The ambulatory surgery center (ASC) landscape in the United States is made up of several thousand facilities, which can be broadly categorized as physician-owned, corporate-owned, and joint ventures between physicians, health systems and operating partners.
Each category carries distinct advantages and disadvantages, making it essential for ASC stakeholders to understand the nuances of each model thoroughly, industry leaders told ASC News.
“There are many new and different ASC ownership models, so it is essential to understand the model you’re investing in,” Joan Dentler, founder of Avanza Healthcare Strategies, told ASC News earlier this year. “The model type can influence everything from the investment price to the projected value of ownership shares to ownership responsibilities to control facility decisions.”
Westchester, Illinois-based Avanza Healthcare Strategies provides strategic guidance to health care organizations seeking to optimize outpatient services.
Other ASC leaders agreed.
“It’s imperative to do your homework before embarking on this path,” Michael McClain, founder and managing member of Left Coast Healthcare Advisors, told ASC News. “Each model has its place depending on the cost of building and maintaining risk tolerance, volume, etc. Some states require certificates of need; others have unique reporting requirements for certain types of transactions. So, knowing what type of partnership model you are entering is crucial.”
Left Coast Healthcare Advisors is an ambulatory health care consulting and advisory firm based in the greater Seattle area. Its team guides strategic development, management, and operations in the ambulatory surgery and specialty practice environment.
McClain further explained that while each model has its benefits and drawbacks, the best model costs the least amount of capital, provides the highest level of return for the invested dollar and matches the risk profile of the investing physician.
“There isn’t one ‘best’ model, but there are less-than-ideal ones,” McClain said. “Those models that take away physician control or limit physician ability to exit without significant penalty are poor unless significant value is being added.”
Dentler echoed those sentiments.
“Arguments can be made for why one ownership model is preferable to another,” Dentler explained. “All the ASC ownership models have qualities that some physicians find valuable, which explains why various models are in use today.”
“With that said, when physician investors are assessing one or more models, they should be doing so in the context of their professional and personal goals – and the reasons they want to be involved in an ASC,” she said.
Physician-owned models
According to the Ambulatory Surgery Center Association (ASCA), almost 90% of ASCs in the U.S. have some physician ownership.
Physician-owned ASCs offer valuable professional control over the clinical environment and patient care quality. This ownership model promotes enhanced care delivery by enabling physicians to concentrate on several procedures, intensified quality control processes, and provides patients with direct access to the physician rather than navigating through hospital administrators.
To maintain ownership, physicians must perform at least one-third of their operations within their ASCs. If there’s an investor, physicians must pay a fair market value for their ownership shares, determined based on recent and projected future earnings.
In this model, some physicians prefer to enlist a management company or team to handle administrative responsibilities.
Having an expert to fill in the gaps is crucial because “you often don’t know what you don’t know,” McClain said.
“ASC expertise can be hard to find – but not impossible. Don’t trade equity for expertise if you don’t have to. Know your value in the market and leverage consulting where and when possible,” he advised.
“Making it a priority to find and employ a great ASC manager – a highly compensated expert on staff well before opening – can save hundreds of thousands of dollars, time and headache. You may still need outside expertise, but real competence starts from within,” McClain explained.
Indeed, the consultant or management team may possess a knowledge base that the surgeon may be lacking, James Stidham, president of Healthcare Management Associates, told ASC News.
“You do not want to go into negotiations without the proper transaction knowledge,” Stidham said. “Management teams or consultants will save you money in the long run if they are involved early in the process.”
Healthcare Management Associates is a Chicago-based independent, national research and consulting firm specializing in publicly funded health care and human services policy, programs, financing and evaluation.
What’s more, when physicians are weighing whether to invest in developing a new surgery center, someone with ASC development and operational experience should be involved in the project, Dentler said.
“Surgery centers are unique entities, with rules and best practices for success that differ from hospitals, physician practices, and any other type of facility,” she continued. “Ideally, physicians will also work with someone who has ASC experience in the same state as the center under consideration or extensive experience in many states, as the latter demonstrates an ability to navigate the rules and regulations that can vary by state. You don’t want to work with people seeking on-the-job training through your project. This can lead to oversights and mistakes that derail or hinder a project, drive up costs, and delay the completion and opening.”
A delayed opening delays how quickly investors begin to generate returns on their investment,” she added.
Corporate-owned models
On the other hand, corporate-owned models are efficient for managing multiple ASCs, undertaking various tasks and attracting new physicians.
In such cases, the corporate partner typically invests in or acquires a minority or majority interest, ranging from 20% to 51%. When employing physicians, the corporation integrates them as partners in the ASC, recruits doctors actively and assumes management responsibility for the associated risks.
Under the corporate-owned model, physician risk is minimized, investment security is bolstered, and overall revenues, profits and volume often upsurge. However, sharing profits comes at the cost of sacrificing independence and control.
“Ensure an understanding of how the entity can commit to the organization,” Stidham said. “This encompasses dealing with ongoing debt, purchasing equipment over a significant amount, how the budget shortcomings will be handled and contractual commitments. These examples could significantly impact future profitability and cash distributions.”
Joint ventures
Physician-hospital joint ventures usually involve the hospital serving as an equity partner and business manager, holding a 51% to 80% ownership stake in the ASC.
In this model, the hospital provides the resources and infrastructure, such as equipment, facility, administrative support, capital and access to its payer contracts. Physicians provide medical expertise, including clinical care and oversight.
The collaborative nature of joint ventures in the health care sector presents numerous benefits, including enhanced access to capital, improved patient care coordination and increased physician involvement in decision-making. These partnerships also facilitate better alignment between physicians and hospitals, ultimately leading to improved quality of care and patient outcomes.
However, it is essential to acknowledge that such arrangements can pose challenges, particularly regarding reduced physician control and ownership and competing capital allocation priorities.
One approach to mitigating these challenges is adopting a physician/hospital/corporate joint venture model, typically managed by a corporation. The most prevalent three-way model involves an equal or near-equal ownership structure between the parties, often as an LLC or limited partnership.
Within this joint venture, all three parties contribute capital and share associated risks, resembling the management structure of an ASC.
Physicians have a reduced ownership stake despite the benefits, requiring careful consideration of investments, profitability, revenue sources, regulatory compliance and risk management.
But even in what seems a relatively safe investment, Dentler advises caution.
“If physician investors are partnering with a hospital or health system, people with ASC-specific knowledge and experience must be involved,” Dentler said. “The hospital can employ these people. What matters most is gaining access to this ASC knowledge. With that said, it is often still worth involving an unbiased third party who can help ensure decisions made are in the best interest of the ASC and not one partner more than another.”
Expert advice
Generally, the experts agreed that when physicians consider investing in developing a new surgery center, they should involve someone with ASC development and operational experience.
Surgery centers are unique entities with rules and best practices for success that differ from hospitals, physician practices and any other type of facility.
“It’s important to recognize that a new ASC project will likely require participation from several different individuals with various skill sets. Examples of who we recommend involving in a new ASC include healthcare attorneys familiar with federal and state ASC regulations and healthcare-focused architects who have successfully designed ASCs in the same state,” Dentler offered.
Then, there is the matter of bringing someone on board who can guide the investors through the ASC’s operational development and initial operations.
“We recommend physicians think carefully about engaging anyone asking for equity in the project and who wants a long-term management agreement,” Dentler said. “Such significant commitments are not necessary to successfully develop and open a new ASC. While entities that require equity and long-term agreements can help launch an ASC, physicians may find that the value these entities provide quickly diminishes.”
In these cases, the challenge is that exiting these partnerships can prove difficult and expensive.
“We’ve found it’s usually easier for a maturing ASC to bring on such partners and find success here once its physicians understand their needs and long-term goals than a new ASC to move on from a poor partnership decision made more on impulse than knowledge,” Dentler explained.
At the end of the day, an ASC is a business, and some businesses aren’t able to weather the ebbs and flows of the market.
“Like any investment, an ASC investment may not pan out. ASCs can lose and fail. Some ASCs close or are acquired for a low price every year. Physicians should choose where they invest carefully. Investing in an entity like an ASC can bring a restrictive covenant that may lock the physician out of other investments,” Dentler cautioned.
There are plenty of reasons why surgery centers struggle and fail.
Some of the most common reasons include poor planning, not updating the ASC’s proforma as decisions are made, designing a facility that is too large or does not follow proper rules and regulations, poor physician and staff recruitment and bad revenue cycle management, among many others.
“These are largely controllable issues,” Dentler said. “We’ve seen uncontrollable or less controllable issues like natural disasters, cyberattacks, death of a high-volume physician, and the opening of a competing surgery center in a shared market doom ASCs.”
Most physicians underestimate the risk involved with ASC ownership, McClain said.
“ASCs were a bit easier to develop and manage 20 years ago. But the landscape has changed dramatically. ASCs take time and significant capital investment; bigger is not always better. Payer contracting is the most underrated component and can add months to return on investment. Start small and plan for the unexpected,” he advised.