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ASC Industry Trends to Watch

Reform and recession mean evolution and adaptation.

It's reasonable to predict that a year of challenge and consolidation for the ASC industry will be followed with one marked by evolution and change. Only time will tell, of course, but a review of the key business and legal developments to emerge over the past year might offer insights into the direction that the industry may take this year.

1. Health systems hunger for ASCs
Health systems, hospitals and physicians are still struggling to understand the impact of healthcare reform, how the concepts of accountable care organizations, "bending the cost curve" and integration will affect them and which business strategies will best benefit them. In light of these concerns, health systems have been aggressively acquiring ASCs and physician practices in an effort to capture greater market share.

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Their voracious appetite has not gone unnoticed by ASCs and ASC management companies looking to partner with health systems. This is particularly true of out-of-network centers that see such a partnership as a necessary defensive tactic that can mitigate the financial hit of transitioning to in-network reimbursement rates by leveraging the health system's contracting power with commercial payors.

In addition, selling significant equity interest to a health system benefits an ASC's owners since many systems are willing to pay a fair market value premium multiple and let the ASC participate in the system's commercial payor rates. Through such a partnership, the ASC's owners could enjoy the potentially lucrative proceeds from a sale while still maintaining the same level of distributions from the ASC.

Some health systems are actually pursuing the "one-two punch" of acquiring 100% of an ASC in combination with employing its affiliated physicians. While this approach departs from the traditional hospital-physician joint venture, owning all of the ASC's equity generally earns a hospital a substantial uptick in Medicare reimbursement since the center is then operated as a hospital outpatient department.

2. Mergers and consolidations
We've seen more and more instances of multiple ASCs consolidating their operations and their revenues. These transactions can vary in complexity, but generally involve the physician-investors of 2 or more ASCs becoming the owners of a single facility.

A number of factors must be considered to determine which ASC will be the surviving entity, including each center's commercial payor contracts and its physical condition. This trend is already exerting a substantial impact on the industry, as it offers the owners of a struggling ASC the opportunity to combine its efforts with those of another ASC to create virtually immediate, and often significant, value.

It's not unheard of for this type of transaction to result in the turnaround of a facility on the verge of closure, at which physician-owners face personal liability for loan guarantees, into a venture that can reap the benefits of selling equity interest for a substantial multiple to a health system of ASC management company.

ASCs aren't the only players joining forces. There has also been a considerable rise in mergers and acquisitions among ASC management firms: a consolidation of the consolidators. For example, USPI acquired HealthMark in the third quarter of 2010.

Given the uncertainty surrounding healthcare reform and out-of-network reimbursement and the sense that the industry has reached a natural consolidation point, it's likely that the large, national ASC management firms will continue to acquire the smaller national and regional ones that have successfully developed and operated centers. It's also quite possible that we'll see some consolidation among the larger firms themselves.

3. Non-compete considerations
Sometimes an ASC's experience with corporate partnership doesn't live up to its expectations. Perhaps the physicians feel their management partner hasn't been able to recruit new investors, secure more profitable contracts from commercial payors or provide sufficient value-added components for their share in the venture.

In these situations, physician-owners might seek opportunities to disengage the ASC from its corporate partner or even withdraw from the ASC to seek support for a new venture. Physician-owners, however, are typically subject to non-compete and other restrictive covenants.

The enforceability of these agreements is unique to each state's laws, but generally a restrictive covenant remains enforceable as long as it is reasonable in geographic scope and duration, and if the enforcing party is attempting to protect a legitimate business interest.

As the ASC market becomes more competitive and its players seek to fuel growth by recruiting new physician-owners, both facilities and management firms must exercise caution not to tortiously interfere with physicians who hold equity interests in other ASCs. While it's been said that lawsuits are, unfortunately, the cost of doing business in America, consulting with your legal counsel and complying with contract law can help to mitigate your exposure to non-compete and similar claims.

4. The anesthesia angle
Anesthesia reimbursement is an increasingly substantial revenue source. Anesthesia services are a natural extension of virtually all surgical services. So it's not surprising that some ASCs and their physician-owners have been considering a number of joint venture models in which they partner with their anesthesia providers to share the profits. These arrangements, however, may raise serious regulatory issues under the federal Anti-kickback Statute and other healthcare laws.

One critical aspect, from a regulatory perspective, is that the physician-owners have both true financial risk — "skin in the game" — and operational risk in connection with the venture. To the extent that an ASC management firm, health system or other non-physician investor participates, such an arrangement may also raise issues with a state's corporate practice of medicine laws.

While additional sources of revenue will always be attractive to surgery centers and their investors, regardless of the state of the economy, anesthesia service joint ventures should only be implemented under the advice and guidance of an experienced healthcare attorney.

Mr. Sokol and Mr. Kaye are partners in McDermott Will & Emery's Miami office and co-chairs of the firm's Ambulatory Surgical Center Industry Practice Group.