6 Common Questions on ASC Syndication and Physician Recruitment: Q&A with Blayne Rush and Curtis Bernstein

ASC Syndication and Physician Recruitment

Blayne Rush, president of Ambulatory Alliances, and Curtis H. Bernstein, managing director of Sinaiko Healthcare Consulting, tackle six common questions associated with ambulatory surgery center (ASC) syndication and physician recruitment. 

Q: What is the difference between syndication and physician recruitment?

Blayne Rush: Physician recruitment is the process by which we recruit physicians who will do procedures in our surgery centers. When we refer to physician recruitment, we are not recruiting physicians to invest in the surgery center — at least not until we have established a substantial relationship with them. We want them to use the surgery center for their cases.

Syndication simply refers to a private securities offering of ownership interest in a healthcare company. You run across this term most often in the selling of ownership interest in the surgery center business, but you can syndicate just about any kind of healthcare company — surgery centers, medical office buildings, medical equipment companies, and so on. Syndication typically takes the form of a sale of limited liability company units or limited partnership interest, although they can also involve the sale of shares in a corporation.

Physician recruitment, in terms of a surgery center, is always part of the syndication process, but syndication is not always part of physician recruitment.

Q: What does an ASC need to do to prepare to recruit new physicians and/or syndicate?

BR: The preparation all depends on what stage of the life cycle that the surgery center is in but a good bit of the process is the same. Let’s start the discussion from the pure recruiting physician’s angle around an existing and operational center cycle.

In the physician recruitment area, one of the first steps is to evaluate the center to see if and why any of the current physicians are not bringing all of their qualified cases to the center and then what the barriers are. Meet with each of the physicians and ask the question: “What can we do differently that will make you more comfortable in bringing all your appropriate cases to the center?” One of the first steps is to understand where the shortfalls are occurring. The reason that this step is very important is because going forward operational inefficiencies will strongly affect recruitment and retention of cases and recruiting new doctors.

Some of the typical responses are as follows:

  • Preferences with equipment or instruments not available at the ASC
  • Investments in another facility or a treatment suite at their office
  • Hospital politics/pressures
  • Confusion around out-of-network vs. in-network contracting at center
  • Confusion with the facility cost for cash-pay patients
  • Staff or scheduler non-compliance
  • Lack of adherence to start times
  • Lack of familiarity/comfort with ASC staff
  • Lack of transparency — both financially and with executive decisions
  • Third-party payor contracts
  • Lack of background research on and/or compatibility with providers
  • Lack of partner enthusiasm/partner frustration

It is imperative that leadership understands that their top priority is to remove as many barriers as possible so that it is easy for the surgeons/physician to perform all of their qualified cases in this center. Create pro formas that can quantify the financial benefits to adding only a few more cases per month. Surgeon-owners must clearly see how incremental case volume growth leads directly to higher margins (given that overhead costs are largely fixed when centers are at breakeven). This helps make the case that the investment of their time in the recruitment process is very profitable.

Evaluate each surgeon’s block times. Some surgeons may be able to or are open to being flexible with their scheduling in order to accommodate new physicians.

Define the kind of physician you want and can support or how you would support physicians that are not married to another ASC. For example, a natural fit for a spine center is to add pain or orthopedics and podiatry. While we at one time could pick and choose what types of specialty docs we wanted to add, this is not the case in all markets. Let’s say you have the physical space that could handle GI but no GI equipment, and you are not making a significant profit to be able to purchase GI equipment. Could you recruit, say, three busy GI docs and package them together so they purchase the equipment and then lease it back to the center? You can justify this since the center is not highly profitable. In other words, you need to be creative through this process.

Determine your recruitment process and who will be responsible for driving it. Putting together a plan will help rally the team and get others to buy in. You then will discuss this process with existing partners, physician users and staff. Everyone needs to be on the same page and understand what you are doing, the importance of the process and the value of the process. In other words, get the buy-in and commitment from as many of the current players as possible. You may even want to put together a checklist of activities that the team members check off and commit to help with.

Gather current case load statistics, such as utilization reports, volume projections and actual cases and current schedules. Get familiar with other metrics, like turnover time, that you think make you stand out in a positive way. Collect the equipment list that will allow you to know what cases you can support now.

Create physician recruitment material, such as a one-page fact sheet and a brochure that has pictures of the center, a map of where the center is compared to the hospitals and other landmarks, list of any state-of-the-art equipment, list of awards, average turnover time, and block time available. Use it to tell your unique story and enticing message. Are you 100 percent physician owned, do you have physical space expansion abilities – what sets you apart from any other center around you? Point of caution: I advise you to not have anything in those materials about investing in the surgery center, that there is possibly an opportunity to invest, or anything along those lines because this falls under securities laws which prohibit general solicitation.

Build a target list of physicians in the area that could do procedures in your ASC. I encourage you to go broad here. You can compile a list from many different sources: the National Provider Database, state provider database, research about who is on staff at the area hospitals, etc.

On the syndication side, if this is a primary offering you will need to get the offering documents that are prepared. A primary offering is when the surgery center sells an equity position and receives the payment for the equity position.

If this is secondary offering — a secondary offering is when a current shareholder sells units and gets the money — you want to collect copies of the original offering documents, current financials, any contracts, debt, etc. We give copies of all of the original documents that the current owner was given with updated financials, caseload, etc., to the new physicians prior to them investing. We need to make sure they have all the information disclosed. When in doubt, disclose it in writing. When you sell securities you need to understand that you must disclose, disclose, disclose.

Decide how much you are going to sell and where the shares will come from.

Review your governing documents. You need to understand what the documents state. You might need to update them for various reasons, and this is a good time to do it. For example, if you are one of the founding members of an existing ASC or the rainmaker, you may want to consider carving out your ownership from some restrictions that you would apply to new owners. You can create different classes of shares, such as the founding owner’s class shares. Depending on the circumstances, a carve-out from certain restrictions may be appropriate since you took the risk on the initial investment and developing the ASC. Additionally, one of the surgery centers that I am working with historically has not had a non-compete. The market is fairly saturated and a non-compete would add another roadblock to recruitment efforts. What we did instead was to strengthen the one-third rule language where we include quarterly audits and a claw back provision if you are not meeting the one-third safe harbor requirement.

Anticipate a new physician’s desires and know what you are willing to be flexible on. In most markets there are a limited number of physicians that can be recruited. Your openness to accommodate will help you in recruitment efforts. The act of accommodating a physician often requires significantly less effort than the benefits it rewards you.

Q: How does a surgery center value the shares being sold during syndication?

Curtis Bernstein: From the valuation perspective, there are three approaches to value. The market approach, the income approach and the asset approach. Whether you’re valuing the controlling interest for a sale to a management company or another purpose, or you’re selling a minority interest or non-controlling interest to a physician or a physician practice, these approaches are all standard from the valuation perspective.

The market approach is probably what most people have heard about in the surgery center space, which is a multiple of EBITDA less percent of funded debt. I put the percent there because you only take the percent you are selling and then subtract that from the multiple of EBITDA. For minority interest, you typically see the 2-3.5x EBITDA range, with probably 2.5x being the median. How we decide where a center falls on that range really depends on the different factors within the ASC, such as are the physicians locked in with non-competes so they can’t go and have other ownership in other ASCs or maybe have some management responsibilities under a co-management agreement with a hospital department, what type of specialties, how many physicians are locked in, etc.

It really has to do with the same things the income approach deals with. That is, what are the expected future returns on your investment and what are the risks that you actually achieve those returns? This is generally done through cash flow. From the ASC perspective, this is mostly distributions and maybe some form of capital gains. What we will do under an income approach is look at the projected future cash flows of the business and present value that’s based on some risk factor, which is actually the inverse of a multiple. So if we’re using a 15 percent risk factor, that’s about a 6.5 multiple, and then come down to a multiple that’s more applicable to a physician interest, which is generally a non-controlling and non-marketable interest. We reduce that amount by a certain percent for the fact that you can’t easily market the interest or the fact that the physician, at maybe a 2 percent or 5 percent interest, really doesn’t have control of the operations of the center.

From the minority interest perspective, the asset approach is generally not applicable because the minority shareholders are unable to liquidate the assets or change the way controlling shareholders utilize those assets. When we would use the asset approach is generally when a business is losing money or has significant asset holdings, like a real estate holding company. Just because a center’s losing money doesn’t mean I can actually go and buy an interest and then all of a sudden turn this center around. If I buy a 2 percent or 5 percent interest, if there’s a 51 percent owner, like a hospital, management company or just one physician, they can continue to manage that business any way they want and there is no ability for us to liquidate those assets.

So even if your center is in a certificate of need state, at the end of the day if you don’t have the ability to turn that business around, even if you can use that CON for a profitable ASC because it’s needed in the market and for some reason your center is underutilized or maybe had too high of an overhead or something causing it to lose money, a CON really doesn’t have as much value as it would in a controlling interest. So maybe a CON is worth $500,000 or $1 million under a controlling interest because even though the business is losing money, you can take that and turn it around and look at your market. From a non-controlling interest, it’s really not worth that much because if I bought 5 percent, there’s really nothing I can do to make the 51 percent owner change the business. Some of that has to do with how it’s written in your operating agreement, some of it has to do with state law and what the owner can do from forcing the controlling shareholder to operate in a different matter under state law. At the end of the day, we follow these same approaches and we come up with the value based on the same facts.

Q: What can an ASC do to lower the cost of the shares or units being sold? Why would a center want to devalue its shares?

CB: Valuation primarily has to do with a few things. One is projected cash flow, two is the risk associated with achieving those cash flows and then three is debt. What we see when we’re looking at the projected cash flow and the expected rate of return on that cash flow is that you may have the value of an interest for a physician that gets to be pretty high. That might be $50,000, $100,000 or even higher than that. The idea with that is I’m going to put in money today and I’m going to get a significant amount of money out and I’m going to get a decent return on my investment and that’s how things need to be looked at from a fair market value (FMV) standard.

The issue you get into is a new physician is recruited to the market and they have the choice of going down the street and investing $15,000 into a new ASC or it may cost $100,000, which they may not be able to afford, to buy into your center. That’s always the challenge from the valuation perspective.

So the question then is how do you lower that $100,000 and what would the liquidation value of ambulatory surgery center be? You can do certain types of leases. You’re getting cash out of the business by entering into leases, whether it’s with a third party, or if you just create a separate company to own the real estate and lease it back, or to own the equipment and lease it back, or to employ the staff and lease the staff to the ASC. You can take on more debt and make distributions to the current owners before the investment. So really anything you can do to decrease the cash flow and increase the debt before the investment allows you to lower the amount.

From the regulatory perspective, one of the OIG’s (Office of Inspector General) main concerns is a physician earning too high of a return on their investment. They don’t want to see someone put in very little money and then all of a sudden make a windfall off of their investment and do it just because they’re referring to an entity. That is a concern of the OIG’s, so you need to make sure it’s all above board and that the value is correct, even taking into account any different strategies to help lower the value of the unit.

Q: When should an ASC recruit physicians, undergo syndication or re-syndication?

BR: ASCs sometimes look at physician recruitment as a one-time “event,” carried out at some stage in the development which can later be forgotten about during the center’s day-to-day operation. The most successful surgery centers understand and make recruitment an ongoing process. For some centers, this will be a paradigm shift and one that they will need to make. The market is changing, and those centers that do not adapt will not survive.

If you are not at 100 percent utilization and your goal is to grow the center, you should always be recruiting. Each dollar of revenue — once you are at breakeven point — can add up to between $.65 and $.80 of profit to the bottom line. Successful recruitment campaigns are as, if not more, important to the success of your ASC than strong payor contracts and business best practices.

The most successful surgery centers have owners that have adopted a physician recruitment mindset. A large part of your administrator’s job needs to be ongoing physician recruitment. I would say at least 20 percent of their time needs to be in the field meeting and recruiting new physicians; this is in addition to the physician partners recruiting as well. There should not be anything going on as far as which physician is doing his/her cases where in the market that the administrator does not know about. Nothing! But that takes commitment and a lot of work.

Remember that each additional dollar of revenue can add up to between $.65 and $0.80 of profit to the bottom line once an ASC achieves breakeven financial status. Each partner needs to keep that in mind when considering how physician recruitment results in increased patient volume and profitability. Their ultimate conclusion will be that case load recruiting is a highly profitable investment of their time.

Syndication can primarily take on one of two forms: (1) syndication of a “de novo” or startup ASC; or (2) selling interests in an existing ASC to physician utilizers or potential utilizers.

The sale of ownership interests to physicians who bring cases to the ASC is an important factor in determining an ASC’s success. Selling equity interests in the ASC to physicians who regularly use the facility strengthens their relationship to the surgery center. Also, physician ownership is often a prerequisite to consummating a sale of the surgery center.

Leading up to a sale of the surgery center is another optimal time to syndicate. Adding 100 cases a month of pain to your orthopedic ASC could help you receive double digit multiple of trailing EBITDA.

Q: What are some of the regulatory risks associated with physician recruitment and syndication?

CB: You have the anti-kickback law or statute. It does require that the transaction be enacted at fair market value (FMV). Some transactions can be below FMV, some can be above FMV depending upon whether you’re buying or selling, and that’s really a question more for your attorney on whether you’re okay not actually being at FMV. Most of the time things are transacted at FMV, and FMV generally means willing buyer, willing seller with knowledge of the transaction, which means you can’t just start ignoring certain facts such as this physician does 200 cases in the center and he’s looking to buy the interest, therefore I’m going to ignore his 200 cases. That would be specific to that buyer, whereas from the FMV perspective you have to look at what if any ophthalmologist is buying that class A ownership, not just a specific ophthalmologist who is already in the center.

From the syndication perspective, I think another very interesting thing to point out and emphasize is that you can’t just go and sell your interest based on your level of referrals. Doctor A does 500 cases, Doctor B does 250 cases, therefore Doctor A gets 5 percent, Doctor B gets 2.5 percent. From the legal perspective, you have to offer the five percent to all doctors. If Doctor A ends up buying 5 percent, and Doctor B ends up buying 2.5 percent, that’s fine, but you can’t just offer 5 percent to one, 2.5 to the other. It needs to be on the same level.


Blayne Rush, president of Ambulatory Alliances, is an SEC-registered and FINRA-licensed investment banker. He specializes in ASC brokerage; ambulatory surgery center turnarounds and increasing ASC valuations through physician recruitment and syndications; and access to the capital markets and capital structuring consulting for surgery centers, urgent care centers and radiation oncology centers.

Curtis H. Bernstein, ASA, CPA/ABV, CVA, MBA, is managing director of Sinaiko Healthcare Consulting. He specializes in providing valuation, transaction advisory, strategic and operational consulting services to clients. He has extensive experience working closely with hospital systems, physician groups, ASCs and other healthcare providers.


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