These are the companies that generally buy more than 50% in an ASC transaction. Typically they buy anywhere from 51-66%. These include (i) United Surgical Partners, (ii) Symbion, Inc., (iii) Amsurg, (iv) NovaMed, (v) Medical Facilities Corporation.
A. Of these companies, two are in the process of going private. Further, each of the companies have different criteria for acquiring ASCs.
B. There are also two principle private consolidatorsof majority interests of ambulatory surgery centers. These include (i) Meridian Surgical Partners, and (ii) National Surgical Care. Separately, there are a number of purchasers of minority interests in ambulatory surgery centers. Seven of the most prominent include (i) Ambulatory Surgical Centers of America, (ii) Cirrus Health, (iii) HealthMark Partners, (iv) Woodrum ASD, (v) Prexus Health Partners, (vi) Nueterra Healthcare, (vii) Regent Surgical Health and (viii) Foundation Surgical Affiliates. Please feel free to contact me at sbecker@mcguirewoods.com or at 312-750-6016 for further information regarding any of these companies.
C. The pricing of surgery centers (majority interests) can be broken down into three different tiers. (1) the first tier of ASCs includes what we consider low risk acquisitions. These typically measure positively with regard to the following five characteristics: (i) certificate of need, (ii) low out of network percentage of business, (iii) limited reimbursement risk, (iv) not overly dependent on too few doctors, and (v) limited non-compete problems. For these types of low risk transactions, we often see prices of 7.5 times EBITDA or higher minus debt. As part of this transaction, parties often acquire 51 to 66% of the units, and the parties enter into a long term management agreement with the buyer. The management agreement is typically at five to six percent of collections. Typically, the buyer, as part of the pricing, acquires the accounts receivable minus the accounts payable. D. A second tier of price deals would include deals that have, of the five characteristics listed in C above, one or two characteristics that pose significant risks. These might be centers in a non certificate of need state or it might be a center with some competition risk or some reimbursement risk or certain other risks. In essence, a situation in which these five factors, a party measures negatively for one to two of these factors, the party might be included in this second tier. Please bear in mind that being completely negative on certain of these factors, can turn a tier one deal into a tier three deal versus a tier two deal. For example, if the center is dependent on one to two physicians, or if many physicians in the venture have significant outside competitive interests, this can make the deal a tier three deal versus a tier two deal. For tier two pricing, we often see pricing of five to seven times EBITDA minus debt. The actual price within that amount depends a great deal on the depth and number of the different risks present.
Finally, we see tier three deals as deals that have several of these risk characteristics. Here, there are typically few buyers for these transactions, and if, in fact, you do find a buyer for these transactions, you are often looking at a price of 3 to 5 1/2 times EBITDA minus debt. Often, for these types of deals, the party will look toward one of the minority buyers with the intent of restructuring the venture to improve it for greater profitability going forward. In essence, instead of attempting to make a capital gain from the transaction, a party may focus on finding a buyer that will buy a minority interest and help manage and improve the center’s profitability and stability.
2. NovaMed Acquires the Surgery Center of Kalamazoo.
CHICAGO, January 4, 2007 – NovaMed, Inc. (Nasdaq: NOVA) announced that it has acquired a 62.5% interest in the Surgery Center of Kalamazoo, a large multispecialty ambulatory surgery center with four operating rooms located in Portage, Michigan. The surgical procedures performed at this center include orthopedic, ophthalmology, pain and plastics. This will be NovaMed’s second surgery center in Michigan.
“This transaction is by far NovaMed’s largest surgery center acquisition to date. In the last 12 months over 8,000 surgical procedures were performed at this surgery center generating over $9 million in net revenue,” commented Thomas S. Hall, NovaMed Chairman, President and Chief Executive Officer. “The Surgery Center of Kalamazoo is a state-of-the-art facility currently used by 20 surgeons, 15 of whom will be our partners in this center. We are pleased to add this high quality operation to our portfolio and look forward to working with our new partners to realize the center’s full growth potential,” added Mr. Hall.
3. The Imaging Sector Comes Alive.
Recently, there has been increased interest in private equity funds investing in the imaging sector. We have been witnessing this as we have discussions with different private equity funds. This is evidenced in part by the recent transaction involving Alliance Imaging. The press release relating to the Alliance Imaging transaction discussed the following. MTS, in partnership with funds under the management of Oaktree Capital Management, LLC (“Oaktree”), purchased a 49.7% share of Alliance from Kohlberg Kravis Roberts & Co. L.P. for $153.1 million in April 2007. Alliance is a leading national provider of shared-service and fixed site diagnostic imaging services. It also operates a growing number of radiation treatment centers. This type of transaction is of interest in that it shows that imaging valuations may be close to hitting a bottom at which point the private equity investors are again interested in acquiring such business. Also of interest, this represented one private equity fund essentially buying interests from another.
4. Whole ASC Ventures – Under Arrangements Structures – Are they Legal or Illegal?
Over the last few years, a new type of joint venture arrangement for surgery centers has gained tremendous traction. This is often referred to as an “under arrangements” structure. The basics of how a whole
venture “under arrangements” structure works are as follows:
<!–
A. Physicians or physicians and a hospital establish an ASC-like entity. This venture has all the qualities of an ambulatory surgical center, such as staff, equipment and leased or owned real estate. However, it does not have a license or provider number.B. The ASC-like entity, rather than selling services to third party payors or directly to patients, sells all of its services to the hospital. The services are usually sold on a “per click” basis.
C. The hospital bills services to third party payors and to the Medicare program at hospital out patient department rates.
D. The hospital does better than it would as a partner in a joint venture surgery center. Here, it bills out at much higher hospital based rates. The surgery center-like entity also often does better than it otherwise would. Here, it provides services to a great variety of payors, and often charges the hospital the same type of rates it would receive from third party payors. The hospital is then able to mark those rates up for Medicare and for third party payors.
E. This strategy has become very popular because it often provides for higher profits for the ASC-like entity and for the hospital.
F. The strategy was developed based on the concept under the Stark Act that services could be provided on a per click basis and still not violate the Stark Act. Here, please note that the services still must be at “fair market value.”
G. The arrangement or structure will not meet any safe harbor under the Anti-Kickback Statute. The relevant safe harbors do not permit per click billing.
H. There is a great and evolving question as to the method utilized to set the price that the ASC-like entity sells services to the hospital. For example, should the ASC-like entity simply provide services as though it is a landlord-type of entity? As another example, assuming 10,000 square feet, $1.7 million in total equipment and annual staffing costs of $800,000 to $1,000,000, a lessor of space, equipment and staff may be paid a flat amount of $2,000,000 a year, inclusive of a mark up. The same center under an “under arrangements” structure may earn $4,000,000 to $5,000,000 a year if paid on a per click basis, e.g., 4,000 procedures at $1,000 to $1,250 a procedure. In contrast, some arrangements are structured with a much lower payment per procedure or with a base fixed amount plus supplies or a smaller payment per procedure. Certain questions are critical to assessing this from a legal perspective. Is the higher pay arrangement really driven by risk allocation or, e.g., is the potential for upside a ayment for referrals? Is it proper to be charging the hospital as though the entity is actually operating as an “ASC.” If it bills the hospital as though it is operating as an ASC, is there a chance this could be viewed as being paid above fair market value as the ASC is really not an ASC? Can it be viewed as a billing scheme intended to treat ASC services as hospital out patient department services and recoup higher payments for what are really ASC services?
I. We have been very reluctant to structure whole venture “under arrangements” transactions, particularly the ones which pay at the high end per click amount, for concerns that they would be viewed as improper under the Stark Act, the Anti Kickback Statute or that they could be viewed as a means to provide private inurement. There is also the chance that they can be viewed as engaging in improper billing.
We view that there is substantial risk that many of these transactions will have to be restructured or unwound. Of course, if they are found to bein violation of the Anti-Kickback Statute, which has criminal provisions, this could lead to problems that are much greater than simply unwinding a venture.
J. In short, as parties increasingly examine “under arrangements” options, we remain skeptical as to the propriety of this model, particularly certain versions of the model. It is of particular concern where both the ASC and the hospital have the right under the Medicare program to bill for the services. For example, it may be more proper to allow such a structure for a limited service line where there is no other way to bill for the services to the Medicare program. In essence, it can be argued that you are really allowing the hospital to avail itself of a service that otherwise could not be billed by the surgery center and that there is no gaming of the reimbursement system in that situation.
5. October 18th to 20th ASC Conference.
We have our 14th Annual Ambulatory Surgery Center Conference scheduled for October 18th to 20th. The conference, with FASA as a partnered sponsor, focuses on improving the profitability of surgery centers and focuses on business and legal issues related thereto. This year, we have added three dynamic key note speakers to help lead up the program. These include, Dr. Mark McClellan, Professor David Dranove and Tom Hall. Mark is the former director of the Center for Medicare and Medicaid Services, David is a very well regarded professor at the Northwestern Kellogg School of Business and Tom Hall is the dynamic CEO of NovaMed.
6. Becker’s ASC Review Adds New Co-Editor in Chief.
We have added Stephanie Wasek, the previous managing editor of Outpatient Surgery Magazine, as the new co-editor in chief of the Becker’s ASC Review. She has worked for the industry leading publication Outpatient Surgery Magazine for several years. Outpatient Surgery Magazine represents the gold standard of ASC magazines in the ASC sector. She is extremely bright and comes from a terrific background. We are delighted to have her join us. She will add greatly to the content of the magazine and help us to broaden the scope of the magazine to be more attractive to certain types of readers and advertisers.
Separately, Becker’s ASC Review has added Maisha Gibson to the magazine who will serve as Vice President of Client Services.
7. The September-October Issue Goes to Print in Two Weeks.
We are very pleased to welcome Kaye/Bassman, Ventas, Foundation Surgery Affiliates, B.Braun and SourceMedical as advertisers in the ASC Review. We also greatly appreciate that all five of the current full year advertisers whose term of advertising was up for renewal have each renewed their advertising. These include Alpine Surgical Equipment and Matt Sweitzer at (916) 933-6911 or at matt@alpinesurgical.com, Eveia Health Consulting and Management, Naya Kehayes at (425) 657-0494 or at nayak@eveia.com, Somerset CPAs Steve Dobias at (317) 472-2163 or at sdobias@somersetcpas.com, Symbion Inc and Mike Weaver, Richard Francis – CEO, and George Goodwin et al at (615) 234-5900 and Medical Facilities Corp – Larry Teuber, MD at (605) 484-1616 or at LTeuber@nssa.com. Each are great companies led by terrific people and we are delighted to have them back. The full year advertisers keep the lights on at the ASC Review.
