It will come as no surprise to anyone that Medicare reimbursement for physician services has remained flat for almost two decades. The 2019 conversion rate for professional services was even less than the 1998 rates. Now the adjustments to relative value units (RVUs) are dropping 2020 reimbursement for professional services even further.

And, as a result, ophthalmologists are now looking for alternative revenue streams.

Surgeons who hold equity shares in an ASC are in a better position financially than their non-equity counterparts. This is because ASC Medicare rates are holding steady. In fact, the recently released CMS fee schedule shows an approximate 2% increase in 2020 ASC fees, allowing ASC shareholders to have a hedge against downward pressure on surgeon fees.

So let’s look at not only why buying into an ASC makes sense, but how to make smart decisions when doing so.

Considerations for Evaluation

Ophthalmologists looking for an ASC investment opportunity are usually already performing surgery at a hospital or ASC where they do not have ownership. Most frequently, these interested surgeons are early in their careers and are working toward a partnership in the practice and/or ASC, often as part of a growth or succession plan for a retiring surgeon.

As with any investment decision, due diligence is critical and should not be rushed.

The prospect of buying in to an ASC should be thoroughly evaluated. It takes time to assess the facility’s standard of care, staff performance, efficiency, leadership, and surgical outcomes. In short, get to know the organization before buying in. You want to be sure it’s on a path of sustainable (and growing) profitability.

Many factors influence ophthalmic ASC profitability, and chief among them are scheduling, utilization, and efficiency. In an ASC setting, patient turnover is faster than in an acute care setting. Generally, the higher the throughput, the higher the net profits, ultimately benefiting the ASC and its surgeon owner(s).

Below are some specific items to consider and questions to ask when deciding whether to invest in an ASC:

1. What contracts does the center have? Surgery centers negotiate contracted rates with each payer, separate from the surgeon. You want to make that sure you (and others) can bring all your surgery cases to the center.
2. What are the contracted rates? Payer contracts—and rates—are critical to ensuring the profitability of each case and the center overall. Most ASCs negotiate based on a percentage of Medicare. Ideally, the commercial payers pay above the Medicare rates while state-funded Medicaid plans or health management organization (HMO) plans often pay only slightly below Medicare rates.
3. Do the ASC’s financial statements demonstrate a growth trend? For any investment, you want to see that the business is growing. Both the top-line and profits (amounts distributed) should be growing.
4. What is the projected schedule of distributions? The ASC should be able to show budgets and pro formas to help you determine your return on investment (ROI).
5. Does the ASC have the right partner mix to sustain long-term growth? A healthy ASC has a solid base of physicians across all age groups and subspecialties and is not overly dependent on a single, high-volume surgeon.
6. What are the criteria for future ownership and divestiture? You want to understand who else will be invited into partnership and what event might trigger a resale of shares back to the center. There are some regulatory requirements involved in these scenarios, so be sure to have your healthcare attorney review the agreements.
7. What are the big risks? Is there a lot of debt you will have to assume? You want to know what keeps the ASC managers up at night.
8. How are shares valued? This is important not only for consideration of your buy-in and ROI; you want to know how your shares will be valued when it is time to sell them back.

Determining ASC Value

Before you can start negotiating a buy-in proposal, you must first determine the value of the ASC so you know what you’re dealing with.

The most common method of valuing a surgery center is to apply a multiple against EBITDA (earnings before interest, taxes, depreciation, and amortization) and then subtract liabilities. This fair market value has been established over the years, primarily from surgery center companies buying into surgeon-owned ASCs.

Most surgical centers use an outside valuation company to determine fair market value. The timeframe used to determine value is typically the trailing 12 months (TTM). If the center is not yet profitable, the share price may be relative to the cost required to start-up and fund the ASC. Once you have determined the total value of the center, divide by the number of shares to get the price per share.

Variables That Increase Share Value

In addition to the considerations listed above, the following variables tend to increase share value:

• Is the ASC located in a state with a Certificate of Need (CON)? CON states limit the number of ASCs built. Requesting a CON license can be costly and time prohibiting. Therefore, this cost will get factored into the price.
• Does the ASC have contracts with most, if not all, third-party payers, or does it rely on out-of-network payments? An ASC with more contracts serving the patient population is less risky.
• How many competitors are there? Supply and demand affect all markets. Fewer competing ASCs tend to increase share value.

Before buying into a facility, ask for a projected schedule of ROI. While the timeline for receiving a return is contingent upon many factors, in most cases you should see a return on your investment within the first year.

In addition to the distributions, there is an ongoing value associated with ownership. Typically, an investment in an ASC will hold a higher value as time goes by. In general, we see physician-to-physician transactions where a minority interest (non-controlling) is acquired, worth 2x to 6x EBITDA, according to the 2018 ASC Valuation Survey by HealthCare Appraisers.

As an investor, you also want to look for any potential gains. Recently, in the past two years, there has been a rise in surgery center growth. Hospital systems and private equity groups are expanding into the ASC space. With this growth, there is a higher chance that an outside party will acquire a percentage of the ASC in the future. The market rate for that type of sale is valued at a much higher multiple of EBITDA than a physician-to-physician purchase price.

Non-Financial Benefits

Once a physician becomes an owner, he or she will experience benefits other than financial that can have a positive effective on the surgeon, the patients, and the ASC.

They include the following:

1. Increased efficiency. In single-specialty ASCs, surgeons can sometimes double their surgical volume compared to in a hospital. This is due to ASCs having fast patient turnover times and utilizing staff more efficiently than what’s encountered in hospitals.
2. A more comfortable surgical environment. In hospital centers, surgeons often do not get the same team to work with each surgery day. Whereas, in the surgery center, the surgeon is better able to establish a consistent team and systems for a smooth flowing surgery day.
3. Control over equipment selection. Physician-owned surgery centers may offer cutting-edge technology that is typically not found in general hospitals or non-physician-owned surgery centers.
4. Increased patient satisfaction. Patients are happier when they experience quality care, which relies on increased efficiency, staff bonds, and better outcomes.
5. Shareholder camaraderie. ASC physician owners share an entrepreneurial spirit and risk tolerance not found in a traditional hospital or joint venture setting. Being an owner of an ASC allows a surgeon to form bonds with other surgeons in the community where they were once only competitors
6. Flexibility to respond to changing market needs. Working with peers in the community allows surgery centers to implement innovative ideas quickly. In addition, ownership comes with the advantage of getting and staying engaged in the ASC’s business model and goals.

A Worthwhile Investment

Most surgeons understand that betting on themselves is a good investment. Performing surgeries at a hospital or an ASC without owning shares in the facility means someone else is profiting from their surgeries. Ownership allows new surgeons to not only benefit from their own hard work but also from the work of the whole group.

The profits you gain from ownership in an ophthalmic ASC allow you to reinvest back into your practice. And reinvesting in your practice further benefits your patients and the community it serves. ■