Tuesday, August 20, 2024

Part 4:
Ambulatory Surgery Centers Investment

by Dr. Shakeel Ahmed

Part 4 of a 6 Part Series

For parts 1, 2, and 3 of this series please visit PhysiciansOfficeResource.com/articles 

The nuanced and specialized process of buying into an Ambulatory Surgery Center (ASC) is a venture often reserved for a select group of medical professionals, predominantly surgeons. Unlike general medical investments, ASCs offer a unique opportunity that combines clinical expertise with entrepreneurial acumen. The decision to invest in an ASC goes beyond financial metrics and requires an understanding of the clinical landscape, regulatory environment, and operational intricacies of outpatient surgical facilities.

Buying into an ASC is a decision that requires careful consideration and a thorough understanding of the landscape. As a prospective investor or medical professional, you're entering a dynamic and evolving industry where outpatient surgeries are increasingly favored due to their efficiency and cost-effectiveness. 

Long considered the pinnacle of business achievement in the field of surgery, it is the end goal that all surgeons aspire to reach. There is no higher peak to reach. There is no other milestone after this in your march to financial nirvana. 

For the novice investor, ambulatory surgery centers are analogous to mini hospitals. They conduct elective outpatient surgeries in a safe and effective environment at half the cost of your local hospitals. Imagine the allure, both to patients and to insurance companies. 

Before we discuss ownership and investment in ambulatory surgery centers, let me dispel a very commonly discussed myth in the industry: namely, that only surgeons can have ownership in surgery

centers. The truth is that anyone, from general physicians to generic investors to the pizza boy can own shares in an ASC. A quick review of ASC owners around the country would reveal that the vast majority of these entities are owned by nonphysician corporations. 

The key is to comply with all federal Anti-Kickback Statutes and safe harbors as an investor/owner. This in itself is a whole book of a topic, and I would strongly suggest partaking in legal advice and counsel should you as a nonphysician walk down this path. The path has its riches, so be open to it.

Having developed and operated close to a dozen ambulatory surgery centers over the last two decades, I can discuss the topic for hours, but to keep things succinct, here is a brief overview of ASC ownership. For a comprehensive discussion on the topic, please refer to my books on the topic, since a detailed opinion on this venture is beyond the scope of this article. Parts of this article are borrowed from chapters of my works. 

Buying into an ASC is by far the most contentious step in the medical business. By this, I mean that it will make or break friendships and partnerships, test your patience and allegiances, perhaps even cost you referrals and consults, and add more headaches to your plate than you can ever handle. Nothing that is important is ever easy, but having said that, if this aspect of the business is navigated rightly and justly, the dividends are enormous. Why the contentiousness? What’s all the fuss about? 

“Something happens when you feel ownership. You no longer act like a spectator or consumer because you’re an owner. Faith is at its best when it’s that way too. It’s best lived when it’s owned.”

—Bob Goff 

Money. And power. The offerings of ASC ownership are an elective decision, and with them bring the utmost prestige and power in the field of healthcare. This means it may not be part of any strategy your partner or even your family anticipated when they signed on. It’s more than “to each his own,” because it represents an investment into a new anchor of allegiance. You’ll be getting more to own in the “to each his own” department and any of your associates or usual comrades-in-arms in the trenches of medicine may resent it if they’re not fellow owners. 

The Psych Factor 

You’ll be taking sides, with those who share ownership and against those who don’t. At first blush, this may not seem like a big deal.

After all, why should anyone care where you do your surgeries or procedures? As it turns out, a lot of folks do. 

1. Physicians Who Don’t Have Ownership: There are many reasons some physicians may not take advantage of ownership in an ASC. Perhaps it’s a matter of liquidity at the moment, with the cost of purchasing shares coming at an inconvenient financial time. It could be that a physician has personal problems with the ones spearheading the ASC movement. It could be that there are discrete alignments of doctors and groups competing with each other, and ownership would necessitate crossing some vague loyalty line in the sand. Also, doing cases at a new place takes some work. There are the credentialing hassles, the additional meetings, and an ancillary staff different than what you’re accustomed to. There are different standardized forms, scheduling routines around a different set of doctors, and—again—that annoying feeling that you’re putting money into someone else’s pocket besides yours. 

If you think doctors are beyond that pettiness, then you assume that book knowledge or a degree must in some way impact ethics. (Spoiler: it doesn’t.) Resentment at best and overt jealousy at worst—a nonowner knows that any time someone does a case at the ASC, it won’t help him or her at all. You can bet this spills over into an overt conviction not to do cases there, which breeds discord between the case-doers and the case- refusers—partners or not, siblings or not. 

2. Physicians Who Fear Risk: One truism you will learn from ASC ownership is this: there are easier ways to make money in the medical profession than by just seeing patients. True, seeing patients is what makes you the doctor you are, but it sure is nice to have something else running in the background on autopilot that is generating income for you while you slug it out in the troughs of private practice. Those who haven’t learned this truism will spurn offers of ownership for fear of losing money, which begs the next truism: nothing ventured really does mean nothing gained. Sure, you could lose your investment, but typically the worst luck with an ASC is only that you might have to wait longer than anticipated for the return on it. 

3. Hospital-Aligned or Hospital-Loyal Physicians: If a hospital owns a doctor’s practice and is not in a joint venture with the ASC, this requires no explanation. For private doctors, however, many develop an affinity for a particular hospital when they’ve been on staff for a while, served on its committees, or even taken part in its marketing and strategic decisions. This is particularly true when the hospital is a community facility. They will double down on keeping business away from an upstart ASC and encourage their patients to choose, instead, their hospital of choice. 

4. The Pariahs: Whether ownership is offered to everyone or not, there are just some doctors that the rest of the medical community—or the majority of ownership doctors—don’t like, for business, ethical, or even personal reasons. Blackball is an ugly word, but it will happen either overtly or discreetly, and usually for valid reasons. Typical reasons include too many malpractice claims, dishonesty, or a criminal or substance abuse history. (By the way, a valuable tip is that if someone is blackballed on the basis of religion, race, creed, or ethnicity, you should number yourself among the nonowners.) 

5. Specialty-Specific Reasons for Nonparticipation: An ASC that does just cardiovascular or spinal procedures will not see any gynecologists wanting to buy in, and even if they did, the neuro/orthopedic and cardiac specialists wouldn’t want to sell to them, since it would dilute their profit return without their contributing cases to that return. 

6. Psychological Exclusions: Here’s where the psychology really kicks in: if you have a cozy relationship with any of the above non-owning doctors, in the way of favorite consults to you or helping with call arrangements, your consults are going to go way down, and you may find that you lose your very convenient

call-sharing with others in your specialty. It’s not personal; it’s just business. Well, isn’t that convenient! To you, it will be personal.

There will be curt pleasantries in the hallways of the hospital, glares from people you don’t even know, and even snide comments from the ancillary staff. It will become a true us-vs.-them scenario, which should improve over time—and even more quickly if yet another ASC goes up, pushing you down the enemies list. 

7. Nonphysicians: Lastly, would-be purchasers who are not physicians really can’t give back. Being a physician is a stipulation in 65 percent of all United States ASCs. (Ninety percent of United States ASCs have at least some physician ownership.) While physician-owned ASCs often utilize the services of management companies for their administration, in one type of ASC model they never relinquish equity to these companies.

This brings up an interesting consideration: how many different models of ASCs are out there? 

Owning and Co-owning

According to the NIH, there are several types of ownership strategies in the ASC business: 

1. Physician-Owned Solely: This is the majority of ASCs—64 percent. It gives maximum control to the physicians but also comes with the huge challenges of managing the facility itself and difficulty garnering leverage in contractual negotiations with third-party payers. As above, such an ASC may form a contract with a management company for help running the ASC, while not allowing any ownership into it by that company. 

2. Physician-ASC Management Company Joint Venture: A joint venture, by definition, is ownership sharing—that is, co-owning. This means that the physicians may no longer have exclusivity in the control of the ASC at the highest levels. That belongs to the majority owner, and that could either be a physician, some of the physicians, or the corporate entity partnering with the doctors. Even if the physicians hold majority equity, the ASC can still benefit from the expertise offered by the minority-owned management company. Control, however, is usually not a worry, since this particular model of the joint venture was sought, initially, to take advantage of the management company’s administrative talents and decision-making wisdom. Only 4 percent of ASCs are of this type. 

3. Physician-Hospital Joint Venture—The Faustian Bargain: This was inevitable, as minimally invasive surgical technology has transformed what used to be an overnight stay (or several days) in the hospital into same-day/outpatient surgery. The unwieldy operations of a large facility combined with losing market share in this niche service have had success in bringing hospitals into a joint venture approach with physicians, realizing “if you can’t beat ‘em, join ‘em.” 

The ASC is also a streamlined method for screening (e.g., colonoscopy), surgical diagnostics (e.g., laparoscopy), and other short-stay procedures, which in the past have been steady sources of hospital revenue. Hospitals have seen this revenue being lost to more convenient standalone ASCs. Preventative care is always evolving and adding procedures that apply well to the ASC and not so well to hospitals who miss the boat. 

The physician-hospital joint venture ASCs make up 24 percent of the cut of the ASC pie—the second largest after the solely physician-owned model. ASCs are beleaguered with construction costs, management policies, and—no small part of it all—contractual posturing with third-party payers, so having a hospital on your side eliminates much of the administrative drudgery with which the physicians must deal. Allowing better contracts with insurers due to hospital clout and partnering with a powerful hospital also cushions the physicians from financial instability. This venture also allows for physicians to be majority owners as well, as a final safeguard of their independence. One caveat: As the saying goes, “He who rides a tiger can never get off.” The physician owners in quite a few instances end up selling their autonomy and their souls to the larger hospital partners here. 

4. Physician-Hospital-Management Company Three-Way Joint Venture: In this arrangement, each entity brings expertise and capabilities to benefit the whole. However, this is the least likely arrangement seen in ASCs, since this model represents only 1 percent of the ASCs. There must be a reason (or many). The reason could involve the checks and balances when no one entity has majority interest; while checks and balances are a good thing on one level, on another level they may prove quite miserable when one of the three types of owners has a specific ambition not shared by the other two. (More likely, not shared with the other two.) 

5. Hospital-Owned Solely: In this construct, there is no real physician ownership. Hospitals—and everything of which they consist—always need the physicians, so there are associations for true physician ownership. Keeping physicians happy means offering substantial physician participation, possibly linked to a comanagement contract and pro rata revenue remuneration. 

This model is different from all of the other ones because it defies the conventional wisdom of involving physician ownership as a key ingredient. However, it demonstrates that creative associations with physicians, even without ownership, can mutually benefit all involved via physician leadership and their substantial involvement. Nevertheless, can cats and dogs really get along? Cats scratch and dogs bite, and no one is scratch-proof or bite-proof. 

A Question of Balance

While the majority of ASCs are still solely owned by physicians, which gives physicians the benefit of maximum control in spite of also bringing the challenges of management and contracting, there is something of value to be considered within the hospital-owned model as long as a win-win situation can be offered. 

With the changing paradigms of medicine and the field’s robust evolution, more types of ASCs will be invented. Some will work and predominate; others will fail and be discarded. Ultimately, the dollar, fiscal peace between physicians and the other types of owners, and win-win ownership strategies will determine the outcome of how the ASC pie is cut in our future. This assumes, of course, that the primary result continues to be excellent care because without that, no one wins—neither owners nor patients. 

Business is Business

The principles of economics, purchasing, and ownership in an ambulatory surgery center are the same principles that apply to all commerce in general. That is, there is a golden ratio that has emerged from all of the arithmetic. 

A business owner who is in the market to sell his entity or franchise would typically like to receive around three years' worth of net income as the purchase price for that entity. 

If you were in the market to buy a Subway restaurant and the Subway restaurant had a net income of $50,000 a year, a reasonable purchase price for that entity (minus any purchase of hard assets) would be $150,000. Obviously, an ASC is not a Subway restaurant, but the principles of commerce remain the same. Government entities are fully aware of these principles, and in order to avoid the appearance of kickbacks in the ASC business, certain laws have been created that guarantee these principles are followed in their concept. 

EBITDA

One of these laws defines the purchase price of shares in an ASC, which is based upon something called EBITDA. EBITDA stands for Earnings Before Interest, Taxation, Depreciation, and Amortization. In other words, and simply speaking, EBITDA means true net income. The purchase price of a surgery center must be at least three times EBITDA in order to meet the rules of fair trade and avoid any perception of kickbacks. If you’re a novice and getting into the “sport” of investing, buying or selling surgical shares will tempt you to shortcut ahead to what’s most profitable for you and your interests; you may try to haggle over the buying and selling of these shares. Don’t. 

If you are ever sold shares in an ASC at a value that is less than three times EBITDA, federal agencies can perceive that as a kickback, and the implications can be gray for both the buyer and the seller of these shares. When it comes to gray implications and the federal government, the government will assume the black end of the spectrum. 

There’s more. Without digressing, if you buy and sell these shares through an agent that is not qualified to sell ASC shares, you’re again in violation of federal laws, so navigate your people carefully. Other people are watching, and while your people may be the right people, they might also be the wrong people. The spectrum of gray is visualized in the government’s watchful eyes. 

Is this bad? Not really. Most laws—the spirit of the law more than the letter of the law—are designed to fulfill the government’s constitutional mandate of “providing for the public welfare.” Since the books written on providing for the public welfare have gotten very thick over the centuries, ownership in an ASC (in fact, the entire ASC journey) is a learning life event, and there will always be lessons learned the hard way. Being careful can only mitigate the injury from when those lessons come to roost. 

Orange is the New Scrub Green

Let me give you an example of the minimum purchase price blues. If as a surgeon owner, you purchase shares in an ASC whereby the return on your investment is 50 to 60 percent of your initial investment sum, federal agencies can perceive that as a kickback. 

Remember the Anti-Kickback Statute? The federal Anti-Kickback Statute (AKS) (42 U.S .C. § 1320a-7b) is a criminal statute that prohibits the exchange (or offer to exchange) of anything of value, in an effort to induce (or reward) the referral of business reimbursable by federal health care programs. No business venture pays 50 to 60 percent return on investment in a year. In doing so (by definition), the sellers have undersold their shares in order to attract your business, thus violating the Anti-Kickback Statute. 

An unscrupulous or overzealous prosecutor who also happens to be friendly with a competing hospital’s administration may decide to have a secret meeting with only those people who will testify against you—and exclude those who can explain your actions or defend you. There is a name for such a secret meeting: Grand Jury. It is the fertile ground where indictments are handed down. Is it just business? Is it personal? This strains the business vs. personal line of reasoning. 

The only way to get shares without satisfying EBITDA criteria is by inheriting them from a family owner who dies (see below). Still, such a transfer is short-lived, since the operating agreement, rules, and/or regulations will specify certain actions when such a triggering event occurs. 

EBITDA is a One-Way Street

Here’s the good news: there is no upper limit of an EBITDA multiple for the sale or purchase of surgical center shares. While an ASC can’t have share values less than three times EBITDA, there’s no disallowed limit above that number. 

While the qualified surgeon would pay three to four times EBITDA for single-specialty small ASC shares, that purchase price increases exponentially with the number of people buying in, their value to the market, and the age and profitability of the center itself. 

Here are a few examples:

If you are buying shares of a surgery center that has been in business for a few years and has a high EBITDA, your buying share price typically would be between six to eight times EBITDA. For a highly successful surgery center, buying shares of it will invoke a purchase price of ten to twelve times EBITDA, especially for buyers who are not surgeon operators—that is, have no way of bringing business to the surgery center. Good examples (of nonsurgeon operators) are most of the national ASC management companies that purchase shares in an ASC around this level of multiple. 

The same principle applies to selling shares. Most operating agreements don’t have a provision that allows you to sell your shares back to the majority shareowners at the purchase price or at an asking price of your choosing. Most ASC operating agreements have a protective mechanism in place that doesn’t force the consortium of the other owners to buy back your shares at your whim or pleasure…or at your price. Be mindful of that. 

Surgery center ownerships are stronger bonds than marriage. You at least can consider leaving your spouse if it’s not mutually beneficial for both of you. And while there are psychodynamics involved in a dissolution of marriage which go far beyond the community property, there are also psychodynamics involved in separating yourself from an ASC by relinquishing your shares. 

What are those psychodynamics? They are the psychodynamics involved when you start messing with other people’s money. Thus, you can’t just leave ASC ownership at the drop of a hat. It’s a complex process that needs mutual understanding and agreement between seller and purchaser at the outset. Germane to that thorough understanding is validation; surgery center share prices can be determined objectively by involving actuary firms that specialize in evaluating ASCs, and thus, their share prices. The cost is huge, but this needs to be considered when dealing with buy-and-sell events. 

What about a surgery center that isn’t there? A special case is a surgery center under construction or one that is a new build and does not have a historic EBITDA upon which to base the price. In this case, the EBITDA can be calculated by the projected number of referrals by the owners in the surgery center, then multiplied by a traditional EBITDA, to come up with an evaluation price. Another way to do valuation for a surgery center is the cost of the build and a multiplier attached to it. 

To explore the complexity and expense, consider, for example, what legal cost you would entail in the build and for the management of an ASC. Our surgical center franchise in the Midwest has legal bills of roughly $250,000–$300,000 a year. These are legal bills that we incur in navigating compliance issues, buy/sell events, and management of our surgery centers. While this might be a high sum compared to a traditional single ASC, these are the kinds of expenses you will consider when you are in the business. 

These are complex scenarios, and I strongly urge the involvement of healthcare accountants and lawyers when these dealings are made. If not for the complexity, then at least for the legality (see above). 

What about when things get ugly? For physicians, investing in an ASC with share ownership is usually a very good deal. Yet, some physician owners may begin contributing less to the group effort—for example, a physician who retires or dies. Some physicians move away for professional or business reasons. Some physicians are just seen as bad owners for one or many reasons. The reality is that shares are equity, but their equity worth depends on the owner’s worth to the ASC in terms of contributing to the income. ASCs, in their operating agreement, rules, and/or regulations, have safeguards for the prudent transfer of shares from a nonproductive owner to someone who will be productive. 

These safeguards are called triggering events. 

One such triggering event is one which jeopardizes everyone: the one-third rule. If a physician is not doing a third of his or her work at the ASC, the harbor for your boat is no longer a safe one. Since safe harbors make physician-owned ASCs legally possible, this decline in participation could be one such triggering event. 

Other nonregulatory triggering events can be defined within the ownership framework, for instance, the aforementioned retirement or death. Also, residency within a prescribed radius of the ASC can be mandated; obviously, moving several states away will mean not booking cases here when the physician lives there. Thoughtful preplanning within the terms of the operating agreement, rules, and/or regulations will prevent turmoil and establish an orderly way to proceed with the transfer (the buying and selling) of ownership shares. Specific terms can be established, such as whether to offer the forfeited shares to minority owners or to a waiting list of potential owners who want in. Also in this preplanning is structuring how the departing owner will be compensated for seizure of his or her shares. 

Share Aware

I will touch briefly on the types of shares that a surgery center offers. Typically, surgery centers have two types of shares: Type A shares and Type B shares. 

Type A shares, as the name implies from an alphabetical standpoint, have an advantage over Type B shares. Type A shares are typically the controlling partners’ shares and tend to be the shares associated with control and board decisions. Other than that, Type A and Type B shares are similar in nature—even the purchase and selling prices of these shares will be the same. 

Of note, unlike other healthcare entities, the majority owner does not have to own 51 percent of an ASC to control the ASC board and its financial and regulatory backbone. As long as the controlling partner owns the most Type A shares—a plurality ownership—they are in full control of the ASC. Again, do not construe this as legal advice; obtain your own legal counsel when you are navigating this part of the process, because things change so fast that the laws of today may be dated—or even illegal—tomorrow. 

Please note, as I mentioned above, that buying into a surgery center creates a bond stronger than most other relationships in life. There are very few options for an ASC minority shareholder owner to exit an ASC. Conversely, ASC operating agreements have very strong laws in their favor supporting the expulsion of a non-compliant owner member, laws of which the owner members must be fully aware. The most important and notorious of these laws is the one-third rule. 

The one-third rule states that a surgeon has to derive one-third of his income from surgical procedures performed at the surgery center where he is an owner. 

This was a safe harbor created back in the ’90s to document that a surgeon is not using the surgery center as an investment but actually using it as a vehicle for his livelihood. This one-third rule can become quite contentious and has been used repeatedly by ASC majority owners to punitively treat and expel minority shareholders. Most states would uphold this law, and owners have to be fully aware of their commitment to its intent when they purchase into a surgery center. The question I am asked sometimes is, What if a surgeon owns shares in ASCs in two different cities, or for example, New York and New Jersey (two different states)? The law is on the surgeon’s side in these cases, and the one-third law applies to surgical cases in both states, collectively. 

Ownership in an ASC is a responsibility. Divvied up according to buying shares means sharing the profits but also the liabilities. The good and the bad. Done right, however, ASC ownership will tip that balance toward the good in rewarding ways and for the longevity of your career. If you think that you’re savvy enough to do it without help, you’re probably lying. If you feel you need help, you’re smarter than the liars who say they don’t. How much help you will need depends on the contributions from other owners and the professional advice you get. Just remember: you get what you pay for. 

I conclude with David Lee Roth’s sage words: “Money can’t buy you happiness, but it can buy you a yacht big enough to pull up right alongside it.” Navigating and winning your battles in this phase of acquisition translates into more financial grounding for you for years to come.

Spanning two decades, Dr. Shakeel Ahmed, a gastroenterologist turned healthcare mogul, has transformed his vision into the Midwest's leading Ambulatory Surgery Centers network. His dual expertise in medical administration and surgical execution-gained from years of frontline experience-has been pivotal in mastering the complexities of the healthcare sector. Dr. Ahmed's notable contributions extend beyond the ASC sphere; he has played a key role in developing a comprehensive healthcare network, including a range of medical facilities, diagnostic centers, and surgical establishments across several states. His literary contributions includes 6 published books alongside hundreds of articles in prestigious national and international journals. He is a consultant for multiple governments on healthcare development and works as an advisor to various governments across four continents in the establishment of outpatient surgery centers.