ASC Valuations:

ASC Valuations:
What i$ Your Facility Worth?

By C. Elliott Jeter, CFA CPA

The value of stock in publicly traded companies is easy to measure; simply refer to newspaper stock market quotes for current prices. Privately held equity interests, such as shares in ambulatory surgery center (ASC) partnerships, are more difficult to value. The assessment of value of privately held stock is subjective in nature and requires knowledge and consideration of all the relevant facts and circumstances about the business.

Physician/Hospital ASC Partnerships

There are certain situations where understanding the value of a physician/hospital ASC partnership is important. Examples of specific situations include:

• An outside company tenders an offer for a portion of the equity of the ASC.
• Physician partners want to purchase the hospital’s equity share.
• A physician shareholder dies and the estate needs to be bought out,
• A physician shareholder retires and needs to be bought out, or
• A physician desires to buy into an existing partnership.

In joint ventures that involve hospitals and physicians, the federal anti-kickback statutes (fraud and abuse laws) require that all transactions between physicians and hospitals be consummated at fair market value. In addition, federal statutes require tax-exempt hospitals that enter into joint ventures with physicians to enter into those transactions at fair market value or risk losing their tax-exempt status. Typically, ASCs hire qualified, independent third-party valuation firms to provide opinions of fair market value in situations like those listed above that pose a risk of violating these statutes.

Because ASC shares or units are not publicly traded, fair market value is used as the industry standard to estimate the price at which the ASC shares would be bought and sold in an open market. Fair market value is defined in the tax regulations as the price at which an entity’s assets or services would exchange between a willing buyer and a willing seller when both parties have reasonable knowledge of the relevant facts and neither party is under compulsion to buy or sell.

When conducting fair market value studies, analysts are required to conduct the valuation based upon generally accepted valuation methodologies. Generally accepted valuation methodologies require the analyst to consider the three approaches to value: the cost, market and income approach. The cost approach identifies the cost to recreate a business, the market comparison approach computes value by examining the purchase price of similar companies in a free and open market, and the income approach projects a future income stream attributable to a business and then discounts those earnings back to present value.

Those who perform independent fair market value assessments should:

• Have appropriate business valuation training
• Focus on valuations as a primary business, and
• Focus on the healthcare industry, and specifically, ASCs

Appropriate business valuation training includes designations associated with the American Society of Appraisers (ASA) and the Association for Investment Management and Research (CFA). These designations call for the successful completion of rigorous coursework and exams along with extensive experience requirements. The valuation consultant must be knowledgeable about the healthcare industry and the elements that drive the operations of ASCs. A business valuation consultant who does not understand what makes an ASC partnership succeed often will misinterpret important equity valuation data. Independence or impartiality is also important. The valuation consultant must be impartial in the treatment of the valuation regardless of the outcome.

Physician ASC Partnerships

Although physician-owned ASCs do not always require the same stringent evaluations of fair market value as physician/hospital joint ventures, an independent and impartial estimate of fair market value can be very useful. To reduce the risk associated with shareholder disputes, we suggest that ASC partnerships engage a qualified, independent valuation firm to provide either an annual or semi-annual fair market value study. The shareholders of a group may elect not to engage in an independent fair market value study for purposes of shareholder buy in and out. The values established by the partnership, however, must not in any way be affected by the value or volume of referrals associated with an individual surgeon partner.

The underlying factors that affect profitability, cash flow, distributable earnings and capital investment also affect the equity value of the ASC partnership. Because these value drivers are not always readily apparent, an ASC valuation can be used as a tool for enhancing shareholder value. A manager who adopts the perspective of managing value can present the shareholders of the partnership with information that allows better business management and decision making for the partnership.

To become a value manager, an ASC manager must adopt a unique perspective that involves understanding and adopting a shareholder’s view of the business and then demonstrating a willingness to act on opportunities that create incremental value. To be effective, the ASC manager must also understand the components of value and the factors that affect value, including:

• Specialty mixes
• Case volumes
• Payer mixes
• Physician preferences
• Procedure mixes
• Staffing levels
• Capital equipment purchases
• Medical supply costs
• Operating room turnover time
• Accounts receivable management

A properly prepared fair market value analysis will clearly delineate the factors that enhance or affect shareholder value. That analysis can be an effective tool to use in managing value on an ongoing basis.