Physician Investment in an ASC

Potential Pitfalls for Sellers and Buyers

By Robert Zasa, MSHHA, FACMPE

Investing and performing cases in an ASC enables physicians to be more productive with their practice time, while augmenting their practice income. In the early years of the surgery center movement, investors were mostly independent physicians and physician groups. But as the industry has matured, ASC acquisition and investment activity has intensified with hospital systems, venture capital groups, health insurers and ASC management firms entering the mix. Like the early physician owners, these new business savvy investors understand that a well- managed ASC offers a solid financial return on investment and a means to expand their market.

As ASCs have become a prime target for investment and acquisition, physicians with ownership in an ASC have been besieged by offers from various health care players to buy or invest in their centers. This is especially true for physician owners in their 60s with profitable centers. Physician owners may be looking to sell a portion of their stake, for a financial return, while remaining involved in the center and retaining a portion of the ASC to perform future procedures. They may want relief from debt, declining profitability due to out-of-network cuts, and the ongoing financial pressure from an increasingly complex health care environment. These scenarios provide opportunities for physicians who have not had ownership to buy into the centers where they now perform or will perform cases.

For both physician seller and physician buyer, there are potential pitfalls during the sale process that can be avoided. This is especially true when there is significant interest in the ASC by several investors and a perceived timeliness to the deal due to the investor competition. In these situations, owners face the challenge of remaining profitable while debating “what comes next?” In some cases, physicians have used the surgery center as a plank in retirement plans and want proper compensation. Physician owners must determine how much of the ASC they want to sell, when the optimum time is to sell and what the ownership structure will be going forward.


The pitfall of the wrong fit.

During the selection and decision process, physician owners must take time to assess the best partner. This is not a matter of just looking at financial data and coming up with a proper EBITDA. This is a more complex process and requires more due diligence. The seller needs to ascertain if the buyer shares similar approaches to managing the center and the impact on the physicians that the surgery center serves. It is in the ASC’s best interest to determine whether the parties will jointly commit to help grow the business post-sale.

Existing partner physicians can assist in identifying unaffiliated physicians in the area that might want to join the center. But before adding them to the medical staff, the ASC administrators should find out whether current physicians are amenable to adding new specialties to the center, and if they are open to reducing staffing and vendor costs to increase profitability.

The pitfall of misunderstanding your managed care environment.

Investors and sellers must understand the current state and projected future reimbursement trends in the ASC’s market area. The new partners need to decide and agree on how to price services to stay competitive in the market, while increasing center profitability. Understanding reimbursement in the area and having the ability to participate with existing payer contracts is critical.

I have experienced markets where the surgery center is very attractive but, due to the concentration of many surgery centers in the area, the center was not able to participate with large payers that already had contracts with too many other ASCs.

Different reimbursement techniques such as flat fees, published fees, bundled fees, and availability of workers comp contracts and personal injury work all need to be considered. Investors should not assume current contracts can be carried over. A thorough review of payer contracts should always be done during a sale.


The pitfall of ill-planned joint ventures.

Successful joint ventures are not based solely on market environment, reimbursement and financial factors, but also on the personal relationship between the investor and seller of the center. Parties must have chemistry and common goals going forward. Sellers have often admitted to seller’s remorse even though they just received a lot of money for their shares. To the remorseful seller, it seemed like the sale was just a transaction, and not a true partnership.

The resulting relationship after a sale is dependent on the effort to build the relationship before the transaction. Unfortunately, this is not emphasized enough as part of the investment process. A sale is a very difficult decision because the owner’s professional reputation, ego, financial resources and emotional attachment to the business are huge. The relationship formed between the seller and investor is critical when the physician seller will stay involved in the center and continue to own interests and use the ASC. This relationship demands a level of trust and a continued positive working environment. It is imperative to create this relationship and nurture it before, during and after the investment.


The buyer’s pitfall of not doing the homework.

Investors should do a significant amount of due diligence on the center’s environment prior to making an offer. The investor needs to estimate new physician availability, and whether there is a medical services differentiation between that surgery center and others in the market that can be used as competitive advantages to grow the business.
How does an investor validate center potential? One method is to ask current partners how they see the center’s strengths and weaknesses. Speaking with anesthesiologists or groups that service the center and other centers in the area is also very useful.

It is sometime helpful to speak with other ASC owners and ASC companies in the market, especially if there is a relationship between the executives of these businesses. Physician owners have a tendency to share information with other physician owners given past relationships. They sometimes help each other with supplies, staffing and other services to support their own financial bottom line. Centers may also form consortiums without breaking any compliance statutes and/or regulations. There are no secrets in medicine or the ASC world. You can also glean information from physician partners who offer services to large companies and insurance carriers in their area. ASCs are a small community, and it is not hard to understand market conditions when investing in an ASC.


The pitfall of not doing background and reputation due diligence.

Those of us who have been in the ASC field for a long time know to perform thorough background checks on key surgeons in the surgery center before investing. To some this may seem insulting, but it is critical to examine the reputation and legal background of the center’s key owners and physicians. As that saying goes, “You are judged by the company you keep.”

I recently passed on an investment even after the financials, market environment and reimbursement checked out, because the reputation of the center proved to be negative due to some of the key doctors. Investing is about the quality of partners; they will affect future numbers and growth of the facility as well as the investor’s reputation. Reputation also impacts the ability to recruit other physicians.


The pitfall of a lax transition strategy.

Investors should have a planned transition with timelines and duties outlined. This does not have to be in excruciating detail, but there needs to be an overall plan to implement changes. In our case, we designated a transition officer in the company to focus on the transition strategy and partner integration. Transitions typically take from three to four months and need focused, individual attention to make sure physician sellers feel they are part of the process. You must love the transition, so the seller-investor relationship grows even stronger.

Deals do not end once the definitive agreement is signed; that’s when they’ve just begun. The transition plan must be tailored to the specifics of the environment, considering attributes of the surgery center, to make it a successful investment for both parties. The plan includes bi-weekly updates enabling the sellers to understand whether the transition is going well and to immediately address any problems.

There are many other pitfalls to avoid when investing or acquiring interest in a surgery center. I’ve highlighted several of the most important ones I’ve experienced over the years of developing, managing and investing in centers. I have come to understand the most critical issues in joint venturing, and what is most important to the physicians in these transactions. It has been deeply satisfying to assist physicians in the successful investment and development of their surgery center “babies.” I am enriched by the relationships that have grown from these experiences.

Robert Zasa is President and founder of Ambulatory Systems Development.
Contact: or 626.840.4248.