Ownership Realignment: Time to Sell A Piece of The Pie?

March 2009 Outpatient Surgery Magazine

This article appeared in the March 2009 Supplement to Outpatient Surgery Magazine and is published here with permission.

Consider the benefits and drawbacks of ownership realignment before sharing a slice of your success.

If you plan to sell a portion of your ownership interest to a hospital, a management company or other physicians, consider what each group will bring to the table and how it will affect the way your ASC is managed.

The local hospital


Faced with the prospect of losing lucrative surgical cases, many hospitals have realized that holding minority interests in surgery centers is better than having no interest at all. From the physicians’ perspective, having a hospital involved in ownership may be attractive for the following reasons:

  • Deep pockets. Besides sharing the cost of developing and operating a surgery center, hospitals are attractive to lenders, who may be willing to lend more money to a surgery center with a hospital as a guarantor.
  • Management experience. Many physicians believe (sometimes mistakenly) that hospitals have greater expertise than they do when it comes to operating healthcare facilities.
  • Freedom from economic credentialing. Inviting the local hospital to be part owner in your center may ameliorate the political fall-out that physicians often fear when they threaten to take cases from the hospital to your ASC.

If you become involved with a hospital, don’t cede too much control of the management and operation of your center. Keep in mind that non-profit hospitals are tax-exempt entities and as such may be required to control certain management policies related to the care of patients who are uninsured. For this reason, non-profit hospital investors may demand a majority ownership interest in your ASC to ensure the center operates in a manner consistent with the hospital’s charitable purpose.

When a hospital becomes involved in the daily management of your surgery center, you may find yourself in an armwrestling match. The hospital, for example, may be eager to handle the billing and collections. However, billing for services in an ASC is very different from billing for hospital services. As a result, you may be better off hiring and training your own billing staff or engaging a third-party ASC billing company.

Letting a hospital have a say in your day-to-day operations, such as OR scheduling, could undermine the very purpose of establishing the freestanding ASC in the first place. Hospitals, especially nonprofits, may be less interested in maximizing the profitability of your ASC than they are in appeasing physicians who are on staff at both facilities.

Management companies


If you’re considering partnering with a management company, you’ll need to evaluate whether, in fact, the management company brings sufficient value to the bargaining table to warrant the management fees and the equity and stock purchase rights the company seeks.

Many regional and national ASC management companies, some of them publicly traded, are interested in owning or acquiring interest in existing physician-owned surgery centers. Whether it’s a majority or minority interest depends on the management company’s business model.

These companies offer full menus of services, from generating initial feasibility studies to development, licensure and accreditation, and day-today management. They usually provide these services based on long-term management contracts that give them control over the day-to-day operations of centers in exchange for management fees that are usually based on net collections.

Some management companies are interested in maximizing profits before selling ASCs at a multiple of earnings. This may conflict with your objective of long-term ownership. Beware that management companies may require physician-investors to agree to “bring along” stock purchase rights. That may require you to sell some or all of your interest in the center if the management company finds a willing buyer and wants to sell its part. At the same time, management companies may not agree to grant physicians “tag along” rights to sell under the same circumstances because a buyer may not be interested in purchasing an interest in the ASC if the physicians don’t continue as owners.

Besides their expertise, for-profit management companies don’t have the “charitable mission” issues that non-profit hospitals have. However, their management fees can cut sharply into physician-investor returns. When it comes to day-to-day management issues, physicians may find that they have only traded one master (the local hospital) for another, without gaining any more control over the ORs than they had when they took their cases to the hospital.

You may also find that management companies dictate the structure of acquisition transactions. If you run into this, consult your tax adviser to determine whether there will be capital gain treatment (currently taxed at a maximum of 15 percent of the gain realized) or ordinary income treatment, or some combination of the two, given to the proceeds of the sale. Usually sellers seek capital gain treatment while buyers try to allocate a portion of the purchase price in a way that could result in the sellers having to recognize ordinary income, which for those in the highest income tax bracket would be taxed, currently, at 35 percent.

Physician-investors


You may wish to forgo the corporate partner or hospital joint venture options by admitting additional surgeons to your ownership group. Be aware that there are requirements outlined in the federal anti-kickback regulations that must be met if the physicianowners of your center wish to enjoy the protection of an applicable safe harbor. You also must follow local securities laws, which vary in each state. Your physician-owners will be considered “promoters” for purposes of these laws.

The chemistry in physicianownership groups can be likened to the chemistry of a football or baseball team. Where the chemistry is good, the ASC can be very efficient and extremely profitable. Yet as in sports, when the chemistry is bad, the ASC will falter. Adding new surgeons can change the chemistry — for better or for worse. You also need to carefully consider the specialty of each physician-owner candidate, and factor that into your overall case mix to ensure your center runs at maximum efficiency and profitability.

Protect your investment


If you plan on realigning the ownership of your surgery center, consult with a lawyer who can assist in preparing the appropriate documentation. Choosing the wrong partner or failing to incorporate adequate protections in your center’s governing documents can result in you losing control of the way your center is run and counteract the economic benefits of being a part-owner.