Strategic partnerships with private equity firms: What ASCs need to know

Current market trends have made ambulatory surgery centers (ASCs) and physician practices hot commodities for acquisition. But for physicians and other owner-operators of ASCs, how do they know whether or when to sell, and who the right partner would be?

At a workshop sponsored by Vector Medical Group at Becker's 28th Annual Meeting: The Business & Operation of ASCs, Dana Jacoby, CEO of Vector Medical Group, and Gary Herschman, a partner of the law firm Epstein Becker & Green, discussed the landscape of strategic partnerships among ASCs today, critical things to consider when exploring a strategic partnership and steps in the partnership process.

Four key takeaways were:

  1. The market for medical groups and ASCs is hot. The rate of reported physician practice transactions is soaring. According to Ms. Jacoby, who cited Cap1Q, Pitchbook and Bloomberg, in 2021, there were 393 transactions, up from 88 in 2015. Despite the economy and rising interest rates, the market has yet too cool, she said. For ASCs, though the exact number of transactions is difficult to track, the volume of transactions continues to be robust. Also, in addition to acquisitions, the number of ASCs has grown as more procedures are shifting to outpatient environments.

"One of the reasons private equity is capitalizing on so many surgical specialties is because they're banking on the ability to stand up ASCs, put bundled payments over them and really be able to enjoy the fruits of doing outpatient-inpatient types of procedures in an ambulatory surgery center," Ms. Jacoby said.

  1. Now is a great time to consider whether a strategic partnership is right for your ASC. With reimbursement dropping and inflation rising, many ASCs and medical groups are straining to stay afloat. "Let's say you saw 35 patients a day last year, how many patients can you really add to your schedule to make up that difference?" Ms. Jacoby asked. "We tell people, it's your fiduciary responsibility to at least look at your options right now, especially with all the changes in healthcare." A potential strategic partnership is not right for every group or ASC, but it may be beneficial in some instances. And rising interest rates may eventually drive down valuations as debt becomes more expensive, Mr. Herschman said, making now the right time to consider possible partnerships

Among the key considerations facing independent medical groups and ASCs are market consolidation, reimbursement and regulations, power players gobbling up primary care referral sources, value-based payment, direct contracting, capital for healthcare IT and ancillary expansion, a shift in focus to the outpatient setting and a post-pandemic new normal. Many of these considerations can make a strategic partnership with a well-resourced entity appealing.

Among all of the considerations, the top three reasons for a practice or an ASC to explore strategic partnerships are: 1) to monetize the true value of the practice or ASC; 2) to mitigate future risks and uncertainties and 3) to realize the benefits of a larger infrastructure for growth and success.

  1. Private equity firms are a viable potential partner with unique benefits for ASCs and medical practices. Among potential partners, including hospitals, payers and mega-groups, private equity offers true business and financial expertise. But this business acumen allows the private equity firms to handle aspects of the business while physicians do what they do best: treat patients. "Investors don't want to tell physicians how to practice medicine; what they want to do is provide capital and help grow the platform of that group and their reputation," Mr. Herschman said.

Typically, private equity firms attain a controlling interest by acquiring a majority interest in a practice or an ASC. Physician owners continue to own a minority interest. That allows the physicians to receive value up front, while sharing in additional upside that is generated post-transaction.

  1. A typical transaction consists of four discrete stages. Phase one is market assessment and an initial valuation analysis, which can be performed by a paid consultant or by an investment banker. Phase two is market exploration, preparation and launch. Phase three is suitor discussions and negotiations, ending with selection and a letter of intent. The ASC can choose to end the transaction at any stage, but once the letter of intent is signed, both parties have generally learned enough to be serious about moving forward. Phase four is the transaction closing.

While a strategic partnership is not for all practices and ASCs, based on the changing healthcare landscape a strategic partnership can be an attractive option with significant benefits.

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