Maximizing the Value Creation of Your Center with a Corporate Partner

By: Blayne Rush, MHP, MBA

 

Physician owners of radiation oncology centers are finding that the rules of the game are changing. Sustainable success is getting harder in the face of tougher and changing legislation, lower reimbursement rates, increasing competition from centers that offer newer technologies and have diverse specialty physician ownership, and hospitals. This raises questions about surgery center management.

Meanwhile staffing costs are rising, the management of a radiation oncology center is getting more complex and new technology is leaving some centers behind, putting pressure on physicians to constantly be on the lookout for new methodologies to add to the business.

Radiation oncology center physicians are being required to spend increasingly more time on management, such as marketing the center or recruiting new physicians, to stay as profitable as before. Successful free standing centers may also find themselves approached by investors, such as hospitals and other management companies, which are looking to buy a stake in or form a partnership.

Furthermore, radiation oncology centers are typically not started by just a single physician, but may have several owners. Getting disparate owners to agree on management and issues of corporate strategy can be time consuming, taking away valuable resources needed for the business of medical care, if you can get them to agree at all.

The Case for Corporate Partners – Who is the Better Owner?

In an increasingly competitive time, physician owners should ask the following question: who is the better owner of their business?

Are they able to add value to their business better than anyone else can?

OR

Will they, by partnering with a corporate partner, be able to get financial leverage to stay ahead of the technology curve, increase utilization and be run as a growth business to secure annual profits of between 25-55%?

OR

Have a corporate partner which can take over the day-to-day minutiae of running the business, manage billing and collections, negotiate better reimbursement rates,  and leverage lower equipment and staffing costs?

Viewing their future through the perspective of who is the better owner also means looking at corporate partners beyond traditional possibilities in the medical field, such as a hospital. The field of possibilities should include non-traditional parties such as a private equity firm and strategic partners that can integrate your center vertically or horizontally, which will bring a performance culture and business experience to maximize efficiency and profitability.

Characteristics of Potential Corporate Partners

The better owner or potential corporate partner should have a range of distinct advantages:

  • Unique and valuable linkages with other centers
  • Distinctive managerial skills that can be replicated
  • Better corporate governance, strategizing for gains in long-term value
  • Access to talent, skills and capital
  • Proven ability to lower cost of expansion

As first owners of the radiation oncology center, physicians bring zeal, passion and determination to their center. As the centers grow, it will need professional managers to not only ensure continued success, but also to sustain growth that keeps pace with the most aggressive in the business. However, many physician owners are concerned that having a corporate partner implies losing independence and having their stake reduced to a minority interest.

Many strategic partners are willing to invest in a minority stake of 20-40%, preserving physicians’ control, but stepping in with needed financing and management expertise. For example, radiation oncology management companies bring a different focus to the business. They have management expertise in day-to-day management, procedures necessary such as development, licensing and accreditation, billing, marketing and long-term development. They have the resources and the business know-how to identify profitable lines of practice or secure better returns by changing the mix of procedures and specialties within an existing radiation oncology business.

A strategic buyer with deep pockets has access to financing to combine several free-standing radiation oncology centers into a full-service, integrated practice that offers patients access to more sophisticated radiation therapies and to both medical oncologists and radiation oncologists.

A corporate partner, such as a successful private equity firm, will bring in much more than just required financing. It has tested management expertise and the financial discipline to implement a longer-range strategy for better returns. For example, just by shifting the focus to a big picture, they are better able to evaluate which new radiation therapies to introduce based on not just professional fees, but a combination of facility fees, changing demand and trends in reimbursement.

An emphasis on performance, an ability to manage costs and capital expenditures creates much greater value than if the radiation oncology center was to be left on its own. Private equity firms have the expertise in creating exit strategies. When the time comes to divest its interest, the private equity firm has linkages to the financial and corporate sectors it can draw on to fetch a significantly higher price and produce excellent returns on initial invested capital by the physicians. For example, after substantial building assets and producing sustainable profits, the private equity firm’s access to capital markets could lead to an initial public offering, an option that most physicians do not have the knowledge and expertise to undertake on their own.

How to Choose

There are various considerations. Some management companies require a fee off the top, others have equity provisions which insist that physician investors have to sell their interests if the management company finds a willing buyer.

The key is to leverage a short list of 3-6 qualified corporate partners to look beyond traditional candidates and find an appropriate fit.

 

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