OASC | DUE DILIGENCE

Up-front Due Diligence When Considering Joining an ASC

Homework will help you craft a successful partnership.

By Pravin U. Dugel, MD

After more than 20 years involvement in ASCs, often in a managerial role, I can tell you they are indeed a great option for retina surgeons. They are not, however, a “no-brainer.” It’s a common misconception that every ASC is a good investment. Like any other investment partnership, joining an ASC requires that you first perform careful due diligence.

First Things

While the idea of buying into an ASC where you could do things your way and share in the profits is certainly appealing, you need to address the following two questions to determine if joining one would truly benefit your practice:

• Will joining this ASC cause you to lose referral sources? Your first priority is to ensure that your consultancy practice is as healthy as possible. That is primary; the ASC is at best secondary. In certain locations, being part of an ASC with particular referring physicians may antagonize other referring physicians — and that may compromise your primary goal for your practice: the consultancy practice. I’ll say it again: No matter what the financial gain from the ASC, it wouldn’t be a good business decision to detract from your medical practice by sacrificing referral sources.

• What type of ASC are you considering? Is it a single-specialty ASC? Rarely does one have a retina-only ASC. Most often, a single-specialty ASC means ophthalmology only. If you’re considering a multi- specialty ASC, where, for example, there’s orthopedics, plastic surgery, pain management, and retina is just one of those specialties, you should find out if it has a history with retina. Who makes the decisions? What’s the philosophy of the ASC? How well is it managed?

UNIQUE NEEDS OF RETINA

The questions regarding the specialties included at the ASC are particularly relevant because retina is a high-risk, high-expense field. Compared to many other specialties, retina has a large capital outlay and great surgeon-dependent variability regarding OR time, disposable expenses, and so on. Therefore, the financial success is largely related to surgeon selection and working philosophy. In general (with notable exceptions), retina usually works best in a single-specialty/ophthalmology-only ASC. (See Adding Retina to an ASC on page 14.)

Equipment Decisions

Part of the sizable capital outlay retina surgery requires is due to equipment costs. We require a lot of expensive equipment to provide optimal results. Therefore, when considering an ASC, finding out if you will have input in equipment purchases is essential. Alternately, is the decision about what equipment to buy made by a board consisting of non-retina, non-ophthalmic surgeons? If people who have no perspective on retina surgery are choosing the equipment you will operate with, it is likely that you will not be happy at that ASC.

For example, you request a new vitrector machine. The differential between a high-end and low-end system may be 100% or more. While the more expensive vitrector may be the one you want because it will enable you to provide better outcomes, will you be able to get what you want? Or, will a board that may consist of a plastic surgeon, an orthopedic surgeon, and a pain-management physician force the decision upon you based solely on economics?

While the governing board’s desire to keep costs down is understandable, my more than 20 years of experience in three ASCs have shown me that effective, state-of-the-art equipment can help cut down on what is an ASC’s largest expense: personnel.

Equipment and Staffing Issues

An ASC that’s a good fit for a retina surgeon will view equipment costs as an investment, understanding that less than optimal equipment compromises patient care. Our surgery is changing rapidly, so our equipment is changing rapidly, too. Is the ASC you’re considering willing to be a leader in technology and make equipment purchase decisions based on patient care and long-term investment goals rather than short-term profitability alone?

Of Profitability and Patients

Another crucial point to consider before buying in to an ASC is what kind of cases the board will allow you to bring. Again, retina has a wide range of case reimbursement and profitability. We have cases that have good insurance coverage, such as a simple vitreous hemorrhage or macular hole or epiretinal membrane. These can potentially be much more profitable than a complex case, such as a PVR patient who may require PFO, or silicone oil, further driving up the cost. Is this governing group going to say, “We really just want you to bring your profitable cases, but not necessarily your not-so-profitable cases”?

If that is the situation, you will be forced to take your most difficult cases perhaps to a hospital that lacks the equipment you prefer, sees a retina case once every 2 or 3 months and where you may not be well known. You don’t want to find yourself in an ASC that forces you to perform your toughest cases in the worst possible venue — for financial reasons — and compromise patient care.

And what about emergency cases? Luckily, we retina specialists do not have many emergencies, but when we do, or cases run late, is the governing group going to tell you they want you to finish at 4 o’clock no matter what? Again, you may find yourself in the situation of having to take such a case to another location where you don’t have the best resources.

The attitude of the ASC’s management team should be, “Yes, we are a for-profit center, and there’s nothing wrong with that. But patient care is our number one priority; profitability is second.”

Of course, few governing boards will come out and say, “Well, really profitability is our number one goal.” So to determine if the ASC really practices what it preaches, be sure to operate there for a while before you buy in.

THE NEXT STEP

Financial Considerations

If the ASC passes these criteria, then you are in a good situation. Now for the third step, which is actually comprised of two parts. The first is purely financial: You need to look at the center’s profit and loss statements, at the long-term goals of the ASC, and at its financial history. Then consider what percentage of the ASC is being offered, and how that initial buy-in calculation is made.

Customarily, the buy-in calculation is based upon a multiple of earnings. At our ASC, we typically do not charge our prospective partners very much to buy in. You have to charge a certain amount by law, of course; otherwise it’s an inducement. So we charge what we believe is a minimal amount, because if we want somebody, we want that person as a long-term partner. We are not going to make a profit on that surgeon on the front end. This is a long-term relationship that we expect to be a good one. We’ll provide great patient care and we’ll profit from each other.

Other ASCs will charge much more to buy in, and they have a different philosophy. Again, I would look at the offer, how it is presented, the multiple of earnings that’s being offered, the long-term goals, and the history.

Chain of Command

The second part of step three is working out where you would be in the surgery center management or hierarchy, if that is an interest or a possibility. You may be someone who wants nothing to do with management; you just want to come in, do your work and leave, just belonging to a reputable ASC that’s profitable. And that is fine.

Or, you may want to be part of the management eventually; you want some voice as to the direction the surgery center takes. If that is your goal, you should negotiate early in the process when you will have the most leverage early in the negotiation process and, potentially, encounter the least amount of misunderstanding. And, yes, it should to be in writing so there’s no room for confusion and subsequent resentment.

An Eye for the Endgame

There is yet another important issue to work out before signing the contract. When you are starting a venture, you rarely think about how things are going to end, but I have observed that often in ASCs, the partnership becomes adversarial (or the ASC fails) not because of the details of the buy-in, but because of the lack of details regarding the buy-out. Frequently, partners have not thought out that part of the process.

For starters, you need to know who your other partners are, their ages, and their level of activity in the ASC. If the age difference is significant, or lifestyles or goals are vastly different amongst partners, there is potential for conflict. For instance, one partner may start slowing down earlier than the others. If that partner is earning the same amount or more from the ASC than you are, how will you feel about that? Does the contract have provisions built in so that as one partner slows down, for instance, the other partners won’t feel as though they are being taken advantage of? What is defined as full-time work versus part-time work?

Related to this point, what is the goal of the entire partnership? Is it to sell out eventually or to perpetuate the ASC? How do you bring in new partners? Who decides? All of these issues come under the heading of the buy out, and must be thought of before the buy in happens.

These issues are sensitive and uncomfortable to discuss, particularly when beginning a relationship. It is akin to discussing divorce provisions during the engagement dinner. Additionally, there are federal and regional legal implications. Therefore, it is crucial to involve a knowledgeable and experienced lawyer in these negotiations. ■