COVID-19: Impacts to ASC Buy-Sell Provisions?

March 31, 2020

Ambulatory surgery centers (“ASCs”) are freestanding facilities which exclusively provide low-acuity surgical procedures to patients on an outpatient basis. Surgical procedures performed at an ASC do not require a hospitalization, typically require less than a 24-hour stay, and do not pose a significant safety risk to the patient. The first ASC was opened in 1970, and in 1982, Medicare approved 200 procedures to be performed in an ASC setting. Since that time, the number of Medicare certified ASCs has increased to 5,788 as of December 2019, and the number of procedures approved by Medicare has increased to approximately 3,500.

ASCs are separate and distinct legal entities, often formed as LLCs, and have their own tax ID numbers and facility licensure. They also maintain their own governing documents, credentialing, staff bylaws, and employ their own staff. Owners of ASCs are typically health systems, physicians, and/or management companies. These owners will capitalize the ASC through the raising of equity and/or debt. Any excess profitability, after cash needs are considered, is generally distributed to owners on at least an annual basis. In a typical ASC LLC operating agreement, holders of membership interests classified as minority units would be restricted from transferring or selling without approval and be subject to ASC buy-sell provisions and restrictive covenants, among other terms. Buy-sell provisions are typically defined in the governing documents for certain transaction or share redemption events, either at the current FMV based on a third-party appraisal or a prescribed formula of earnings and an earnings multiple (EBITDA is most common). A frequent example could include a defined purchase price upon redemption of a member at a X times multiple of the average EBITDA over the last two or three fiscal years.

The COVID-19 pandemic is causing many challenges across the nation and our healthcare system. Specifically as it relates to ASCs, many states and other governing bodies have recommended or implemented guidance impactful to ASCs. On Saturday, March 14 U.S. Surgeon General Jerome Adams tweeted that hospitals and health care systems should consider stopping elective procedures amid the COVID-19 outbreak. On March 18, the Centers for Medicare & Medicaid Services (CMS) also released guidance to limit, “non-essential adult elective surgery and medical and surgical procedures, including all dental procedures.” The guidance additionally notes that while, “decisions remain the responsibility of local healthcare delivery systems…and those surgeons who have direct responsibility to their patients,” when determining the risks and benefits of any planned procedures, “…not only must the clinical situation be evaluated, but resource conservation must also be considered.” (1)

As a hypothetical example, ASCs will likely return to normal operations sometime in the future, and physician members will continue to transact in the ownership units of their business. As they do, for an ASC using a buy-sell formula that relies on a multiple of EBITDA, calculated as the average of the last several fiscal year, problems may arise due to these non-recurring impacts. The short-term fluctuation in volumes and performance will likely impact these calculations, reflecting a decrease in earnings and therefore valuation under the buy-sell formula.

Will operators seek to adjust for these fluctuations in business performance as they redeem or transact with owners? Will sellers require adjustments to the formula in order to agree to a sale? While the magnitude and duration of the COVID-19 pandemic impact on ASCs remains uncertain, it is evident that some impact will be felt. Buy-sell transaction issues will inevitably arise when transactions occur and valuation issues, and any potential adjustments required, will become critical to ensuring timely and compliant ASC transactions.

(1) State Guidance on Elective Surgeries. (n.d.). Retrieved from