DOING BUSINESS
should be made if the ASC’s rental rate varies from the local market.
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Management fees—Many ASCs pay a management fee to an outside com- pany to perform day-to-day manage- ment functions of the center. These fees typically range from 5 percent to 8 percent of net revenue. If a par- ticular ASC’s historical management fee expense is below or in excess of this range, a normalization adjust- ment might be warranted.
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Billing fees—ASCs can outsource their billing and collection functions. These fees, structured similarly to management fee arrangements, typically range from 4 percent to 6 percent of net revenue. Historical billing and collection costs should be analyzed and adjusted if outside of this range.
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Personal, discretionary and one-time expenses—These
costs should be
eliminated. Examples include personal automobile expense, discretionary charitable contributions and one-time consulting or repairs expenses.
Projecting Revenue The most commonly used method for valuing ASCs is the “discounted cash flow (DCF) method.” Revenue projec- tions are typically constructed on a rev- enue-per-surgical-case basis. Important factors that influence volume include capacity, case mix, local demand for services and competition. Additionally, factors that influence reimbursement include payer mix, contract renegotia- tions and case mix shifts. ASC capacity usually can be esti- mated based on average time per case or maximum cases per day divided by operating hours or days per year. Con- sideration should be given to the spe- cific ASC’s case mix. For example, a center with a high concentration of pain management cases, which are less time-intensive than cases in other spe- cialties, will be able to accommodate more volume than a center of the same size that has a high concentration of
orthopedics cases. As long as case vol- ume remains below capacity, volume growth is typically a function of local demographics and competition. Con- sideration should also be given to the specifics of certain physician-users, i.e., a high volume-producing physi- cian is nearing retirement, etc. Growth in revenue per case is typically
a function of payer mix. Absent other mitigating factors, annual reimbursement growth for governmental payers such as Medicare and Medicaid typically ranges from 0 percent to 2 percent. Commercial payer reimbursement growth tends to be a bit higher and could range from 2 percent to 4 percent annually. Projected reimbursement per case should be weighted by each payer’s estimated reimbursement growth and each payer’s percentage of the ASC’s total charges. Aside from payer mix, other factors can affect reimbursement projections. ASCs periodically renegotiate their commercial payer contracts, and those negotiations can result in higher reimbursement. Multispecialty ASCs might also make efforts to shift case mix toward more complex cases, which can result in faster increases in revenue per case.
Projecting Operating Expenses ASC operating expenses primarily con- sist of staff salaries and wages, medical supplies, billing and collections, man- agement fees, and facilities and equip- ment. Variable expenses, such as med- ical supplies, are a function of volume
or revenue and should be projected as such. Meanwhile, predominately fixed expenses, such as staff wages and facil- ities and equipment, typically increase at inflationary rates. Careful consider- ation should be given to volume pro- jections and the effect volume has on staff wages expense, because a signif- icant projected increase in case vol- ume would likely merit an increase in an ASC’s staffing to accommodate the additional volume. As previously stated, individual
operating expense items such as rent, management fees and billing fees, should be analyzed and adjusted, if necessary, to ensure they are consistent with fair market value. Further, total operating expenses—typically as a percent of revenue and per surgical case—also should be compared to applicable benchmark data to ensure the overall projections make sense relative to other ASCs. When possible, specific benchmark data should be used to ensure that the ASCs included in the benchmark data provide a valid comparison to the ASC being valued since factors such as number of ORs, case volume and case mix can impact an ASC’s expense structure and average cost per case.
Risk Factors and the Discount Rate After making adjustments to histor- ical operating expenses, projecting ASC revenue and operating expenses, and making adjustments for certain items such as capital expenditures and changes in net working capital, the valuator discounts projected future cash flow to present value using a dis- count rate. A discount rate measures the degree of risk associated with the ASC’s projected future cash flows. Discount rates have an inverse rela- tionship with value: the higher the dis- count rate, i.e., more risk, the lower the value and vice versa. Important risk factors to consider when develop- ing an appropriate discount rate for an ASC include:
ASC FOCUS JANUARY 2016 19
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