Investopedia defines equity as, “the value of an asset less the value of all liabilities on that asset.” Or, in plain accounting terms, equity equals assets minus liabilities.
If the assets of ambulatory surgery centers are its surgeon/physician owners, and the surgeon/physician owners believe in themselves and the case volume they project, why would they consider giving up significant equity in their ASC?
I should qualify my previous statement. In certain cases, physician owners are not the only assets in an ASC. Joint venture opportunities are one example. Hospital systems can not only make good ASC partners, but also have the potential to be valuable ASC assets. They can extend leverage in the market and their payor contracting clout can have significant value. Additional assets health systems can bring to an ASC are found here.
Surgeons sow the seeds of ASC success. They are the primary volume drivers to the surgery center. Therefore, it is our belief that as much equity as possible should be in the physicians’ hands.
Large ASC management companies often request larger portions of equity. Their rationale is typically based on two premises. First, that they will work harder for the success of the entity if they hold a significant ownership share. And second, that the services they bring to the center justify this type of equity position. We’ve found this is not necessarily the case. Consider the following:
- Management contracts based on a fee-for service provide the same, or even greater, incentive for the management company to perform. If a management company isn’t delivering results, their own profit margin suffers. Eventually, ASC ownership will seek management expertise elsewhere.
- No management company would advise their on-site management team to work harder, or put in less effort, based on the level of ownership held.
- The leverage a management company brings in terms of vendor contracts or payer arrangements are not enhanced by equity levels.
There is something else to think about when considering giving up sizable equity. If the relationship with the management company does not work out, it is very difficult and costly to buy-out or disengage that partner. A more thorough discussion of the non-equity management model from the perspectives of physician/hospital joint ventures, is available here.
In some cases, giving up additional equity makes sense. This is true when investing partners need a large amount of capital to build a facility and they simply do not have the financial wherewithal to pull that capital together. In this case, it behooves physician owners to give up only what’s needed to finance the project – nothing more.
It may also make sense for the facility to surrender equity when the contracting clout of the large equity partner results in a significant return on that equity in the form of enhanced managed care contracts. For example, if a center is going to give up 25% of their equity, the contracting clout should return 35% in improved reimbursement.
The success of an ASC comes from physician partners utilizing the facility. The more equity the surgeons/physicians have, the more invested they are in ensuring the ASC’s success. This is the best way to maximize ASC prosperity.
Rick DeHart – Principal Partner