How should an ASC handle underperforming surgeons?

Underperforming physicians are a problem in most centers. Once upon a time, a surgery center had 20 to 30 partners, but only a few were truly committed to the ASC and used it exclusively for their cases. Times have changed and those committed physicians are increasingly getting upset with the underperforming physicians and those underperforming physicians reduce the value of the surgery center in the eyes of the buyers.

Even though we are discussing this in the context of preparing your surgery center for sale, we believe that you need to constantly reevaluate the ownership structure of your facility to reflect its current users. This will help keep the incentives of the owners properly aligned to maximize the ASC’s value, which puts your center in the best light for an acquisition.

Fairness and group persuasion might be the best and easiest ways to convince partners to sell some or all of their shares. Have someone, or a group of someones, approach the offending physicians and ask them to sell their shares. There are two ways to redeem the outgoing physician’s shares.

  • An existing physician or physicians can purchase ┬áthem.
  • The ASC can purchase the shares from the selling physician. When the ASC is buying back the shares, it typically holds them until a new physician-investor is identified, and then the ASC sells the shares to the new physician.
  • A new physician-investor can purchase the shares directly from the selling physician.

Most ASC documents have agreements in them whereas all partners must fulfill the one-third test, which means that for a physician owner, one-third of his income derived from performing outpatient surgery  must be performed at the surgery center in which he has an ownership stake. The ASC safe harbors. If the physicians are not adhering to that, the typical agreement allows for removal for non-compliance by some method.

Additionally many ASC documents have the “no cause” termination or defaulting partnership provision within them, enabling a vote be it the board or a supermajority of owners (usually 65 percent to 80 percent) to remove an owner for any or no reason or because of a defaulting event.

If your operating agreement doesn’t contain any of these and you are looking at this in the preparing to sale context, you should be able to squeeze them out by their paying FMV for their shares and not being allowed to be part of the new company that you would create with the buyers and with the docs that are committed to the surgery center.

Remember, this is general information and you need to be working with your lawyer to execute this.

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Category: Selling My Ambulatory Surgical Center
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