Becker's ASC Review

Transactions & Valuation Issues 20 ASC Valuation Analysis: 3 Biggest Opportunities for Improvement By Todd Mello, Partner and Co-Founder of HealthCare Appraisers, and Nicholas Newsad, Senior Associate at HealthCare Appraisers T he three biggest variations we see among ASCs that can be controlled are related to information systems, liability insurance premiums and underutilization of facilities. ASC Information Systems As a general overview, good information systems are great tools for ASC owners to manage their business. The reporting tools alone are instrumental in effective management. You cannot manage what you cannot measure. We have encountered many ASCs without good information systems that have to endure a great manual labor effort just to tabulate basic metrics like case volumes by physician, payor mix or supply costs per case. Our experience is that ASCs that utilize information systems intended for physician practices tend to under-realize their contracted reimbursement rates. Billing and collections can be managed much more effectively when ASCs use an information system that is intended for an ASC. For example, ASC-specific information systems tie supply usage to specific cases. ASC billing systems will automatically add billable supplies and implants codes to cases that used those items. The billing systems can also be used to track outstanding dictation reports, the length of time after surgery it takes to file claims and follow-up on unpaid balances. ASC information systems are also critical to supply cost management. ASCs that don't log their supply usage on every case can't track the cost to perform these cases. Some ASCs save lots of money on inventory by getting implantable devices like intra-ocular lenses and orthopedic hardware on a consignment basis. Liability insurance premiums We also see a fair amount of variation in the pricing of liability insurance. Some ASCs are getting coverage for much less than their peers. We have seen premiums vary 200 percent to 300 percent from one ASC to another. Some of this variation could probably be nullified by conducting annual Requests for Proposals from several insurance carriers every year. We've observed that professional management companies are particularly good at reducing insurance costs. Scheduling with excess capacity Finally, there are substantial differences in profitability between ASCs with excess capacity. We have seen some of these ASCs rely on PRN staff and only open for surgery two to three days per week. Other ASCs maintain full-time staff and experience considerable "down-time." The ASCs that staff vertically and only open two to three days per week can often break-even or turn a profit on far less cases than ASCs that open every day with full-time staff. n Future Surgery Center Transaction & Acquisition Expectations: Q&A With Todd Mello of HealthCare Appraisers By Laura Miller C Q: What are the most important expectations major acquirers have for ASCs? sale. The acquirer's due diligence team has to concisely identify the risks and opportunities of investing in the ASC, while their capital planning committee has to compare numerous competing capital projects. The process may be longer for acquisitions involving large dollar amounts or acquisitions of distressed centers which may pose financial risks to the buyer. Todd Mello: It appears that consistent future growth is the most important expectation. Our 2013 ASC Valuation Survey indicates that 60 percent of ASC acquirers expect earnings to grow 3.1 percent to 6 percent per year while 40 percent of acquirers expect earnings to grow 9 percent or more per year after they buy an ASC. Acquirers typically expect to realize financial "upside" after the acquisition by making revenue cycle improvements, expense reductions, or by adding new surgeons. They look for potential improvements they can make during their due diligence process. It is also important to many buyers that physician owners stay vested in the ASC. Unless the ASC purchase is part of a related physician practice acquisition, the acquirers are going to probably expect most physicians to sell down rather than totally sell out. If physicians are being completely bought out, many buyers require the sellers to sign non-competes prohibiting the physicians from having a financial interest in another ASC for one to two years after they sell their shares. These non-competes typically preclude investment in competing ASCs within five miles. Clearly most major ASC management companies and health systems are subject to stringent capital planning and approvals processes to procure the funds needed for ASC acquisitions. The due diligence process for an ASC acquisition may be long and arduous, particularly if the ASC has not exhibited consistent growth during the years leading up to the Q: How can ASC physicians and administrators ensure they meet these expectations? o-founder and Partner of HealthCare Appraisers Todd Mello discusses current surgery center acquisition expectations and the outlook for transaction trends in the future. TM: Clearly communicate your expectations for the continued use of your ASC by each of your major physician users and all users over 60 years

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