Aren't All ASC Management Companies the Same?
Insights from an ASC Expert
May 25, 2021 - Aren’t all ASC management companies the same?
Definitively, no. All ASC management companies should bring professional expertise and guidance to your ASC project, but almost every ASC management company’s economic model is unique. Let’s dive deeper into the primary differences and discuss how to maximize your return on investment.
- Majority vs. Minority – In the ASC industry, most firms fall into one of two “buckets.” The first group requires a majority equity interest (>51%) in an ASC partnership. These firms typically have ready-made ASC rates with the commercial payers (depending on the market).
The second group is comfortable holding a minority equity interest (<50%) in the ASC partnership. Firms in this group have various equity ownership requirements, with some companies offering a sliding scale based on their financial model/offering (i.e. development fee, management fee, revenue cycle fee, etc.).
- Governance/Control – Firms who own a majority interest in an ASC partnership typically require controlling provisions in the operating agreement, primarily for two reasons: (i) It’s the largest shareholder and wants to protect its investment, and (ii) The commercial payor relationships require a ‘controlling interest’ in an ASC for their rates to apply.
Minority firms typically have physician-friendly governance requirements in the partnership agreement, though minority firms will not cede all rights, as they want to protect their investment as well. In this scenario, these firms provide expert guidance to surgeon partners to ensure the partnership makes solid business decisions.
- Commercial Payor Rates – This should not come as a surprise, but the majority firms typically have better reimbursement rates to offer to their ASC partnerships. For these to apply, the tradeoff to the surgeon investors is less equity and control.
Some minority firms have ready-made ASC rates while others do not. For those firms without available rates, they will lead rate negotiations with the payors in the respective state. Ensure the firm has experience negotiating rates with commercial payors for a de novo ASC and determine their likelihood of success. Some factors to consider: (1) is the market saturated with other ASCs, (2) what percentage of cases will be transitioning from the hospital setting (higher cost) to the ASC (lower cost), and (3) what is the specialty mix of cases to be performed in the ASC? This topic deserves focus while evaluating ASC partners.
So where do I begin, and what’s the best fit for a new ASC?
If I were preparing to develop an ASC, should I consider a majority or minority management firm to partner with? Here are three reasons to start with a minority firm.
- You maintain more equity in the partnership and thus a higher financial upside both short-term and long-term (more below).
- You have input and control on key partnership and project decisions early in the process (i.e. equipment, floorplan, staff, location, lease terms, etc.) as well as throughout the partnership.
- You maintain the ability to sell a majority equity interest (to a hospital or a majority ASC firm) which could create a significant liquidity event for the surgeon investors. Fair market value for the purchase of a majority interest in an ASC is approximately 8 times its TTM EBITDA. If you’re unfamiliar with TTM or EBITDA, contact me to discuss this important topic.
While every situation is unique and should be discussed with multiple firms to get a feel for the right fit, there is a clear recipe to maximize economic returns. I would be happy to discuss your situation in detail to offer professional guidance accordingly.