Valuation for ASCs and optical shops can be simple

October 15, 2007

The valuation process for ambulatory surgery centers (ASCs) and optical shops is different from the process for an ophthalmology practice, but both require little work if handled properly. Sandra E.D. McGraw, president of Health Care Consulting and president of Health Care Law Associates PC, Plymouth Meeting, PA, said that ophthalmologists could derive income from either owning interest in an ASC and performing cases there or owning an optical shop and encouraging sales.

Keypoints:

Plymouth Meeting, PA-The valuation process for ambulatory surgery centers (ASCs) and optical shops is different from the process for an ophthalmology practice, but both require little work if handled properly. Sandra E.D. McGraw, president of Health Care Consulting and president of Health Care Law Associates PC, Plymouth Meeting, PA, said that ophthalmologists could derive income from either owning interest in an ASC and performing cases there or owning an optical shop and encouraging sales.

Trends in ASCs show that cases are moving rapidly, and centers are either single or multispecialty. McGraw said Medicare safe harbors allow the trend, creating ancillary income for the physician partners.

The market for ASCs is $7 billion and growing 10% annually. McGraw warned that there is talk about legislation to reduce ASC rates, but the rules and suggested rates are unclear. And of the total $24 billion vision market, ophthalmology makes up less than 10%.

When choosing partners for an ASC, McGraw said, it's important to think about what different owners bring to the business: capital, cases, or stability. Non-physician owners can be attractive because, generally, they don't seek an equity interest.

Another issue to think about is the need for management and development. Consider hiring a management company to help launch the ASC, solicit new people, and help with development.

There are different valuation models from which to choose when negotiating to bring partners into the ASC.

The equity approach, McGraw said, is very common for physicians just starting an ASC, with each partner kicking in his or her fraction of the capital. The deal can become complex if one partner wants a higher ownership percentage on the basis of bringing in more cases. Two years down the road, there might be a realization that someone else really brings in more cases, which can lead to an adjustment.

Through the equity approach, all partners typically share the same risks, including construction delays, project overruns, and licensing and reimbursement surprises. It's an "all-for-one and one-for-all" approach.

The more common valuation for ASCs is earnings before income tax, depreciation, and amortization (EBITDA) model. McGraw said those models are not easy, and the deal can become sticky when there are transactions between partners.

"Medicare regulations say transactions have to be at fair market value," she said. "You can't loan money to an investor."

She said partners want to see value for the surgery center, but bringing to the table investors who also bring cases to the ASC changes the marginal rate of return. Profitability, McGraw said, is the top factor affecting valuation. When ophthalmologists bring in more ophthalmologists, the net profit per case slightly increases. Bringing in partners with dissimilar backgrounds doesn't always change the profit margin.

"Full and better use of the facility will change profit margins," McGraw said.

When negotiating value, McGraw said, it's a very "upside-down" process. The perspective is different depending on who is coming in as a partner. From a junior partner's perspective, that person is only worth what he or she can produce. From a senior partner's perspective, he or she can produce only because he or she was given the opportunity in the practice. "It's really a push and pull as to how to do it, but it's an easy sell," McGraw said.

When it comes to valuations, McGraw said, very few elements are within a physician's control. Valuations, she said, are almost always done at the most inopportune time-during divorce proceedings, when a partner wants to leave when the entity is profitable, or when admitting a new partner.

But, she added, the scenario can be controlled to some extent. The formula can be driven through the ASC's documents.