Project One

Situation Overview:

Client - A large multi-location Physician Practice (“the Client” or “Practice”) in Southern California that lacked a coordinated Ambulatory Surgery Center (ASC) strategy. The Surgeons were free to invest in whatever ASC they wanted to and divert cases wherever convenient. Without a coordinated ASC strategy, the individual Surgeons lacked the scale to positively affect the clinical, the operational and the technological experience their patients deserved. Individual Surgeons partnered as minority investors in a large chain style ASC oftentimes had their demands and needs unmet as the national chain ASCs reported to a corporate partner or to larger organized practices. A profit centered viewpoint (instead of an overall relationship centered view) on operational management meant that Surgeon requests fell on deaf ears. Mosaic Healthcare Solutions (“Mosaic”) worked closely with the Client and each surgeon individually to understand the operational and technological needs they felt were needed to ensure a positive patient experience. A buy vs. build discussion refined the appropriate strategic next steps for the practice. By understanding each Surgeon’s unique needs, Mosaic developed an ASC strategy that met the Practice’s overall goals (consistent positive patient experience + access to new technology) while allowing the practice to leverage its scale into an asset that allowed for favorable discussions in realizing the individual Surgeon’s unique needs (clinical control, improved ROI, patient expectation management).

Discovery

The Client has a large footprint throughout Orange County and diverted its case load to several ASC and HOPD locations. Ownership at those ASCs / HOPDs were fractional and not meaningful from a financial or control perspective. Each partner’s ownership was immaterial (<1-3%) with distributions inconsistent. Inconsistent distributions could be tolerated if the Client had some control over the ASC decision making. Because so many different centers were utilized, The Client was unable to ensure a consistent positive experience. The Client was looking for a centralized ASC solution where the majority of their local cases would be diverted to while ensuring patients had the same consistent positive experience. The Client was also concerned that non-compete provisions in their existing agreements may be triggered should they invest elsewhere. Buying an ASC outright would allow the practice to secure a location immediately on a turn-key basis but would in theory be costly as purchasing control of an ASC that was profitable requires a willing seller as well as substantial capital. Building an ASC was more cost effective and could be built to exact specifications but also meant the Client would have to endure an additional 18-24 months of subpar patient experiences on top of the strain of building, operating and growing an ASC to cash flow positivity.

Phase 1.

Screen local market for the following criteria:

  • Medicare certified ASC (Ambulatory Surgery Center) within a 45min drive of the practice locations.

  • Under-utilized ASCs to filter out high priced assets unlikely available for sale or prohibitively expensive to purchase control

  • ASC's that were turn-key (i.e. existing service line in the same specialty) or could accommodate high volume case days

  • Existing contracts favorable for the Client’s specialty 

  • Ability to provide high customer service / customer satisfaction

  • Location outside of non-compete radius

From Phase 1, several candidate centers emerged for further discussions: 

Targets 

  1. Multi-specialty ASC managed by a chain ASC management company - A multi-specialty surgery center that was profitable but struggling to retain surgeons and caseload. They were equipped for the Practice’s cases but struggled to attract new surgeons due to low distribution history. The Practice had at one point performed cases at this location but never owned shares. 

  2. Single specialty Medicare certified ASC owned by a solo Plastic Surgeon within walking distance of practice - The Plastic Surgeon operated a center within a center ASC / Practice model which allowed the Client to purchase control of the ASC at a steep discount to comparable freestanding ASCs. Conversely, the center would only be an ASC on certain days of the week, growing to additional days as the Plastic Surgeon approached retirement (Plastic Surgeon was mid 60's and near retirement. Selling ASC was part of his retirement goal). 

Phase 2, Maximizing value for the Client

Mosaic initiated a dual track process of engaging both the Multi-specialty ASC and the Single Specialty ASC to maximize options for the Practice. After much discussion, diligence and negotiations, the Practice purchased a significant stake in the Multi-Specialty ASC. 

Actions Taken By Mosaic Healthcare Solutions

Mosaic Healthcare Solutions had relationships with key decision makers that managed the Multi-Specialty ASC. We convinced the Management company of the Practice's interest in using the center as a core part of the Practice's long term surgical solutions (increased surgical volume = stability in operations, distributions for all partners, ability to syndicate to new partners due to improved ASC performance). Selling a significant (>20%) interest in the ASC aligned the interests of the existing partners, the Management Company and most importantly, the Practice.

Through Mosaic Healthcare Solutions' negotiation efforts, the initial sale price provided by the Management company was eventually reduced to 50% of the original offer price. Mosaic Healthcare Solutions successfully challenged the valuation provided by the 3rd party appraisal firm engaged by the Management Company and successfully reduced the purchase price by identifying valuation errors and inconsistencies. We negotiated a board seat and medical directorship that allowed the practice to affect direct decision-making control with regard to patient experience, purchasing decisions and clinical safety. We negotiated several technology upgrades that compelled the center to invest in new equipment (high end microscope) and technologies (laser platform). Lastly, we negotiated financing for the Practice by a 3rd party that allowed for zero cash outlay for the practice in securing its ownership in the ASC. 

Retrospective View

With the Client as an anchor practice in the ASC, the management entity was able to attract several new providers as well as several health systems to invest in the ASC. Changes initiated by the practice operationally helped improved efficiency within the center, attracting new partners. Overall patient experience was now standardized and consistent. Within 24 months, the Practice sold down ~10% of its interest to help the ASC syndicate to the new health system partner. The proceeds of the sell down were used to repay the original loan used to purchase the interest in the ASC, thus making the effective cost basis for practice investment in the ASC near zero.