Legal Issues for 2010

The ambulatory surgery center industry (ASC) confronted both challenges and change in 2009. However, with numerous ASC developments underway and an economic recovery on the horizon, the ASC industry is poised to perform well in 2010. This article addresses the key business and critical healthcare regulatory developments of this past year and their potential impact on the ASC industry for 2010.

Sale to ASC Management Companies and Health Systems

A significant business issue confronted in 2009 by the ASC industry was the decline in transactions involving a sale of a significant equity interest in an ASC to an ASC management company or health system. This decline was likely precipitated at least in part by a few historical ASC management companies that slowed down their acquisition strategies due to the tightened credit market.

In addition, the terms and pricing associated with a sale of a significant equity stake in an ASC clearly changed. For the past few years, many ASC management companies and health systems were willing to acquire a controlling equity interest in an ASC for a 7-plus purchase price multiple. Most purchase price multiples have dropped into the 5-6 range.

The purchase price formula is typically calculated as follows: (i) the ASC’s earnings before interest, taxes, depreciation and amortization (EBITDA) for the prior twelve months; multiplied by (ii) the purchase price multiple (e.g., 5-6 range); less (iii) the ASC’s long-term liabilities; multiplied by (iv) the ownership percentage being purchased. For example,. assume an ASC with $800,000 in EBITDA and no long-term debt desires to sell a 51 percent interest to an ASC management company, then the purchase price could range from $2 million to $2.5 million (e.g., [($800,000 x 5 to 6) – $0] x 51 percent).