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31 Executive Briefing ASC Ownership Trends in 2017: More Complex Joint Venture Deals A mbulatory surgery centers make compelling value prop- ositions as care delivery shifts to lower-cost, higher-mar- gin outpatient settings. Recent deals between some of the biggest ambulatory surgery centers, hospitals, manage- ment companies and insurers signal a new period of M&A ac- tivity for ASCs. Valuation experts expect the ongoing drive to explore managed care opportunities among increasingly inter- connected parties to produce more complex joint ventures in the ASC market in 2017. For many ASCs and interested investors, joint ventures provide ample opportunity for market growth with more diversified ownership risk compared to traditional transaction structures. This article examines overall ASC market conditions, common ownership models in ASC transactions and trends in joint ven- ture deals between various healthcare entities. It specifically ex- amines health systems' strategic motivations for contributing to joint-ventured ASCs moving forward, rather than just simply ex- ecuting acquisitions. Finally, the article differentiates fair market value from synergist value in valuating business contributions to joint ventures. ASC Market Overview "Overall, there continues to be tremendous interest in outpa- tient surgical centers, on pace with previous years," said David Walline, ASA, director at HealthCare Appraisers, a specialized valuation firm focused on healthcare and life sciences transac- tions. For years, provider groups looking to expand their ser- vice lines through vertical integration have seen value in affil- iating with freestanding ASCs. Healthcare investors interested in ASCs primarily include providers looking to expand market share, hospitals and health systems seeking to better position themselves in their market and ASC management companies le- veraging their core competencies to increase operational value. The ASC industry has also undergone a period of rapid con- solidation in response to a variety of factors. Rapid regulatory changes and reduced government reimbursement have chal- lenged independent ASCs to stay competitive with more dom- inant ASC peers and outpatient surgical departments of local hospitals. Seventy-one percent of physicians reported changes in healthcare regulatory, compliance and government policy significantly affected their ability to remain independent, ac- cording to a 2016 ProCare Systems survey. "We are still seeing mergers and acquisitions throughout the industry as ASC management companies and health systems look to strategically reposition themselves in the market" says Hunter Outcalt, CPA, director at HealthCare Appraisers. Ac- cording to the HealthCare Appraisers 2017 ASC Valuation Sur- vey, approximately 50 percent of survey respondents reported acquiring between one and 10 surgical centers in 2016, and 69 percent expect to purchase between one and 10 ASCs in 2017. Health systems, ASC management companies and health plans are also opting for less-traditional transaction models. Joint ventures and strategic partnerships have become a common alternative to traditional M&A because they allow participants to retain their independence while expanding a particular ser- vice line. These ownership arrangements also allow for more nuance in contracts and terms of the affiliation. This trend to- ward more complex, multi-entity ownership structures reflects the drive for enhanced collaboration between healthcare pro- viders in care management. Common Joint Venture Participants and Structures Mr. Walline and Mr. Outcalt expect multi-entity joint ventures to proliferate in 2017. The valuation experts outlined a variety of joint venture scenarios they expect to see most often in the 2017 ASC market. Remaining independent of health systems and/or ASC man- agement companies can present long-term challenges for ASCs. Independent ASCs potentially face weaker positions in payer negotiations and decreased opportunities to become risk-sharing partners in value-based arrangements with health systems. "Freestanding 100 percent physician-owned ASCs are becoming fewer and far between," Mr. Outcalt says. Instead, many ASCs are strategically positioning themselves for future success by affiliating with more powerful allies. ASC Management Companies ASC management companies have emerged as key players in ASC transactions. These companies offer smaller ASCs the cap- ital, economy of scale, administrative support and leverage in payer negotiations needed to remain competitive in their mar- ket. These same core competencies also allow large multi-spe- cialty ASCs to continue-to expand and compete within their markets. In exchange for providing these specialized services, as is common with most larger ASC partners, ASC management companies often purchase an ownership interest in the ASC. When purchasing equity in ASCs, 57 percent of survey respon- dents said they preferred ownership rates between 1 percent and 50 percent, according to HealthCare Appraisers. Physicians Physician interest in ASC ownership opportunities continues unabated. "We continue to see physician interest in both sin- gle- and multispecialty ASCs," Mr. Walline says. Physicians have partial ownership in approximately 90 percent of ASCs nation- wide, according to the ASC Association. Health Systems / Hospitals Hospitals and health systems continue to expand their ambula- tory footprints as the industry moves toward value-based care. In 2016, 50 percent of survey respondents reported selling a controlling interest of a surgery center to a hospital or health system, up from 46 percent in 2013, according to HealthCare Sponsored by: