What are some of the regulatory risks associated with physician recruitment and syndications?

Note that we aren’t lawyers, thus you need to work with your lawyer on this. This is from the perspective of an SEC registered and FINRA Licensed Investment Banker as well as a Securities Principle responsible for the supervision of Investment Bankers and their activities. You need to be aware that syndication involves the sale of securities-whether you are selling shares, or LLC Units or limited partnership units. Federal and state securities laws determine the manner in which the offering and sale of ownership interest must be conducted. Additionally securities laws control who can affect the sale of securities and how. There is a white paper and a few articles around this very important but not well understood law that are posted on the Ambulatory Alliances website. To ensure compliance with the securities laws, syndication almost always involve some form of disclosure documents, whether an offering memorandum, purchase agreement or similar instrument. The primary purpose of such a document is to fulfill the disclosure requirements of the Securities Act, while serving as a shield against any future charges of violating the antifraud provision of the securities laws. The documents will serve as an outline of the transaction and a tool for marketing the offering. The gist of the documents is to ensure you have an educated buyer, educated in the sense that they know what they are getting into. With secondary offerings, even though one physician is selling some of their shares to another physician you need to make sure that the second physician is fully informed by giving them copies of all of the original documents and updated documents such as current ownership percentages, updated financials including any debt instruments, updated disclosure documents etc. Additionally, we have seen some doctors trade these securities often. The securities laws as well as all of the transaction documents mimic the laws and state something along the lines of- you acknowledge that the purchase of the securities is for the investment intent and not for resale. The securities must come to rest in the hands of the investor. Different states have different interpretations or safe harbors so to speak as to how long a physician must own the security before they can resell it. That is why when we do a resyndication, before executing an exit strategy we make sure the securities have come to rest and we are very careful. In some cases around the above we have advised clients in certain situations that warrant it that they can write the state securities administrators and ask for a “no action letter”, which is a letter to the state securities administrator or SEC for that matter explaining the action asking if the staff...

What does an ASC need to do to syndicate to new physicians?

The preparation all depends on what stage of the life cycle that the surgery center is in and if it is a primary or secondary offering, but a good bit of the process is the same, so here is what you need to do to syndicate to new physicians. You need to be aware that syndication involves the sale of securities-whether you are selling shares, or LLC Units or limited partnership units. Federal and state securities laws determine the manner in which the offering and sale of ownership interest must be conducted. Additionally securities laws control who can affect the sale of securities and how. To ensure compliance with the securities laws, syndication almost always involve some form of disclosure documents, whether an offering memorandum, purchase agreement or similar instrument. The primary purpose of such a document is to fulfill the disclosure requirements of the Securities Act, while serving as a shield against any future charges of violating the anti-fraud provision of the securities laws. The documents will serve as an outline of the transaction and a tool for marketing the offering. The gist of the documents is to ensure you have an educated buyer, educated in the sense that they know what they are getting into. If this is a primary offering you will need to get the offering documents 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 share holder sells their units and gets the money, you want to collect copies of the original offering documents, current financials, any contracts, debt etc. Because we give copies of all of the original documents that the current owner was given with update financial, case load, 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. Review your governing documents. You need to understand what the document state. You might need to update them for various reason 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 rain maker 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....

What do buyers typically do after they purchase an ASC to improve it? Can an ASC do any of that prior to the sale to increase the value of the center?

The actions that buyers of your surgery center would look at and possibly make adjustments to for improvements all relate to value drivers. More specifically they will look for every way to decrease cost, increase revenue and increase efficiencies. Even in the most advantageous market, many owners of ASCs leave substantial money on the table when they sell their surgery center — most often because they do not truly have a handle on what they can do to maximize the multiplier basis (the metric buyers use to multiply and get a final price) or they don’t want to invest the required time and effort. However, the buyer will take the time and effort to make these changes after they purchase your center. So the question is do you want a multiple of the profit derived from the changes or do you want a percentage of those changes that you will get after the buyer makes the changes? Examples: Look at your staffing levels and cost right size that. Look at your cost per OR min and see if you can gain any efficiencies there. Supply cost-surgery centers can reduce surgical supply costs by consolidating suppliers. As a standalone center you can push for price reduction, but an investor that has multiple surgery centers can typically get a better supply cost. You want to perform an analysis on the different suppliers currently used at the surgery center, this will help the materials manager identify which cases use the most supplies — often also the cases that are performed most frequently at the center — and work on cutting the number of companies from several down to one or two if you can get that price down by doing so. You need to know what you are spending per item for surgical cases. Many centers don’t track spending levels deeply enough and as a result there are lost profits. Physician preference items often cost the surgery center a great deal if the physicians don’t partner with the ASC to reduce materials costs. Make needed adjustments. As you determine which suppliers have the best deals, work with surgeons to consolidate their preference items for the lowest cost high quality provider. Benchmark your costs against yourself and others.There are many benchmark surveys for most of the categories that you can turn to if need be. Renegotiate your lease on the ASC space, equipment etc. Renegotiate vendor agreements-all of them! Renegotiate third party payor agreements-even if you have a year left. New cases are the lifeblood of a successful ASC. Ask each partner and physician that is doing cases in your center if there are any cases that they could bring to the center that they are currently taking...

How should a physician go about getting buy-in from partners?

It cannot be stressed enough how important it is to have candid and open communication with all parties. Deals have blown up at the 11th hour or in the red zone (to use a football term) because of trust, when it could have been prevented with better buy-in and consistent OVERcommunication. Some of the pros to selling your surgery center (a huge part of getting partner buy-ins):  Convert future income into today’s dollars with advantageous tax rate-pay capital gains rates today rather than income rates over time. Take money off the table and diversify your investments. Reduce your risk exposure and debt-no one has a crystal ball to see what the future holds, all business ownership carries risk. Better management, contracts, pricing, improved physician recruitment, efficiencies. In some cases you get your life back, meaning someone else is responsible for the IT problems, personal problems, replacing that nurse of office staff, etc. and you can concentrate on practicing medicine. Some of the cons of selling your surgery center are: You are no long the only decision maker; now you have a corporate partner. Have to pay management fees, and in some cases pay even if you are not making a profit. You have to share the future performance of the center. You might have chosen the wrong partner and they may not benefit you long term. You need to speak with the partners and discuss the pros and cons of selling your ambulatory surgery center and keep them informed throughout the process in order to keep that buy-in. This needs to be spoken about early on and not held until later in the process or it can kill the deal. Buyers want partners who are serious about the transaction, can make decisions and know what they want and do not want. Do not wait until you are in the negotiation stage to educate and get the buy-in of your physicians. You do not want them learning about this piecemeal though half-true rumors, which leads to assumptions and...

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  them. 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...