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32 Executive Briefing Appraisers. Fitch Ratings estimated hospitals and health sys- tems own between 25 percent and 30 percent of existing ASCs in 2017, up from 20 percent in 2011. "Hospitals want to make sure they have lower cost alternative [settings] both for private payers and government-based pay- ers," Mr. Walline says. "Hospitals are also looking to diversify their revenue streams and leverage [payment] rates. ASCs of- fer that opportunity." Several recent deals illustrate the growing preference of the largest ASC providers to create joint ventures with larger pro- vider networks or health insurers. Dallas-based Tenet Health- care acquired a majority ownership stake in United Surgical Partners International for $425 million in 2015. OptumCare, the healthcare arm of UnitedHealth Group, agreed to pay $2.3 bil- lion to merge Surgical Care Affiliates with its own ASC manage- ment firm. SCA has a partial stake in about 190 ASCs in the U.S. Five Strategic Advantages to Hospital Joint Ventures Hospital systems appear to increasingly prefer joint-ventured ASCs to acquiring 100 percent ownership. Mr. Walline and Mr. Outcalt identified five strategic advantages hospitals see in contributing to a joint venture. 1. Payment neutrality. The move to site-neutral payments, effec- tive Jan. 1, has decreased the value of 100 percent ownership in off-campus ASCs. The Bipartisan Budget Act of 2015 disallows off-campus surgical centers acquired or established by hospi- tals after Nov. 2, 2015, from billing Medicare at a higher rate than freestanding ASCs for the same services. Hospital-owned outpatient surgery departments established prior to November 2015 may continue billing at higher rates. Freestanding ASCs typically receive 25 percent to 50 percent of what hospital out- patient departments receive for identical services and proce- dures, although this rate is highly dependent upon the subject ASCs percentage of government payers and their respective commercial payer contracts. Hospitals are less inclined to buy 100 percent ownership in an ASC today because rates between HOPDs and free- standing ASCs are neutralized. Joint-ventured ownership still allows the hospital to reap some benefit from outpatient procedures, however. Some hospitals are even beginning to divest full ownership of their surgery centers for partial own- ership with strategic partners. "We have seen a number of joint ventures which contemplate the contribution of a current freestanding ASC and the con- tribution of a freestanding HOPD surgery center once it goes through the process of converting to a freestanding ASC," Mr. Outcalt says. 2. Physician alignment. Joint-ventured ASCs support hospi- tals' ongoing recruitment and retention of top-tier physicians. "[A joint venture] can be a more cost effective way to achieve physician alignment compared to going out into the communi- ty, buying a [surgical] practice and employing the physicians," Mr. Outcalt says. Major draws for surgeons include the poten- tial economic upside of an ownership interest in the ASC, en- hanced productivity in the ASC environment and the patient experience in the ASC. Hospital-physician alignment strategies that foster cooperation and shared goals between providers in the same community offer significant opportunities for efficien- cy and quality improvements. 3. Strategic market position. Hospitals can maximize patient ac- cess and capture increased market share by aligning with an ASC. Joint-ventured ASCs in different geographic locations ex- pand a hospital's presence and patient base in the community. The organization then has the opportunity to extend its brand to new markets. 4. Management and operational expertise. Many hospitals ben- efit from the administrative support and resources ASC man- agement companies bring to the table. In some instances, Hos- pital leaders are not as familiar with overseeing operations in an outpatient space. ASC management companies can provide additional capital, operational expertise and experience medi- ating previous joint ventures. 5. Increased surgical specialization. "We are seeing hospitals targeting larger multi-specialty ASCs when they are looking for a partnership," Mr. Walline says. Often expanding the number of surgical specialties offered can help improve both efficiency and coordination of patient care, producing a more seamless patient experience. Key Factors in Determining Fair Market Value of Contributions Structuring and negotiating a joint venture between multiple partners requires diligence, good faith and a clear understand- ing of each entity's fair market value. When valuating an entity's contribution to a potential joint venture, participants must con- sider the value of each contribution as-is rather than the antici- pated value it may produce post affiliation, known as synergistic value, Mr. Outcalt says. "It's important to consider what each party is bringing to the table when looking at a business that is expected to be contrib- uted to a newly formed joint venture," Mr. Outcalt says. "This means taking into consideration current patient volume and reimbursement, not the expected volume and reimbursement resulting from the joint venture." Conclusion Interest in joint-ventured ASCs remains steady among hospitals, health systems and management companies. Hospitals buying or joint venturing with physicians in ASCs has been common practice for several years, but there are now a greater variety of ownership models available. n HealthCare Appraisers, a nationally recognized valuation and consulting firm, provides services exclusively to the healthcare industry, including: business valuation (e.g., ASCs, hospitals, physician practices, dialysis centers, home health, diagnostic/treatment facilities, and intangible assets); fixed asset appraisals for furnishings, ma- chinery and equipment; real estate appraisals and market rent analyses; fair market value opinions for compen- sation and service agreements (e.g., employment, ED call coverage, medical directorships, collection guarantees, equipment lease/use arrangements, and service/co-management arrangements); consulting and advisory ser- vices (including valuation for financial reporting); and litigation support.