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Legal Update
The Case for Merging 2 Marginal ASCs
Henry Bloom, Jerry Sokol, Joshua Kaye
Publish Date: May 7, 2011

Declining reimbursement rates, market saturation, a still-sluggish economy and continued uncertainty over healthcare reform have taken their toll on ambulatory surgical center profitability. Payors in several markets have issued or are considering moratoriums on adding ASCs to their panels. Others are delaying or denying payment to out-of-network facilities, while threatening to cancel contracts with in-network physicians affiliated with them. Little wonder, then, that financially underperforming ASCs are considering mergers as a way to weather the storm.

Objective: Survive and thrive
By now, the ASC industry may have reached a natural consolidation point. Recent years have seen the development of fewer and fewer start-up ASCs. It doesn't appear that trend will change in 2011.

There's also been a recent rise in mergers and acquisitions among ASC management firms: a consolidation of the consolidators. USPI acquired HealthMark late last year, Surgery Partners executed an agreement to acquire NovaMed, and AmSurg last month announced plans to buy National Surgical Care.

Mergers aren't limited to the industry's big players, though. Two or more marginally profitable (or even not-profitable) ASCs that join forces to consolidate physicians, operations and revenues under 1 roof may be able to create a more formidable — and more valuable — facility.

Consider the case of 2 Florida ASCs. Each had generated about $1 million in earnings before interest, taxes, depreciation and amortization (EBITDA) and operated with less than 30% profit margins. As separate entities, they had a combined equity value of about $6 million, taking into account their long-term debt. The physician-owners were disappointed by the performance of their respective centers and by the fact that selling each with such low EBITDAs wouldn't bring the returns from corporate partners that they'd hoped for. By closing the doors to one and bringing all the cases into the other center, however, the physician-owners more than tripled the combined equity value.

Here's how. First, the overhead cost savings, increased operational efficiencies and improved payor contracts the 2 centers would realize as a single entity doubled their combined estimated $2 million EBITDA to $4 million. Next, the ASCs were marketed to potential corporate buyers based on the anticipated operations of a single, healthy facility, as opposed to 2 marginally profitable facilities. The potential buyers instantly saw the value of the merged center and were willing to pay a higher purchase price. As you can see in the table below, the multiple went from 5 for each individual center to 6.5 for the merged center, ultimately increasing the total equity value by $16 million.

The Whole Is Greater Than the Sum of Its Parts




$1 million

$4 million

Times the multiple



Equals a business value of

$5 million

$26 million

Minus long-term debt

$2 million

$4 million

Equals an equity value of

$3 million

$22 million

Times the number of ASCs



Equals a total equity value of

$6 million

$22 million

Keys to consider
It's possible that a merger can cure what ails many unprofitable centers nowadays. While it can prove fiscally beneficial, merging 2 ASCs into a single facility isn't a seamless process. Those who undertake it will face countless legal and business issues before the deal is done. Here are 5 important steps they'll have to settle before they begin.

Build the pro forma. Building an accurate pro forma for a merged center can be as difficult as it is important. Since this business plan lets all parties make an informed decision, it is strongly recommended that someone who has experience in the task develop it. While you can eliminate certain expenses in a merger, you may need to add new ones. A close examination and justification of each itemized expense is an important first step toward a successful merger.

Value each ASC. Joining 2 independent surgery centers will raise sensitive questions about the true value each one brings to the transaction. While the relative EBITDA of each is likely the primary factor on this front, there are others to consider. Engage a fair and unbiased third party to manage the merger process.

Determine the surviving entity. Before the merger, each ASC will have its own name, tax ID number, Medicare number, lease, vendor relationships and commercial payor contracts. Post-merger, only one of the ASCs will still be standing. As a result, physicians will use only one of these sets of details, with the numbers and contracts from the other facility no longer valid. Only after a careful analysis can you determine which facility merges and which survives.

Identify physician-leaders. The merger process may involve 20 or more physician-owners, each of whom has his own view on how the deal should be structured. In order to manage all the personalities and opinions, and to keep the deal from drowning in discord, a team of 3 to 5 physicians who can fairly lead the team across the finish line is ideal.

Agree on major issues at onset. Owner-ship and governance present a huge list of considerations, even for a single-center start-up. If you sign the documents for a merger without discussing these major issues, your deal is likely to fall apart. How is ownership structured? Which staff members stay and which go? What are the future plans for syndication or sale? Who will handle anesthesia? What's the payor contracting strategy? Who's willing to rearrange their surgery schedules? This is just the beginning, but the more that's out in the open up front, the stronger the merger will be.