5 Common Questions on Ambulatory Surgery Center Transactions: Q&A with Blayne Rush and Curtis Bernstein

Blayne Rush, president of Ambulatory Alliances, and Curtis H. Bernstein, managing director of Altegra Health, tackle five common questions associated with ambulatory surgery center (ASC) transactions.

Q: What did you see as the typical pricing of deals in 2012? Where do you seem them in 2013?

Curtis Bernstein: With regard to deals, I think things have stayed fairly consistent in 2012. A lot of the larger players are looking for good deals, good centers that are well syndicated and have a good mix of specialties and case volume.

We still have some buyers out there who are willing to look at out-of-network (OON) centers, and are still making similar adjustments to that revenue stream with the risk associated with being OON depending on the level of OON cases within the center.

We’ve seen prices maybe increase a little bit in 2012, but it’s been pretty consistent as far as multiple ranges have gone — your typical 5-7x EBITDA has stayed the same. We’ve seen better opportunities for sales of centers that maybe have not operated as well as they could have where the buyer can improve on the operations, but you already have a solid case mix and operations there.

As far as 2013 is concerned, we continue to see more interest in the space. Ambulatory surgery is a low-cost provider. We’re starting to see a little more private equity. We’ve had some consolidation on the buyer’s side with some of the larger buyers being brought together over the last few years and driving down a little bit more of the larger competition, but we still see a number of smaller players in the market as well.

We also see hospitals continue to come into the space. They’re doing physician integration deals where they’re buying practices. A lot of our clients are looking into primary care and are a little hesitant to buy specialists. When they get the specialists involved, they may also be buying the ASC, even in certificate of need (CON) states. We had a deal recently in Washington where the doctor also owned the surgery center, so the whole package kind of came together for the health system.

I’m sure we’ll continue to see more of that and then some alternative structures to keep the doctors, and maybe even management companies, involved in the centers the hospitals buy.

Blayne Rush: The numbers for the most part are consistent, but the difference is that you might see an uptick or two on price for centers that have more competition or are considered more attractive to buyers.

I think the biggest difference as far as the pricing goes is that you’re seeing more centers trade at the higher end of their profile range. So the very attractive centers are at the top of all of those ranges, and there are more centers that are turning at that higher point. Riskier deals are being more consistently bought and traded at the higher end of their ranges, so I think that’s the biggest difference as far as the pricing goes. There’s still a significant amount of competition out there. While there are some management companies on the market now for larger management companies to buy them, there are still significant players in the market creating competition, which causes an increase in the pricing.


Q: Do you see more or less interested buyers competing for deals than a year ago?

CB: We’re now starting to see a little bit of an increase. As mentioned, some of the consolidation of the players in the market may have driven down the number of buyers, but at the same time, now we’re seeing some of the more regional players come in that some of the larger health systems have had relationships over the last year. I’ve seen some of those larger health systems get a little more aggressive trying to get more involved in ambulatory surgery deals. Some of those systems have been involved with management companies or may be out there on their own trying to do deals in their markets.

On the physician integration side, we’re seeing some health systems going after ASCs are part of the whole physician acquisition/buying the practice trend. We’re starting to see a little more of an uptick now where we may have seen some consolidation for the last two years.


Q: As far as selling a surgery center, what did you see that was different last year compared to years past? What do you foresee for 2013?

BR: The market in 2012 started out a little slow, but heated up towards the end of the year. That has continued and we believe it will get hotter as we move through 2013. The deals that we have historically referred to as very attractive are becoming harder to come by. All of the buyers — the minority-interest investor buyers and the majority-interest investor buyers — want to look at those deals, and those competing bids are driving prices for those centers up. When you start to look at deals for OON centers, the potential buyers are going down, but we have some creative solutions that we can explore. Over the recent past, the buyer pool for the smaller, single-specialty, 1-2 physicians centers has not been great. That is changing some. We are seeing competition for the centers with that profile that are able to articulate a growth strategy and present confirming evidence.

Additionally, the default for ASC management companies has been that they want to come in and lock the seller with a letter of intent that has a no-shop or stand still agreement in it, with the purchase contingent upon the management company’s ability to recruit surgeons or syndicate. I have never liked that process and we have seen more buyers willing to purchase a center prior to syndication; in other words, they would close on the transaction and then recruit physicians and syndicate. This is a change, but the center must be able to articulate growth and defend why they have not already taken that course of action, then prove it up, which is easier said than done.

Some of the traditional majority-interest buyers that have focused on healthier centers, if you will, have been willing to take minority positions in centers that need some work if they are in markets that present solid futures, such as CON states and licensure states that have recruitable physicians. This can give the selling physicians two bites at the apple if you structure the deal with put options and possible drag along rights to keep the management company’s valuation honest. Again, you will need to be able to convey the message and then prove it.

We also are seeing and will see more consolidation among the ASC management companies, which we believe will create some opportunity for new management companies to form.


Q: Who are the typical buyers and what are they looking for in a center/deal?

CB: I don’t think there really is a typical buyer; it just depends on the situation. If it’s a fully owned physicians’ center, we’re seeing a bunch of different buyers. The management companies are looking for those and looking for the best centers that are syndicated correctly: there are non-competes, financial interest, a good case mix a good volume mix a good payor mix, and they have capacity to grow and ability to improve operations. These are all great things.

We are seeing more of the larger health systems that may be looking at going out and buying ASCs being a little bit more aggressive. Some of the larger systems are acting more like management companies. Where they used to just be looking in the areas in which their hospitals operated, now they’re going out and looking essentially anywhere they can to operate. Management companies would love to have centers in areas where they have a number of other centers so they have some negotiating clout, but they’re willing to buy outside of those areas as well.

It really just varies depending upon the type of center. At this point, we’re seeing management companies ramping up, obviously interested in the better centers and willing to take the opportunities on de novo centers, OON and other centers where they may have to do a little more work.


Q: What are some strategies that ASCs can take to best position themselves to compete now and in the future?

BR: You must shore up your leadership team both from the business side and the physician side. Surgery centers must have strong administrators and physician managers in order to drive a successful business. The leadership should be engaged on the surgery center’s growth, costs, and quality of care because its takes great leadership to be successful.

One of the greatest virtues of the surgery center environment is that it is very different from the hospital environment, especially when it comes to accessing leadership at the top. Hospital CEOs may seem out of reach for surgeons who need to discuss an issue or make a change, but surgery center administrators are often right around the corner and able to address requests quickly, but they must have the capabilities. If your leadership is weak, your ASC will always be weak. Replace them now. If it is from the surgeon’s side, even if they are the majority owners, if they are the weak link, have that direct and crucial conversation now.

We all know that the success of an ASC hinges on the center’s ability to attract and grow the necessary volume of cases. Generally speaking, there are two avenues that ASCs obtain their patients: directly and indirectly through referrals.

A key determinate of success for management companies is growth in same-store sales. For standalone ASCs it is the growth of your center. This continues to be a problem. If you look at the surgery center management companies that are for sale and at some of the individual ASCs, this has been one of the issues that potential buyers are seeing. This must be addressed. You must help your surgeons grow their practices and help them stay independent. Surviving and thriving depends on it. So let’s discuss some strategies that ASCs and ASC management companies can take to best position themselves to compete now and in the future — this is the future of ASCs.

Same-store growth can be attributed to a few key elements within each of your centers: 1) ability to expand service lines and attract higher acuity cases, 2) ability to help existing physicians  increase individual case volume, and 3) ability to expand the physician base via the physician recruitment efforts. Those are not new, but let’s take a peek behind the curtain as to what could be different.

It has been quoted that about 60% of U.S. companies are self-funded rather than traditional insurance, and more are moving towards self-funding because of the Affordable Care Act. I perceive that to be a little high, but the point is that this is an opportunity. This allows employers and their third-party administrators to be flexible and very creative in exploring new ways to manage costs. Your ASC and ASC management companies are natural fits for self-funded employers and their administrators. If you have a center of excellence, you can market that directly to the employers and negotiate global prices for preferred status or even exclusivity. They will even pay for the travel to your center, so think outside your local market. Additionally, think about having these employers become a partner in your surgery center; have multiple employers invest in your center. Be a trend leader, not a follower.

There is a war going on to control primary care physicians in most markets. As hospitals and health systems move toward buying physician practices and accountable care organization (ACO) participation, many standalone ASCs are worried that they will be excluded. I encourage you to give significant thought to how to help keep physicians independent and what you can do to serve them, both surgeons and primary care physicians. Even if the primary care doctors are part of a network, hospital-owned ASCs and physician networks are not fully integrated and there are still independent primary care physician groups, thus giving freestanding ASCs time to develop relationships with primary care providers.

Some of the ways to establish strategic alliances with primary care that we have seen are along the lines of helping those primary care physicians make money that will in turn help them stay independent. For example, we have seen surgery center open houses with continuing medical education presentations that have topics of how a primary care group can make money built into it. Some primary care physicians believe specialists have been greedy with all of the ancillaries, etc. Be different; some of this will require the surgeons to give up some of their revenue-enhancing model, but it will help with establishing the alliances that you are looking for. Educate the primary care groups on how they can provide the patient workups, setup labs relationships, do the MRIs, etc.

I know that some hospitals have management companies made up of physicians that are primary care; this is also being done for ASCs. Is there a primary care group that is still independent in your market? If so, they can help manage your ASC, doing the billing and collecting. This will give them a chance to understand what a great resource you are for their patients.

Teach the primary care physicians how to do procedures and then have a designated expert supervise the patients’ primary care provider doing the procedures in your ASC. I know one program where the expert — such as a general surgeons, gastroenterologists or colorectal surgeons — teaches the primary care doctors how to do endoscopies, then the expert supervises the primary care physician doing the procedure in the ASC. This program has outcome studies led by a well-respected medical school that states their outcomes are better than most GI centers. Can this be done with other procedures? You get the facility fee and a relationship with a primary care, the primary care physicians get to bill for the procedure, and the expert also bills as the assistant. Patient care and experience improves because it is their long established primary care doctor.

The point is if you help the primary care providers grow their business, you will establish a strategic alliance with them and, in turn, they will trust you with more of their patients’ care.

Another method is physician recruitment. I know this has been beat to death and you do not have any free agents in your market. I get it, but I would challenge you to think about it a little differently. I am of the opinion that even with management companies, there is an overall weakness in this area. I am a little biased because we do this and I have been involved with headhunting for over a dozen years, but I have seen it up close over and over.

There are a few management companies that are currently looking to be bought by larger management companies or financial buyers. One of the issues that continues to come up during due diligence is same-store growth, which relates greatly to internal and external case load recruiting. I have quizzed management companies and many of them do not have a dedicated team that is structured in the mold of headhunters that are physician recruiters. I believe that they must improve in this area as well as independent ASCs. The program should be modeled around the headhunter models in that a physician recruiter should be responsible for knowing everything that goes on in the market that they are recruiting. They should keep in touch with all of the surgeons, the nurses in their offices, the practice administrators, etc. to understand who is coming and who is going, who is recruitable, etc.

Over the past few years, there has been a trend of increasing consumerism in healthcare. We live in a more informed society: more people are seeking knowledge and an understanding of their issue and their providers, they are absorbing more of the healthcare cost, and more self-insured employers exist. You must think of patients as customers and look at your practices as a consumer market. These patients make decisions based on price, quality and convenience. This gives you a significant opportunity in direct-to-patient marketing.

While this has been done successfully by some in the ASC marketplace, it has been slow to be adopted. Direct-to-patient marketing has been proven to work. There is no greater example of the power of direct-to-patient marketing than the pharmaceutical industry, dentists and chiropractors. You can also see some examples by looking at bariatric surgeons, LASIK surgeons and some spine surgeons. If you have the patients, you will control the surgeon. If you have patients to refer, then you can recruit doctors and you will help your surgeons stay independent from hospital employment. I have an ASC that I am currently selling that has built a strong direct-to-patient marketing program for bariatrics and that intellectual capital and program is one reason that this center is attractive to a couple of the buyers vying for this center. They can roll this program out across some of their other centers and for other sub-specialties. In this particular center, they have one person responsible for leading both physician recruitment and the direct-to-consumer marketing. They also have a call center of one person that handles the calls from the marketing.

The days where the local primary care would refer to the specialist are still here, but with the growing number being employed by hospitals that is eroding. Healthcare is a business and businesses have marketing. Since we have an opportunity to capture the patient before they go to their primary care doctor or their specialist, you can influence the patients’ decisions and be a destination surgery center of excellence.

To recap: you need to align yourself with primary care physicians and help keep the independent ones independent. You need to help your surgeons stay independent. You need to establish a stronger physician recruitment program and look to the headhunting model as well as establish a direct-to-patient marketing program, and work to establish strategic alliances with payors and employers.


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 the managing director of Altegra Health. 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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