Surgery Center Transactions and Valuation: Thoughts From VMG Health’s Kevin McDonough

Published by Becker's ASC Review At the 9th Annual Orthopedic, Spine and Pain Management-Driven ASC Conference in Chicago, Kevin McDonough, CFA, senior manager with VMG Health, gave a presentation on surgery center transactions, current market analysis and valuations.

Market observations

Mr. McDonough began the presentation by noting the maturation of the ASC industry in recent years. The development of de novo centers has slowed as markets become saturated, and ASCs are more focused on consolidation and cost control than new development. The economic downturn and the sluggish recovery of the economy have put additional pressures on ASCs as patients opt out of elective surgery. Finally, declining reimbursement rates and the uncertainty of healthcare reform have forced ASCs to consider the future of their revenue streams and options for partnership with hospitals and management companies.

ASC industry maturation

Mr. McDonough said the maturation of the ASC industry means growth has leveled off and the number of available physicians per surgery center has declined. The industry has also seen more mergers and consolidations, among both ASCs and surgery center management companies. The last few years have shown a declining growth in ASC development, with just a 2-3 percent increase since 2008. Growth in the number of surgery centers from the largest ASC management companies — including USPI, HCA, NovaMed and AmSurg — has also declined over the last two years. Click here to continue to the full article.

Co-Management Agreements, Compensation & Compliance

Published by ABA Health eSource Hospitals’ critical success factors are shifting towards quality performance benchmarked to national standards. This trend towards improved quality is increasing the need for hospitals to align with physicians since they control the delivery, management, and utilization of clinical services. As a result, many hospitals are involving physicians in various types of service arrangements, such as co-management agreements. It is important to understand that compensating physicians for assisting in the attainment of high quality care must be set at Fair Market Value (“FMV”) and that the terms of the arrangement must be consistent with regulatory guidelines. Failure to do so could result in criminal and/or civil penalties based on healthcare fraud and abuse laws. The following provides an overview and regulatory guidance associated with paying for quality care and specifically addresses co-management agreements.

The Trend - Paying for Quality

Governmental and commercial pay for performance (“P4P”) programs indicate that compensating hospitals for quality care is becoming more common. Perhaps the most relevant regulatory support related to paying for quality care is based on CMS’ P4P pilot project, the Hospital Quality Incentive Demonstration (“HQID”) Program. In 2003, CMS started financially incentivizing hospitals for quality through this P4P program which was launched by CMS and Premier Inc.1HQID includes more than 250 hospitals which are measured on more than 30 standardized and widely accepted care metrics for patients in six clinical areas – heart attack, coronary bypass graft, heart failure, pneumonia, hip and knee replacements, and the Surgical Care Improvement Project. There is not yet a nationwide CMS P4P program; however a CMS national Value Based Purchasing (“VBP”) program is expected soon. On January 7, 2011, CMS released a proposed rule establishing the VBP program which would be mandated under Section 3001 of the Patient Protection and Affordable Care Act (“PPACA”). It is anticipated that the new program will provide value-based incentive payments to hospitals beginning in Fiscal Year 2013, based on their achievement or improvement on a set of quality care measures.4 Similarly, Accountable Care Organizations (“ACOs”), mandated under Section 3022 of PPACA are expected to provide financial incentives for quality outcomes; the proposed rule implementing this provision was published April 7, 2011.5 Finally, history has shown that commercial payors are influenced by governmental initiatives and that the entire industry will most likely continue to see growth in commercial payor P4P programs. Click to continue to the full article.

Physician Compensation: New Complexities and Trends

Published by ImagingBiz The current trend toward hospital–physician integration has renewed the focus of leaders on both sides on developing fair, sustainable physician-compensation plans. On March 21, 2011, in Chicago, Illinois, at the Congress on Healthcare Leadership of the American College of Healthcare Executives (ACHE), three speakers, Timothy J. Cotter, Ralph DeJong and Thomas Nantais, presented “Best Practices for Physician-compensation Governance and Strategy.” They addressed emerging trends in physician compensation (as well as best practices gleaned from prior experience in structuring these arrangements). Timothy J. Cotter, managing director of Sullivan, Cotter and Associates, Inc (Chicago), began the presentation by noting that approximately 40% of primary-care physicians and 25% of specialists in the United States are currently hospital employed, and the means by which these employed physicians are compensated are evolving as a result of health-care reform. What’s more, he says, it is increasingly vital that these arrangements be appropriate, as they are subject to more federal oversight than ever before. “There are very hefty penalties against health systems for physician-compensation noncompliance,” he notes. “Health-care organizations want to make sure they have a strong, defensible position regarding physician compensation.” Click to continue to the full article.

Transactions Outlook 2011: More of the Same

Published by ImagingBiz Written by Todd Sorensen and Elliot Jeter From a transactions perspective, 2010 was marked by a frenzy of imaging-center acquisitions on the part of hospitals. A number of factors came together to create the perfect storm of a buyer’s market for imaging centers, including uncertainty surrounding health-care reform and the opportunity for cash-strapped hospitals to augment the bottom line quickly and easily. The strongest motivating factor for both groups, though, was a strong differential between hospital reimbursement for outpatient imaging and freestanding-center reimbursement. Irrespective of whether health-care reform progresses according to its current trajectory, undergoes significant changes, or is even repealed, there is an understanding in the marketplace that this reimbursement differential will not persist indefinitely; it is likely either to be greatly decreased or to be eliminated entirely over some period of time. Forward-thinking members of the radiology business community will thus be asking themselves whether the acquisitions frenzy will continue in 2011, and what the marketplace will look like when it has finally concluded. All of the elements for a perfect storm of hospital acquisitions are still in place this year, but how has last year’s frenetic transaction environment affected imaging centers that remain free of hospital ownership? What are hospitals seeing as they survey a newly reshaped landscape for health care (in general) and imaging (in particular)? Click to continue to the full article.

Physician Hospitals After the PPACA: Life Goes On and New Strategies Emerge

Published by PHA Pulse The Patient Protection and Affordable Care Act of 2010 (“PPACA”) was signed into law on March 23, 2010. The period since enactment has been a time of soul searching for 285 existing physician owned hospitals (“POHs”). Our work at VMG Health, providing valuation and transaction advisory services to the POH industry, affords us the opportunity to analyze the financial condition and observe the strategic response of a large sample of POHs post PPACA. Our observations confirm that POH leaders are busy assessing their future, weighing their options, and mulling strategic opportunities with the ultimate goal of preserving and enhancing shareholder value. Although POH management’s skill in navigating these challenges will become clearer in years down the road, evidence displayed thus far has shown that the industry will respond with skill and ingenuity to pursue creative paths to improve financial performance and enhance shareholder return. Each POH’s exposure to the growth and physician ownership restrictions promulgated by the PPACA is unique. The characteristics of each POH will determine the level of risk exposure to these restrictions and generally dictate the appropriate strategic response. In the post PPACA environment, existing POHs can be considered to fall within three separate and distinct classifications based on their unique attributes. These include those operating in a “Business as Usual” manner, those reaching a “Fork in the Road”, and those that are “In Need of Restructuring”. The attributes of each POH category are summarized in the table below: Click here to continue to the full article.

Analysis of ASC Data Suggests a Mature ASC Market

Published by Becker's ASC Review Those that have been involved with this industry in recent years have heard a common theory proclaiming the ASC market as a mature industry. What does this mean and is it true? In this column we will illustrate and briefly highlight several trends that suggest this to be a valid assessment of the industry and explore the ways in which experienced ASC operators are responding.

Overall ASC growth has significantly leveled off

The number of ASCs operating in the United States expanded rapidly throughout the late 1990s through to the late 2000s (see chart below). This high growth was fueled by a number of market dynamics, including:
  • physician desire to perform outpatient surgery in an focused and efficient environment;
  • physician desire to participate in the management of their surgical facilities;
  • physicians seeking to supplement their professional income streams;
  • technological and surgical advances which made more procedures suitable for ASC setting;
  • many new ASC management / development companies entering the market, providing funding, organization and expertise; and
  • abundance of lenders willing to provide capital to physicians and developers.
Click to continue to the full article.

8 Factors That Make Your ASC Risky for Buyers

Published by Becker's ASC Review 1. Lack of lucrative specialties. While a really efficient single specialty ASC such as a GI-only facility can be highly desirable, it helps to include lucrative specialties like orthopedics. 2. A few physicians do most cases. Your center should not be relying on a few surgeons to bring in most of its volume. What happens if one of those surgeons is incapacitated or retires? "If your three top producers account for 50 percent or more of volume, you are too top-heavy," Mr. Kickirillo says. 3. Physician infighting. A physician group that lacks cohesiveness not only makes the ASC less productive but also raises buyers' concerns that some partners might exit the ASC and open a competing center after the sale. 4. Partners who are aging. "A center where all the physicians joined 30 years ago and are now ready to retire will appear risky to buyers," Mr. Kickirillo says. "Who will take their place?" Centers need to take the time to identity younger physicians and offer them membership. 5. Ineffective partnership agreement. The partnership agreement should include items like mandating physicians to sell all or part of their shares when they reach a certain age or when their volume drops. This will ameliorate risks to the buyer. The agreement should also have a strong non-compete covenant, stipulating that physicians cannot invest in another center within a certain radius. It should also require surgeons to bring at least one-third of their cases to the ASC, though this is also a legal safe-harbor requirement. 6. Too many cases with one payor. Buyers will view it as risky to have one large payor, such as Blue Cross Blue Shield, covering a majority of the center's volume. A center can do little about this when one payor dominates the market. It could help, however, to make sure the ASC has contracts with as many of the smaller payors as possible. 7. Too many out-of-network cases. Buyers are cautious regarding centers that rely heavily on out-of-network status because this option appears to be fading away. In the short term, however, out-of-network cases can still boost the ASC's bottom line. "Ride it as long as you can, but know that the model is going away," Mr. Kickirillo says. 8. Lack of competent management. Buyers are impressed when ASC management has demonstrated expertise with contracting, buying supplies and delivering reliable financial results. If internal management lacks these skills, a management company can step in. "Physician-owned centers can be very, very successful, but it helps to have a strong management company behind you," Mr. Kickirillo says.

ASC Benchmarking Analysis

Published by SurgiStrategies In today’s mature ASC environment, revenue growth is difficult to achieve. Until the last few years, new entrants into the ASC market experienced significant growth and a favorable level of competition for physicians and cases. Now, growth is decelerating, with the growth in the number of ASCs and cases per ASC slowing. This dynamic has caused an increased focus on the expense side of the profit equation in the ASC industry. Measuring ASC performance against internal and external comparable benchmarks has become a critical tool for achieving efficiency as ASC operators focus on making their current caseloads more profitable. In a mature industry — one in a state of equilibrium with an absence of significant growth — businesses tend to behave in a fairly standard manner. ASCs are no different. ASCs are reacting predictably to the normal market-maturation process, in which earnings may remain stable, but growth prospects and expectations decrease significantly. In this changing business environment, we have witnessed ASC managers change their focus from growth to operations, innovation, and maintenance. This significant systematic effort within the ASC industry has required a shift in resources and managerial skill, with emphasis to innovation and efficiency. ASC Benchmarking is but one component of organizational improvement. Benchmarking is not a one-time, quick fix. It is a process, a continual process of monitoring and adjusting. The process is commonly described in three steps – identify, track and change. If you can identify or measure a metric, you can track it. If you can track it, you can change it. Developing and implementing an ASC benchmarking plan for your surgery center has the benefits of improving operational efficiency and maximizing performance, both clinically and financially, which will lead to a more profitable and valuable ASC.

Identify

The first step in ASC benchmarking is fairly obvious – identifying where in the organization improvement may be made. Fortunately for ASCs, many areas of focus can be easily identified. For example, on the revenue side, comparing net revenue per case by specialty to national and regional benchmarks is critical to understanding an ASC’s performance, even though an ASC may not have the ability or market leverage to improve contracts. On the expense side, the major cost components are readily identifiable and are typically variable in nature (versus fixed – such as facility rent). Staffing expenses and medical supplies usually take center stage. While improving revenue can be a difficult proposition, making expenses more efficient can have a meaningful and dramatic affect on bottom-line performance. One ASC benchmarking method is to develop internal benchmarks which can be analyzed as a series over time. For example, staffing costs per case can be measured from quarter to quarter, or year to year. If the cost remains flat or decreases, this can be seen as improvement, while an increase in costs may be seen as inefficiency or a warning sign. The benefits of internally benchmarking include consistency of data collection and comparison, as well as ease of measurement of quantifiable goals. Lacking understanding of how the indicator or statistic compares to an industry average presents challenges, however. For example, if staffing costs increase dramatically for the industry due to macro or regional issues, judging an internal benchmark will not tell the whole story. A second benchmarking methodology which can be used in conjunction with internal ASC benchmarking is to benchmark against comparable peers. The benefits include a more objective measurement of performance, as well as the ability to determine if increases or decreases in performance are industry-wide factors. The challenges include finding quality data to benchmark against, and consistently calculating the same statistics internally to create an “apples to apples” comparison.

Track

There are useful publications in the ASC space to assist independent ASC operators in comparing key statistics. These include the VMG Intellimarker™ and Salary Benchmark Survey data published by the ASC Association. Great care should be applied to the proper calculation and application of these statistics to ensure a meaningful comparison.

Imaging Center Data: Interpreting New Industry Volume Trends

Published by ImagingBiz Analysis of the fair market value of an imaging center requires the analysis of disparate sets of information regarding the environmental in which the subject company operates. The valuation analyst will research various sources of economical industry data, as well as obtaining company-specific information as part of the analysis.Radiology Business Journal and SDI Health LLC (Plymouth Meeting, Pennsylvania) published an article in the August/ September issue of RBJ illustrating trends related to the top 20 imaging-center chains and the larger environment in which they operate. The data in this study can assist the valuation analyst in formulating a basis for future revenue projections used in the income approach (discounted cash flow) to analysis.The industry information also assists the valuation analyst in determining the velocity, pricing, and strategic motivation behind market transactions within the industry.This information is crucial in determining the fair market value of an imaging center using the market approach to value. Click to continue to the full article.

Orthopedic Surgery Call Coverage Payments: Understanding and Applying Survey Data

Published by Becker's ASC Review Statistics show orthopedic surgeons are paid for call coverage more than any other specialty. According to a 2009 Sullivan Cotter Survey, approximately three out of four hospitals, who report on-call payments to physicians, provide payments for orthopedic surgeons. Health systems struggling with what to pay these physicians can take some comfort in the fact that compensation survey data for this specialty has remained relatively stable for the past four years. The following outlines compensation survey data findings, along with valuation considerations, when determining if an orthopedic surgeon warrants compensation at the low-, mid- or high-end of survey data.

Market data on orthopedic surgery call payments

Most valuation experts advise health systems to steer clear of relying on survey data alone when it comes to determining call coverage payments. Reasons this data is considered unreliable include:
  • low number of survey respondents;
  • large variance in reported fees;
  • lack of information related to volume of call (the OIG suggests this be considered);
  • lack of information related to payor mix (OIG suggests this be considered);
  • no details related to the agreement terms; and
  • the data is based on hospital-physician relationships, which is considered risky to rely upon based on guidance from healthcare regulations (Stark).
Click to continue to the full article.