Your Primer to Healthcare Mergers and Acquisitions

When Is It Time for an ASC To Consider a Strategic Partner?

May 17, 2022

by J. Blake Peart

Volume 9, Issue 10, May 17, 2022

The ambulatory surgery center (ASC) market is changing rapidly. Surviving in the current market is no longer as simple as meeting the needs of the community you serve. Competition among ASCs is now measured through a litmus test of strength based on collateral along with quality standing. These are now the deciding factors that determine winners and losers in the market.

Consider that hospitals and healthcare systems are more aggressively pursuing outpatient surgery strategies that include building and acquiring ASCs as hospitals and systems look to dimmish the impact of the ongoing migration of surgical care out of the inpatient setting and better support value-based care efforts. De novo ASC development is on the rise in markets throughout the country as surgeons, sometimes in a partnership, look to capture that surging volume. Private equity companies are also moving into the ASC space, often through the acquisition of a physician practice or megagroup/supergroup that owns one or more surgery centers.

This increase in competition is placing pressure on independent ASCs and pushing a growing number to consider a strategic partnership. The right partnership can provide an ASC and its physician owners with improved financial stability (in part by reducing the physician owners' financial risks) and access to resources and expertise that can strengthen a center's short- and long-term competitiveness.

This brings us to a question all independent ASCs should ask themselves: When is the right time to consider a strategic partner? For some ASCs, achieving internal stability and growth may be required before considering a strategic partner, but for others, the time is now.

Let's look at nine of the top indicators that a surgery center may want to consider a strategic partnership more seriously.

1. Management of staff disrupts daily operations

Once an ASCs surpasses 20-25 employees, the management of these individuals inevitably becomes more challenging and tedious — especially in the current environment where ASCs, like most other healthcare organizations, are experiencing higher rates of turnover. As the time and resources that must be allocated to staff management increases, it's likely that physician owners will be forced to take on a greater role in the daily operations of the facility and tackle work outside of their normal duties. This can negatively affect surgeons' case volumes, time to dictate (thus delaying billing), and overall satisfaction with the ASC experience.

A strategic partner can introduce human resources support, including providing guidance in recruitment, interviewing, hiring, and training processes; offering insight into benefits options; and helping secure cost savings for stronger benefits packages that can help with recruitment and retention of qualified staff.

2. Paper charting won't cut it anymore

As an ASC grows, so does the quantity of documentation it must complete for billing and compliance. It's only a manner of time before paper charting, which is quickly becoming obsolete, makes management more difficult, increases the risks of falling out of compliance with recordkeeping requirements, and prevents a center from achieving best practices. As documentation quality suffers, ASCs are more likely to be found deficient with regulatory and accreditation standards, and the risk of potential lawsuits concerning lack of proper documentation rises.

Eventually, an ASC will need to transition from paper to electronic records, such as through the adoption of an electronic medical record (EMR) system, and implementation of other software, like patient tracking and analytics.

This brings a potentially significant challenge for ASCs: The startup cost for even the most modest EMR systems can run in the tens of thousands of dollars and bring with them a monthly cost in the thousands of dollars. In addition to this expense, an ASC will need either internal IT support and/or to partner with a managed services provider that can help ensure proper implementation, setup, training, usage, security, and a host of other needs that come with moving to an increase in reliance on technology.

A strategic partner can help an ASC assess its EMR and software options, purchase the technology, and build the IT and personnel infrastructure needed to best ensure proper and maximum usage of the technology.

3. Need to capitalize on supply chain cost reduction

Most vendors discount their products when those products are purchased in bulk volume. A single ASC can only grow so much and perform so many procedures to justify the increased supplies and equipment volume that will move their purchasing power to a higher tier of cost savings. For some procedures, that elevated tier may substantially change the profitability of a procedure.

A single ASC's fortunes in this regard can essentially be changed overnight when a strategic partner brings in a large vendor platform of orders that then ties the ASC to the partner's existing vendor contracts. In addition, some strategic partners have relationships with local hospitals and health systems. This can further add to overall cost savings as well as improved supply and equipment availability, accessibility, and shipping time and decreased order delays.

4. Surgeon recruitment stagnant

Surgeon recruitment is often a key driver for growth and is essential for succession planning. If competition is increasing in an ASC's market, surgeon recruitment may be needed to offset the potential or likelihood of losing non-surgeon owners to a competing facility.

When a privately owned ASC is struggling with recruitment of new surgeons, a strategic partner might be an effective way to break through barriers. The partner may have relationships with practices and other surgeons in the market. The partner may also have a better ability to reach outside of the market and recruit available surgeons to the ASC. The added value the strategic partner brings to the ASC may support the appealing growth, long-term prospects, and strong distributions that available physicians are looking for that may not have been achievable prior to an acquisition. A meaningful distribution program for minority physician partners can help improve recruitment and secure retention of physicians.

5. Identifying growth opportunities but lacking the ability to achieve them

There are tremendous opportunities for ASCs to grow in the current market for reasons we've already noted and others, including the continued outpatient case migration, improvements in technology that are better supporting minimally invasive procedures, and the growing number of patients requiring same-day surgical care. But just because opportunities exist doesn't mean an ASC has the space in its facility or capital to capitalize on them.

A strategic partner can help an ASC move forward with such efforts that may otherwise have been out of reach. Whether an ASC is looking to expand an existing center, build an additional site, relocate to a larger location, or purchase new surgical equipment to support new procedures, specialties, and/or surgeons, a strategic partner can provide the financial support and additional resources to achieve this growth while helping reduce the risk to the physician partners' financial securities.

6. Struggles with revenue cycle performance

One of the many advantages of taking on a strategic partner is the departmental support the partner typically brings to the table. Many strategic partners offer an in-house revenue cycle management service supported by a team of coding, billing, and collections professionals; efficient systems; and policies and procedures that can be adapted by the acquired ASC. For ASCs struggling with their revenue cycle performance, a strategic partner with such a service can help identify and shore up problems and increase efficiency and performance, all while reducing the overall cost associated with running the center's business office.

In addition, a strategic partner with a large ASC platform may be in a position to strengthen managed care contracting. This can translate to an ASC adding new payer contracts and improving the rates and terms of existing contracts.

7. One full year of growth achieved post-COVID-19

An ASC that wants a strategic partner will need a strategic partner that wants the ASC. There are some qualities that strategic partners are increasingly looking for in today's market. One of the most significant presently concerns the pandemic.

ASCs were among the most impacted types of healthcare organizations during the lockdowns in 2020 and the subsequent, gradual reopening. Depending on geographical location and local policies, the individual impact of the public health emergency has varied over the past two-plus years.

In most situations, strategic partners see acquiring a profit-generating ASC much different than purchasing a rebuild (i.e., turnaround) facility. To maximize an ASC's valuation, recovery from the pandemic is important in not only snapshotting a future growth proforma but also demonstrating the stability of the ASC and its physician partners. By showing that it has achieved at least a full year of growth since the declaration of the pandemic, an ASC will enhance its appeal to prospective partners.

A successful year of recovery can support the timing for considering a strategic partner in addition to helping maximize overall valuation, indicating stability within the ASC, and validating the growth opportunities within the geographical location of the facility.

8. Three-to-five-year growth strategy with existing surgeons

A strategic partner typically wants to recoup its expenses within three to five years following the acquisition of an ASC. One of the first assurances a partner is looking for to mitigate its acquisition risk is to see that the ASC has strong surgeon engagement and a robust physician practice(s) that will drive surgical volume to the center.

At a minimum, strategic partners tend to like to see at least three surgeons on the clinical staff who appear committed to the ASC, are eager to bring their strong case volume to the center, and intend to remain on the center's board for at least the next five years. Note: The more surgeons that are affiliated with the ASC and actively performing procedures within the center, the less concerned a strategic partner is likely to be about the near-term prospects of the center.

If physician partners, especially those responsible for a high percentage of an ASC's surgical volume, plan to retire shortly after the acquisition, it becomes much more difficult to sell a center to a strategic partner. A strategic partner wants to assure risk is valuated and the opportunity to build on the ASC can be supported by existing physician involvement as well as a potentially robust physician recruitment process.

9. Surgeons align on moving forward with a strategic partner

To assure a more successful acquisition from a strategic partner, all or at least a vast majority of an ASC's surgeons must be on the same page with the transition. Animosity or tension among the ranks will only cause division and are likely to impede potential opportunities to encourage a strategic partner's interest.

Strategic Partnership: Why Now May Be the Right Time for Your ASC

No one predicted COVID nor could have anticipated the impact it had on ASCs. Now we are faced with a gloomy economy, fear of a recession, and growing interest rates compacted with the unknown risk of another COVID outbreak. Current and potential developments could lead to another devastating impact on surgery centers in the near future. For a growing number of ASCs that have performed a risk analysis on today's market, they've determined that taking on a strategic partner which can mitigate risk while helping facilitate growth is increasingly a worthwhile consideration.

The factors identified above provide an overview of when a company has reached a stage of growth where a strategic partner can deliver significant benefits to an ASC. We've also identified a few of the key qualities that strategic partners are looking for and that should be achieved if a surgery center hopes to secure and be successful with a partnership.

Once an ASC has reached the threshold discussed in most or all the areas highlighted, consideration of a strategic partner may be the most practical next step to more effectively achieve future growth while protecting the investment of the physician partners. If your ASC is at or approaching this stage, consider bringing in outside assistance that can help you spread the word about your interest in a strategic partnership and attract prospective partners to you.

At VERTESS, our team of expert Managing Directors helps ASCs and many other types of healthcare organizations effectively prepare for a transaction, attract and negotiate with potential partners, and secure a sales price that rewards owners for building a successful organization. To learn what we can do for your ASC, reach out and let's talk about the next stage for your center.

J. Blake Peart, CM&AA

J. Blake Peart, CM&AA RRT, CM&AA

Managing Director

Blake has had the opportunity of an extensive and diverse career in healthcare for over twenty years. In the past ten years, he has served as CEO for multiple hospitals of Fortune 500 companies and CEO for several large Ambulatory Surgery Centers. In addition, his operations and business development knowledge have allowed him to experience the entire M&A process from start to finish focusing primarily on private equity transactions. His history as both a CEO and clinician provides a unique perspective based on years of experience and empathy when working with business owners seeking M&A advice. Blake's expertise is in Ambulatory Surgery Centers, Physician Practices, and independent hospital businesses. He is committed to supporting healthcare business owners who select the M&A direction as one who has walked in their shoes. He knows that every transaction is unique and tailored to a seller’s need in getting the best deal and providing a positive experience throughout the entire process.

We can help you with more information on this and related topics. Contact us today!

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