After years of market dominance, ASC management companies are facing stiff competition from physician practice management (PPM) companies owned by private equity investors looking to acquire and consolidate single-specialty practices and their affiliated surgery centers. It will be interesting to see which ASC transaction model wins out — the traditional ASC management company joint venture (JV) that preserves physicians' direct ownership in their ASC, or the PPM platform that views the ASC as a small piece of a roll-up strategy and eliminates surgeons as direct owners.

The ASC industry was born from physician discontent with the hospital setting, more lenient regulatory laws and an emphasis on lower cost outpatient care. Traditional ASC management companies structured thier core business model through JVs with physician partners, harnessing the physicians' entrepreneurial spirit and adopting a partnership approach. Today, publicly traded companies or private equity funds have acquired many of these "traditional" ASC companies. In the last 5 years alone:

• Bain Capital acquired a controlling interest in Surgery Partners
• Envision Healthcare merged with AmSurg
• Kelso & Co. acquired Physicians Endoscopy
• KKR & Co. acquired Covenant Surgical Partners
• Tenet Healthcare Corp. acquired a controlling interest in United Surgical Partners International (USPI)
• UnitedHealth Group/Optum acquired Surgical Care Affiliates

Despite these mega deals involving the largest ASC management companies, many of those that remain continue to structure their ASC partnerships in traditional JV arrangements, rooted in the value of having physicians as direct minority owners. Physician ownership creates economic and reputational alignment, leading to high-quality care, better utilization and smarter expense management. The few ASC management companies that have tentatively explored PPM arrangements still tend to pursue the traditional JV model, consistent with their historical strategy and national platform.

No matter who holds the reins, traditional ASC management companies seem to have the same horses in the race. This is not the case with PPMs, which have a fundamentally different approach to ASCs.

PPM model

After the failures of the 1990s, today's PPM companies (often referred to as "platforms") are focused on delivering value to their managed practices and growing the PPM platform's earnings. They often do this by developing and building out ancillary services, including lab, imaging and ASCs. Unlike ASC management companies that view the surgical center as the core business, the typical PPM platform views the ASC as only an "ancillary service" to a medical practice. Because of this fundamentally different investment strategy, the PPM platform typically elects to:

• enter into a long-term management arrangement with the practice;
• purchase 100% of the ASC; and
• issue the physician partners rollover equity in the larger PPM platform.

The upside to a typical PPM transaction is that physician-sellers take home a larger up-front return when they sell 100% (versus 51%) of the ASC. They also receive a very small slice of rollover equity in the national PPM platform, but it is both temporary and attenuated from ASC performance, as the ASC is only a small portion of the overall PPM platform and the private equity fund is obligated to sell the PPM platform (and rollover equity) in the near future.

As background, private equity funds pool investments from various limited partners and use those funds to buy private companies, increase their profitability (via managerial expertise, acquisitions, working capital, new technology, operational efficiencies and business strategy), and then are required by their fund documents to sell those portfolio companies in 5 to 10 years. When a private equity fund sells — or "exits" — the PPM platform, physicians generally have the right to participate in that transaction and sell their rollover equity. Following the private equity fund exit, the physicians no longer have any indirect ownership interest in their ASC, as a new enterprise now owns the platform.

May the best model win

While both the JV and PPM ownership models have pros and cons, one thing is certain: the ASC marketplace is more competitive than ever. A few CEOs of ASC management companies recently told me in no uncertain terms that despite the PPM industry activity, they would continue to pursue a traditional ASC joint venture model as part of their core strategy. OSM