intellimarker multi-specialty asc study 2017 · payor mix analysis ... the same is true for the...

INTELLIMARKERMULTI-SPECIALTY ASC STUDY

2017

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Overview ................................................................................................................................... 1Industry Analysis .................................................................................................................... 4Financial Statements ............................................................................................................ 13 Income Statement Common Size Income Statement Balance Sheet Common Size Balance Sheet Liquidity Analysis .................................................................................................................. 16 Volume Analysis ................................................................................................................... 17 Case Volume Mix Case Volume SummaryPayor Mix Analysis ............................................................................................................... 19 Payor Mix (Gross Charges) Payor Mix (Cases) Payor Mix (Collections)Revenue Analysis .................................................................................................................. 22 Revenue per Case Otolaryngology Revenue per Case Gastroenterology Revenue per Case General Surgery Revenue per Case OB/GYN Revenue per Case Ophthalmology Revenue per Case Oral Surgery Revenue per Case Orthopedics Revenue per Case Pain Management Revenue per Case Plastic Surgery Revenue per Case Podiatry Revenue per Case Urology Revenue per Case EBITDA Margin Analysis .................................................................................................... 29 Staffing Analysis .................................................................................................................. 30 Staffing Summary Hourly Salaries & Wages Staff Hours per Case Operating Expense Analysis .............................................................................................. 33 Facility Statistics .................................................................................................................. 34Regional Analysis ................................................................................................................ 35 Income Statement Common Size Income Statement Liquidity Analysis Case Volume as a Percent of Total Cases Case Volume Summary Payor Mix as a Percent of Collections Net Revenue per Case Staffing Summary Hourly Salaries & Wages Staff Hours per Case Operating Expense Analysis Facility StatisticsKey Definitions ....................................................................................................................... 47

TABLE OF CONTENTS

2017 INTELLIMARKERThe Multi-Specialty ASC Intellimarker (the “Intellimarker”) provides detailed financial benchmarking information and analysis on ambulatory surgery centers (“ASCs”) across the United States. The Intellimarker is designed to help you better understand the relative financial and operational perfor-mance of ASCs. By comparing an ASC’s results to other similar facilities, you can identify areas where a facility might be excelling or areas for im-provement. The benchmarking information contained in the Intellimarker can help pinpoint issues and provide a basis for developing actionable strategies for improving financial performance and creating value.

The study is based on detailed information provided for 278 centers around the country representing an aggregate surgical case volume of over 1.3 million. Data included in the study is from 2015 and 2016. The information provided has been divided into sections which cover all significant areas of financial and operational performance. These benchmarking sections are as follows: income statement, balance sheet, liquidity, case mix, case vol-ume, payor mix, net revenue per case by specialty, EBITDA margin, staffing, operating expenses, and facility information. The study also includes a re-gional analysis which allows users to compare benchmarks across various regions.

INTERPRETING RESULTSThe financial and operational performance of an ASC is driven by a number of market-specific factors which include contracts with commercial payors; competition from ASCs and other facilities; insurance coverage; regional labor markets; and supplier contracts. As such, no two ASCs are perfectly comparable from a benchmarking perspective. However, by aggregating financial and operational information from a large sample of ASCs across the country we are able to reduce noise in the benchmarking data caused by these market-specific factors.

Each of the financial and operational line items presented in the analysis are treated as independent variables. For example, the "total operating ex-penses" line item on the income statement presents the distribution of the observed total operating expenses for all centers included in the study. This is independent of the other expense line items presented; therefore, the sum of the individual operating expenses will not equal the total operating expenses. The same is true for the balance sheet and other operational benchmarks.

Furthermore, each line item in our analysis excludes centers that did not re-port the respective information. For example, the case mix information pre-sented represents the median percentage of total cases performed within the designated specialty for all centers performing cases in the subject spe-cialty. Stated differently, it is the median percentage of total cases for all centers which perform the designated specialty. Individual centers included in the sample do not perform cases in all of the specialties listed; therefore, the sum of the individual specialties will not equal 100%. The same is true for payor mix and other benchmarks.

MULTI-SPECIALTY ASC INTELLIMARKER 2017

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NOTES & DISCLAIMERThe information in the Intellimarker is intended to provide users with information regarding ranges of financial and operating results of ASCs around the country as provided by participants in the study conducted by VMG Health. Improper use of this information including limiting competition, restricting trade, and reducing or stabilizing salary or benefit levels is expressly prohibited. Such improper use is prohibited by federal and state antitrust laws. Violators risk criminal penalties and civil damages for each offense.

The material contained herein is based upon information that we consider to be reliable, but neither VMG Health nor its affiliates warrant its completeness, accuracy, or adequacy and it should not be relied upon as such. Any assump-tions, opinions, or estimates used in connection with the analysis and preparation of the Intellimarker constitute our judgment as of the date of this material and are subject to change without notice. Neither VMG Health nor its affiliates are responsible for any errors or omissions or for results obtained from the use of this information. Past performance is not necessarily indicative of future results.

This report contains valuable information of VMG Health which is licensed to purchasers of the study for internal review only. No other use is permitted. Requests for permission to make copies of any part of this publication or to arrange for additional user licenses should be directed to:

VMG HealthChateau Plaza2515 McKinney AvenueSuite 1500Dallas, TX 75201

or to:

[email protected]

CONFIDENTIALITYInformation furnished by participants in our research including information regarding the business, financial condition, customer lists, marketing strategy, names of employees, compensation amounts and formulas, billing amounts, operations, and prospects shall be treated as confidential.

VMG Health will not disclose or reveal any of the confidential information to any persons or entities other than to those employees, officers, directors or affiliates who need access to actively and directly participate in the evaluation of the information and the production of such research.

No individual facility information is disclosed in our research and all data is used in a form that makes it im-possible to determine the identity of an individual facility. All information is presented in the aggregate and as summarized statistics.

CITATIONNo part of this publication may be retransmitted in any form or by any means, in whole or in part, without written permission from VMG Health, LLC. Violators risk criminal penalties and civil damages for each offense. Copyright violators will be prosecuted.

Any printed or published reference to or use of data included in the Intellimarker should be cited as follows: VMG Health’s Multi-Specialty ASC Intellimarker 2017.


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BUSINESS VALUATION SERVICES CAPITAL ASSET VALUATION

FINANCIAL REPORTING VALUATION LIFE SCIENCES CONSULTING

PROFESSIONAL SERVICES VALUATION

REAL ESTATE VALUATION

TRANSACTION ADVISORY SERVICES

DISPUTE RESOLUTION & LITIGATION ADVISORY

FMV TOOLS™ INVESTMENT DECISION SUPPORT

ABOUT VMG HEALTH

We perform thousands of healthcare valuations each year in support of mergers, acquisitions, asset sales, joint ventures, divestitures, reorganizations, and litigation activ-ities. Beyond providing an assessment of the value of the business, our process helps providers gain more insight into value and profitability drivers, which ultimately help them enhance their operational and business potential.

To ensure compliance with regulatory guidelines, includ-ing federal and state anti-kickback statutes, and to ensure proper tax treatment for all parties, asset purchases must be conducted at the purchased assets fair market value. Our healthcare and valuation expertise allows us to under-stand all potential issues when establishing fair market value for assets by any healthcare organization.

From consulting agreements to call coverage, physician relationships are vital to enhancing product and service quality. To ensure compliance with regulatory guidelines, including federal and state anti-kickback statutes, we val-ue these relationships to ensure they are established at fair market value.

Our certified real estate valuation team provides expert val-uation and consulting services to healthcare facility owners, operators, lenders and their advisors. The special nature of healthcare real estate assets requires a firm understanding of the business, financial and legal environment in which our clients work. Our expert professionals are focused on the unique characteristics of the healthcare field.

We help buyers and sellers plan proactively – or quickly adapt – by providing thorough and objective financial in-sights at a strategic level, including valuations, financial projections, market and investment analyses, and assis-tance with financial structures, terms, and documentation.

We provide multidisciplinary, independent dispute advisory, expert witness, and strategic consulting services to create and protect value for our clients. We provide value in nu-merous facets of the litigation process such as case as-sessment, strategy formulation, complex financial analysis, damage theory, settlement consulting, and expert testimony.

VMG Health is recognized by leading healthcare systems as one of the most trusted valuation and transaction ad-visors in the U.S. Unlike most firms, which generally serve a wide variety of industries, healthcare is our only area of focus. Our client list includes virtually every type of healthcare service provider in markets throughout the U.S. and around the world – from hospitals and healthcare networks to standalone facilities and ancillary service providers.

Financial reporting requirements associated with mergers and acquisitions burden healthcare operators long after a transaction is completed. Business combinations often re-sult in financial reporting challenges arising from the acqui-sition of tangible and intangible assets and the recording of goodwill. We are uniquely suited to help both non-profit and for-profit healthcare organizations address these challeng-es through our knowledge of fair value reporting require-ments and focused healthcare industry expertise.

The life sciences industry is facing increased scrutiny re-garding payments to health care providers and other refer-ral sources. While the existing disclosure requirements are at the forefront of most compliance strategies, the actual compensation paid for a physician’s time, development ef-forts, and various advisory roles will be a component that will be examined once disclosed. We understand the val-ue brought by thought leaders and the acceptable market data for establishing the fair market value compensation for these health care provider consultants. 4

FMV Tools™ allows health systems to quickly establish healthcare fair market value compensation levels for em-ployed and contracted physicians in various roles based on systematic and unbiased guidelines. FMV Tools™ produc-es a formal opinion outlining pertinent value drivers for the subject arrangement. Each FMV opinion is also accompa-nied by a thorough FMV Reference Report which outlines the data and methodologies for deriving each of the three major Tools, or service categories: clinical services, medi-cal directorships and on-call coverage.

Today’s environments involve projects within various healthcare provider industry sectors that continue to grow in complexity. Most importantly, you must understand the financial and operational risks that exist in achieving cer-tain financial results. We bring 360° financial visibility to the healthcare investment decision support process. Using a proprietary VMG Risk Scorecard, we bring together a vari-ety of products, insights and solutions focused specifically on healthcare investments.


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ASC OVERVIEWAmbulatory surgery centers (“ASCs”) are freestanding facilities which exclusively provide low-acuity surgical proce-dures to patients on an outpatient basis. Surgical procedures performed at an ASC do not require a hospitalization, typically require less than a 24-hour stay, and do not pose a significant safety risk to the patient. ASCs perform sur-gical procedures in a wide range of specialties, including otolaryngology (“ENT”), gastroenterology, general surgery, obstetrics and gynecology, ophthalmology, oral surgery, orthopedics, pain management, and plastic surgery. In order to be licensed by Medicare as an ASC, facilities must satisfy provider enrollment requirements as well as regulatory Conditions for Coverage (“CFCs”). Facilities can meet the CFCs through accreditation with The Joint Commission, the Accreditation Association for Ambulatory Health Care (“AAAHC”), or other accreditation organizations approved by the Centers for Medicare and Medicaid Services. The majority of commercial insurance companies require ASCs to meet Medicare licensure requirements.

NUMBER OF MEDICARE-LICENSED ASCSAs illustrated in the chart above, the number of Medicare-licensed ASCs increased 5.4% compounded annually from approximately 3,028 in 20001 to 5,135 in 20102. This includes both single-specialty and multi-specialty ASCs. A num-ber of factors contributed to the growth of ASCs over that time, including migration of surgical services to the outpa-tient setting as a result of medical and technological advances, patient and physician convenience, performance on safety and quality metrics, and lower cost as compared to surgeries performed in the hospital setting.

Since 2010, ASC facility growth has slowed, with the number of ASCs increasing just 1.2% compounded annually from 5,135 in 2010 to 5,519 as of December 20162. Consolidation of management companies, physician employment by hospitals, and volume pressure resulting from the proliferation of high-deductible health plans (“HDHPs”) have contributed to the decline in growth since 2010. It is estimated that the ASC market generates approximately $15.0 billion–$25.0 billion3 of annual revenue.

©2017 VMG Health, LLC. All rights reserved.4

3,028

5,135 5,217 5,287 5,363 5,437 5,474 5,519

-

1,000

2,000

3,000

4,000

5,000

6,000

2000 2010 2011 2012 2013 2014 2015 2016

Total Medicare Licensed ASCs

Source: MedPAC, Medicare Provider of Services File


GEOGRAPHIC OVERVIEWCertain state laws require a certificate of need (“CON”) in order to operate an ASC. ASCs in a state with a CON requirement must complete a regulatory review process in order to obtain the certificate. CON applications are typically reviewed by the state depart-ment of health and awarded only when additional capacity is needed within the market. State CON programs were implemented with the stated intention of controlling escalating health care costs by reducing excess capacity.

The chart below illustrates the states which require a CON in order to operate an ASC. As of March 2017, 27 states required a CON to operate an ASC.4 The number of ASCs per 100,000 persons for those states was approximately 1.6 as compared to 1.8 for states that do not require a CON.5

Overall, the states with highest concentrations of ASCs were Maryland and Georgia, with approximately 5.8 and 3.2 ASCs per 100,000 persons, respectively. Vermont, the District of Columbia, and West Virginia had the lowest concentration of ASCs, with 0.2, 0.4, and 0.5 ASCs per 100,000 persons, respectively.5

A number of companies specialize in the management and own-ership of ASCs. AmSurg is the largest operator of ASCs, as mea-sured by total number of facilities, with a total of 260 ASCs as of December 20166. Approximately 74.0%6 of AmSurg ASCs are sin-gle-specialty centers providing gastroenterology or ophthalmolo-gy surgical services. On June 15, 2016, AmSurg entered into a merger agreement with Envision Healthcare Holdings, a publicly traded physician services and medical transportation company. The merger was completed on December 1, 2016, with the new combined entity operating as Envision Healthcare Corporation.

United Surgical Partners International (“USPI”) is the largest op-erator of multi-specialty ASCs as measured in terms of net rev-enue. On March 23, 2015, Tenet entered into a contribution and purchase agreement with USPI, which consolidated the USPI fa-cilities and Tenet outpatient facilities into a single joint venture. As of December 31, 2016, the joint venture owned and operated approximately 239 ASCs7.

LARGEST ASC OPERATORS


ASC CONNo ASC CON

CON Regulation By State

1.3

0.82.5

2.31.3

2.0

2.1

2.7

1.6

3.13.1

2.2

1.5

2.2

2.4

2.2

1.1

1.7

2.0

1.6

0.8

1.2

2.3

1.30.9

1.0

0.7 3.2

2.0

1.42.1 1.0

0.70.7

1.91.6

1.8

0.5

2.0

1.5

1.2

0.7

0.2 (VT)

2.1 (NH)

0.8 (MA)

0.9 (RI)

1.3 (CT) 3.0 (NJ)

2.4 (DE)

5.8 (MD)0.4 (DC)

Number of Medicare Licensed ASCs Per 100,000 Persons (Dec. 31, 2016)

Source: United States Census Bureau, Medicare Provider of Services, National Conference of State Legislatures


Company Name # of CentersAmSurg 260USPI/Tenet 239Surgical Care Affiliates 186HCA 118SurgCenter Development 106Surgery Partners 99Other Management/Multi-Site Operators 504Total Centers 1,512

Note: Number of Centers as of December 31, 2016Source: Public Company SEC Filings, Becker's ASC Review & VMG Research

Surgical Care Affiliates ("SCA") owns approximately 186 ASCs and manages an additional 19 ASCs8. SCA was recently acquired by Optum, the health care arm of UnitedHealth Group. Other large op-erators include HCA and SurgCenter Development, which operat-ed 1189 and 10610 surgery centers, respectively. Overall, the ASC market place is fragmented, with the top operators owning approx-imately 27.0%11 of the total surgery centers and no single operator owning more than 5.0% of the total ASCs. However, the ASC indus-try has begun to consolidate in recent years as the growth in the number of centers owned by multi-site operators has outpaced the growth in overall surgery centers every year since 2009.

INDUSTRY TRENDSOUTPATIENT MIGRATIONOver the past 20–30 years, more effective anesthetic agents and less invasive surgical techniques, such as ar-throscopy, have increased the number of procedures that can be safely performed in an outpatient setting. As a result, a significant number of surgical procedures have migrated from inpatient to outpatient settings. Overall, outpatient surgeries as a percentage of total surgeries have increased from 50.5% in 1990 to 65.9% in 201412. The migration began to slow in 2000. The percentage of outpatient surgeries to total surgeries increased slightly from 62.7% in 2000 to 63.6% in 2010. However, the percentage of outpatient surgeries to total surgeries has re-cently increased from approximately 63.6% in 2010 to 65.9% in 2014. Medical and technological advancements are expected to drive continued migration of surgical procedures to the outpatient setting, which will drive addi-tional volume growth for ASCs.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

PERCENTAGE OF INPATIENT VS. OUTPATIENT SURGERIES

Outpatient Surgeries Inpatient SurgeriesSource: American Hospital Association TrendWatch



Independent Centers73%

Multi-Site Operators27%

Top Multi-Site Operators as a % of Total ASCs

PROLIFERATION OF HIGH-DEDUCTIBLE HEALTH PLANSIn recent years, there has been a significant shift in commercial insurance coverage toward HDHPs due to historical increases in premiums for employer-sponsored health plans. HDHPs are generally defined as plans that have a minimum deductible of $1,000 for single coverage and $2,500 for family coverage that must be met before insurance coverage takes effect. According to the Kaiser Family Foundation, it is estimated that the percentage of workers enrolled in a plan with a general annual deductible of at least $1,000 has increased from 10.0% in 2006 to 51.0% in 201613. More recently, the percentage of covered workers enrolled has increased from approximately 41.0% in 2014 to 51.0% in 2016.

The shift toward HDHPs has pressured surgical volumes as greater patient financial responsibility has resulted in patients opting to delay care. In addition, HDHPs have increased consumer price sensitivity as patients are responsible for a larger amount of out-of-pocket expenses. The shift has also increased seasonality in surgical volume as patient demand for health care services is greater at the end of the year once the plan deductible has been met.

EMPLOYMENT OF INDEPENDENT PHYSICIANSHistorical reimbursement pressure from government and commercial payors has resulted in a sig-nificant decline in the percentage of U.S. physicians in private practice. To avoid declining revenues and increased capital burdens associated with electronic medical records, physicians have sold their private practices and subsequently entered into employment agreements with local health systems.

According to Accenture, the percentage of physicians in private practice has declined from approxi-mately 57.0% in 2000 to approximately 37.0% in 201314. The percentage of independent physicians was projected to have further declined to 33.0% in 201614. The increasing employment of indepen-dent physicians by health systems negatively impacts ASC volumes in two ways. First, it reduces the number of specialty physicians eligible for ownership in ASCs, as a significant number of health sys-tems prevent employed physicians from holding an ownership interest in ASCs. Second, the employ-ment of primary care physicians by health systems reduces the number of eligible patients for ASCs as these patients are directed toward the facilities of the health system which employs the physician.

©2017 VMG Health, LLC. All rights reserved. 7

16%21%

35%40%

46%50% 49%

58%61% 63% 65%

10% 12%

18%22%

27%31%

34%38%

41%46%

51%

6% 8% 9%13%

17%22%

26% 28%32%

39%

45%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Percentage of Workers With General Annual Deductible >$1,000

Small Firms (3-199 workers) All Firms Large Firms (200+ workers)Source: Kaiser Employer Health Benefits Survey, 2016


MEDICARE PAYMENTOVERVIEW Beginning Jan. 1, 2008, CMS implemented a revised payment system which utilizes the relative weights from the Hospital Outpatient Prospective Payment System (“OPPS”) as a guide to determine payments for ASC procedures. The revised payment system was implemented over a four-year time period and significantly expanded the number of procedures eligible for payment by Medicare in the ASC setting. There are approximately 3,700 procedures cur-rently approved for payment by Medicare in an ASC.

Under the revised payment methodology, Medicare makes a single or bundled payment to ASCs for facility services furnished in connection with the covered surgical procedure. Facility services bundled in the payment include the following:

FACILITY COST

EQUIPMENT COST

CLINICAL AND ADMINISTRATIVE STAFF

BUNDLED RADIOLOGYSERVICES

ADMINISTRATIVESERVICES

IMPLANTABLE DEVICES THAT ARE NOT CONSIDERED PASS-THROUGHDEVICES

SUPPLIES AND EQUIPMENT FOR MOST ANESTHESIA PROCEDURES

DRUGS AND MEDICAL SUPPLIES (NOTE: CERTAIN DRUGS AND MEDICAL SUP-PLIES ARE ELIGIBLE FOR CARVE-OUT PAYMENTS)

ASCs are eligible for separate payments for covered ancillary services integral to a covered surgical procedure, which include drugs and radiology services separately paid under the OPPS, brachytherapy source, implantable devices, and corneal tissue acquisition. It should be noted that the ASC payment does not include payment for the physician’s professional services, anesthesia professional services, durable medical equipment, or non-implantable prosthetic devices. These are separately billed by the provider of the services.

Each procedure approved for payment in an ASC is classified into an ambulatory payment classification (“APC”) group on the basis of clinical and cost similarity. The APCs utilized for the ASC system are the same APCs used for the OPPS. Each APC is assigned a relative weight based on the geometric mean cost to perform a procedure in that APC as compared to procedures in other APCs. The relative weight is then multiplied by a conversion factor to determine the payment amount for the respective APC. To adjust for geographic differences in input prices, CMS adjusts the labor portion of the conversion factor (estimated at 50.0%) by the hospital wage index. The conversion factor for calendar year (“CY”) 2017 was $45.030. Since procedures within an APC have the same relative weight, all procedures within the APC are reimbursed at the same amount.

CMS updates the relative weights and conversion factor annually based on established methodologies. Each year, CMS sets the relative weights for ASC services equal to the OPPS relative weights. The ASC relative weights are then scaled, as mandated by the Medicare Prescription Drug, Improvement, and Modernization Act to maintain budget neutrality, to eliminate any difference in the total payment weight between the current CY and the upcoming CY. This process is completed using the “weight scaler.” This is calculated as the ratio of total payment weight for the current CY to the total payment weight for the upcoming CY based on ASC utilization from the most recent full year of claims data available. The ASC conversion factor is adjusted annually based on the Consumer Price Index for All Urban Consumers (“CPI-U”), which is reduced by the multi-factor productivity adjustment as mandated by the Affordable Care Act (“ACA”).



CMS utilizes a different methodology to determine payment amounts for office-based surgical procedures, device-intensive procedures, and separately reimbursable drugs and radiology services. Office-based proce-dures are defined as procedures performed in a physician’s office at least 50.0% of the time. Payment for these services is the lesser of the standard ASC rate determined based on the methodology described above or the non-facility practice expense portion of the Medicare Physician Fee Schedule rate (which applies when the ser-vice is furnished in a physician office). This methodology is designed to minimize financial incentives to shift services from the physician office to the ASC setting. It is the same methodology utilized to determine payment amounts for separately payable radiology services.

Device-intensive procedures are defined as procedures for which the device cost is packaged into the procedure payment and the cost of the device accounts for more than 40.0% of the total payment. For these procedures, CMS divides the payment into a device portion and a non-device portion. The device portion is reimbursed at the OPPS payment rate while the non-device portion is reimbursed using the standard methodology. Separately reimbursable drugs/biologicals are paid at the OPPS amount.

Finally, ASC payment rates are adjusted when multiple surgical procedures are performed during the same encounter. When this occurs, the ASC is paid in full for the highest reimbursed procedure and 50.0% of all sub-sequent procedures performed15.

Source: MedPAC payment basics

CMS CY 2017 FINAL RULING On Nov. 1, 2016, CMS released the CY 2017 OPPS and ASC payment system policy changes and pay-ment rates final rule. Based on the final ruling, ASC payment rates will increase by 1.9% in CY 2017. The increase is determined based on a 2.2% inflation adjustment per the CPI – U less the multifactor productivity (“MFP”) reduction of 0.3% mandated by the ACA. In addition, CMS calculated a wage index budget neutrality adjustment of 0.9996 for 2017. Therefore, the final CY 2017 ASC conversion factor for ASCs that meet quality reporting requirements is set at $45.030, which is calculated as the product of the CY 2016 conversion factor of $44.190 multiplied by the wage index budget neutrality adjustment of 0.9996 and the MFP adjusted CPI-U update of 1.9%16.


Conversion Factor (CY 2017

$45.030)

APC Relative Weight

Payment

Labor Portion (50%) Adjusted By Hospital

Wage Index

Medicare ASC Payment Overview


MEDICARE ASC PAYMENT TRENDSTotal Medicare payments to ASCs have increased approximately 7.2% compounded annually, from approximately $1.4 billion in 2000 to $4.2 billion in 2016. Over the same time period, Medicare spending per ASC has increased 3.2% com-pounded annually, from approximately $462,000 in 2000 to approximately $766,000 in 2016. As previously mentioned, Medicare made significant revisions to the ASC payment system in 2008. Since that time, growth in Medicare payments to ASCs have slowed, increasing 4.0% compounded annually, from approximately $3.1 billion in 2008 to $4.2 billion in 2016. Over that same time period, Medicare spending per ASC has increased 2.5% compounded annually, from approx-imately $627,000 in 2008 to approximately $766,000 in 2016. Overall, ASC payments account for less than 1.0% of total Medicare spending17.

Presented in the chart below is a summary of the estimated 2015 and 2016 Medicare spending by CPT code for the top 10 CPT codes performed in ASCs ranked in order of 2016 spending. During 2016, the top CPT codes in terms of Medi-care spending were CPT 66984 (cataract surgery with intraocular lens, 1 stage) and CPT 43239 (upper GI endoscopy biopsy), which accounted for approximately 27.7% and 4.6% of total 2016 Medicare ASC spending, respectively. The next highest paid codes were CPT 45380 (colonoscopy and biopsy) and CPT 45385 (lesion removal colonoscopy), which accounted for approximately 4.5% and 3.0% of the total 2016 Medicare ASC payments, respectively. Overall, the top 10 procedures accounted for approximately 51.5% of total Medicare ASC spending18. It should be noted that Medicare has made significant payment adjustments for some of the top 10 CPT codes in 2017.

TOP 10 MEDICARE ASC PROCEDURES


$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$0

$100

$200

$300

$400

$500

$600

$700

$800

$900

Tota

l Med

icar

e Sp

endi

ng o

n AS

Cs (I

n Bi

llion

s)

Med

icar

e Sp

endi

ng P

er A

SC (I

n Th

ousa

nds)

Total Medicare ASC Spending

Medicare Payment Per ASC Total ASC Medicare Payments

Source: MedPAC Reports to Congress from 2004 to 2017. Medicare ASC payments for 2016 based on CMS estimates.

CPT Code Description Est. 2015 Payments

% of Total Medicare

Est. 2016 Payments

% of Total Medicare

Est. 2017 Change

66984 Cataract surg w/iol 1 stage $1,092 28.1% $1,108 27.7% 1.0%43239 Upper gi endoscopy biopsy $177 4.5% $185 4.6% -9.0%45380 Colonoscopy and biopsy $181 4.6% $180 4.5% 13.0%45385 Lesion removal colonoscopy $117 3.0% $118 3.0% 13.0%66982 Cataract surgery complex $95 2.4% $96 2.4% 1.0%64483 Inj foramen epidural l/s $94 2.4% $87 2.2% 6.0%63685 Insrt/redo spine n generator $54 1.4% $82 2.1% 10.0%64493 Inj paravert f jnt l/s 1 lev $53 1.4% $71 1.8% -24.0%63650 Implant neuroelectrodes $52 1.3% $66 1.7% 12.0%66821 After cataract laser surgery $65 1.7% $65 1.6% 4.0%

Total $1,980 50.9% $2,058 51.5%

Source: Federal Register Analysis of ASC 2017 Final RulingNote: Percentage of total Medicare represents the percentage of total spending by Medicare on ASCs. Total spending is presented in millions.


FEDERAL ANTI-KICKBACK STATUTEThe federal anti-kickback statute prohibits the knowing and willful offer, payment, solicitation, or receipt of any form of remuneration in return for, or to induce, (i) the referral of a person, (ii) the furnishing or arranging for the furnishing of items or services reimbursable under the Medicare, Medicaid or other governmental programs, or (iii) the purchase, lease, or order or arranging or recommending purchasing, leasing or ordering of any item or service reimbursable under the Medicare, Medicaid, or other governmental programs. The anti-kickback statute is a criminal statute, violation of which is a felony punishable by fine of up to $50,000 per violation, imprisonment for up to five years, or both. In addition, violators may be excluded from partici-pation in the Medicare program.

Beginning in 1999, the Office of Inspector General ("OIG") created a series of “safe harbor” regulations which outline payment and business practices that, if fully complied with, the OIG will not consider kickbacks, bribes, or rebates in violation of the anti-kickback statute. There are 16 safe harbor regulations outlined in 42 CFR 1001.952 (A)-(U), including a safe harbor specifically applicable to ASCs, which is outlined in section R. Specifically, the surgery center safe harbor protects payments that represent a return on an ownership or in-vestment interest, such as dividend or interest income, made to an investor as long as the investment entity is a certified ASC, the operating room and recovery room space is dedicated exclusively to the ASC, patients referred to the ASC are fully informed of the physician’s investment interest, and additional requirements, depending on the category of ASC, which are outlined in the safe harbor. The surgery center safe harbor defines four categories of ASCs: (1) surgeon-owned surgery centers, (2) single-specialty surgery centers, (3) multi-specialty surgery centers, and (4) hospital/physician joint venture surgery centers.

STARK SELF-REFERRAL LAWThe Ethics in Patient Referral Act of 1989, commonly known to as the Stark law, placed significant restric-tions on physician referrals. Stark I, which became effective on Jan. 1, 1992, as part of the Omnibus Budget Reconciliation Act of 1989, prohibited a physician from referring specimens for clinical laboratory testing reimbursable by Medicare or Medicaid to any entity with which the physician (or immediate family member) has an ownership or investment interest or with which the physician (or immediate family member) has entered into a compensation arrangement.

The Omnibus Budget Reconciliation Act of 1993, frequently referred to as "Stark II,” expanded the self-re-ferral prohibition to cover other "designated health services" reimbursable by Medicare. These designated health services include clinical laboratory services; physical therapy services; occupational therapy services; radiology services including MRI, CT, PET, and ultrasound; radiation therapy services and supplies; durable medical equipment and supplies; parenteral and enteral nutrition, equipment and supplies; prosthetics and/or orthotics; home health services; outpatient prescription drugs; and inpatient and outpatient hospital ser-vices. In addition to Stark II’s focus on fair market value, Stark II requires that contractual arrangements be-tween physician-owned entities should “involve a transaction that is commercially reasonable and furthers the legitimate business purposes of the parties.”

In the final Stark regulations published by the U.S. Department of Health and Human Services on Jan. 4, 2001, the term “designated health services” was specifically defined to not include services that are reim-bursed by Medicare as part of a composite rate, such as services provided by an ASC. However, if designat-ed health services are provided by an ASC and separately billed, referral to the ASC by a physician investor would be prohibited under Stark law. ASCs that do not separately bill for designated health services are not subject to Stark law.



SOURCES

1. Medicare Payment Advisory Commission (“MedPAC”) March 2017 Report to Congress.2. Medicare Provider of Services File.3. SCA and USPI/Tenet Investor presentations.4. National Conference of State Legislatures and VMG review of state regulations.5. Population estimates provided by United States Census Bureau, licensed ASCs by state sourced from the Medicare Provider of Services File.6. Envision Healthcare Investor Presentation March 2017.7. Tenet Healthcare Corporation 2016 annual report.8. SCA 2016 annual report.9. HCA 2016 annual report.10. SurgCenter Development website as of April 1, 2017.11. VMG research of number of ASCs owned by identified management companies and Becker’s “39 ASC management & development companies to watch - 2017”.12. American Hospital Association TrendWatch Chartbook.13. Employer Health Benefit Annual Survey published by the Kaiser Family Foundation and Health Research Educational Trust.14. Accenture, The (Independent) Doctor Will Not See You Now.15. MedPAC Medicare payment basics.16. Ambulatory Surgery Centers Association (“ASCA”) analysis of 2017 ASC final rule.17. MedPAC Reports to Congress from 2004 to 2017. Medicare ASC payments for 2016 based on CMS estimates.18. Analysis of 2017 and 2016 OPPS and ASC final rule posted in the Federal Register. Spending amounts exclude patient portion.




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$'s in thousands Mean 25% Median 75% 90%Net Operating Revenue $9,620 $5,520 $8,446 $12,266 $17,259

Employee Salaries & Wages $1,984 $1,244 $1,673 $2,413 $3,505Taxes & Benefits $471 $268 $385 $574 $785Occupancy Costs $573 $344 $505 $710 $981Drugs & Medical Supplies $2,217 $1,272 $1,908 $2,718 $4,221Other Medical Costs $87 $16 $29 $68 $196Insurance $60 $34 $48 $69 $118General & Administrative $1,491 $894 $1,327 $1,893 $2,550 Management Fees $470 $257 $388 $622 $886 Billing Fees $259 $137 $224 $345 $502

Total Operating Expenses $6,855 $4,388 $6,076 $8,128 $11,565

EBITDA $2,760 $803 $2,019 $4,200 $6,103

Income Statement

Mean 25% Median 75% 90%Net Operating Revenue 100.0% 100.0% 100.0% 100.0% 100.0%

Employee Salaries & Wages 22.2% 17.9% 21.6% 25.9% 29.9%Taxes & Benefits 5.2% 3.9% 4.8% 6.1% 7.8%Occupancy Costs 7.1% 4.0% 6.1% 9.9% 11.9%Drugs & Medical Supplies 23.8% 18.6% 23.0% 28.2% 33.5%Other Medical Costs 0.9% 0.2% 0.3% 0.8% 1.7%Insurance 0.7% 0.4% 0.6% 0.9% 1.3%General & Administrative 16.7% 13.3% 16.4% 19.8% 23.0% Management Fees 5.1% 4.0% 5.0% 6.0% 6.9% Billing Fees 2.8% 2.0% 2.8% 3.9% 4.6%

Total Operating Expenses 76.3% 66.0% 76.2% 86.2% 95.6%

EBITDA 23.7% 13.7% 23.8% 34.0% 44.0%

Note: Billing & Management Fees are included in General & Administrative

Common Size Income Statement

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$'s in thousands Mean 25% Median 75% 90%ASSETS

Cash & Equivalents $930 $359 $631 $1,172 $1,849Net Accounts Receivable $998 $513 $797 $1,229 $1,782Other Current Assets $364 $167 $289 $488 $659

Total Current Assets $1,971 $860 $1,630 $2,546 $3,733

Gross PP&E $4,800 $2,489 $3,997 $5,979 $8,239Accumulated Depreciation ($3,410) ($1,795) ($3,009) ($4,350) ($6,311)

Net Fixed Assets $1,484 $528 $1,019 $1,655 $3,044

Total Assets $3,385 $1,653 $2,837 $4,180 $6,282

LIABILITIESCurrent Liabilities $740 $340 $560 $917 $1,447Current Portion of LTD $304 $86 $212 $380 $747

Total Current Liabilities $859 $389 $633 $1,090 $1,862

Long-Term Debt $1,678 $395 $1,159 $2,114 $3,634Other Long Term Liabilities $256 $126 $180 $284 $416

Total Long Term Liabilities $1,578 $368 $975 $1,915 $3,663

Total Liabilities $1,921 $671 $1,260 $2,481 $4,301

EQUITYShareholders Equity $2,356 $1,081 $1,823 $2,834 $4,564

Total Liabilities & Equity $3,385 $1,653 $2,837 $4,180 $6,282

Balance Sheet

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Mean 25% Median 75% 90%ASSETS

Cash & Equivalents 27.5% 21.7% 22.2% 28.0% 29.4%Net Accounts Receivable 29.5% 31.0% 28.1% 29.4% 28.4%Other Current Assets 10.8% 10.1% 10.2% 11.7% 10.5%

Total Current Assets 58.2% 52.0% 57.5% 60.9% 59.4%

Gross PP&E 141.8% 150.6% 140.9% 143.0% 131.2%Accumulated Depreciation (100.7%) (108.6%) (106.1%) (104.1%) (100.5%)

Net Fixed Assets 43.8% 31.9% 35.9% 39.6% 48.5%

Total Assets 100.0% 100.0% 100.0% 100.0% 100.0%

LIABILITIESCurrent Liabilities 21.9% 20.6% 19.7% 21.9% 23.0%Current Portion of LTD 9.0% 5.2% 7.5% 9.1% 11.9%

Total Current Liabilities 25.4% 23.5% 22.3% 26.1% 29.6%

Long-Term Debt 49.6% 23.9% 40.9% 50.6% 57.8%Other Long Term Liabilities 7.6% 7.6% 6.3% 6.8% 6.6%

Total Long Term Liabilities 46.6% 22.3% 34.4% 45.8% 58.3%

Total Liabilities 56.8% 40.6% 44.4% 59.4% 68.5%

EQUITYShareholders Equity 69.6% 65.4% 64.3% 67.8% 72.7%

Total Liabilities & Equity 100.0% 100.0% 100.0% 100.0% 100.0%

Common Size Balance Sheet

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$'s in thousands Mean 25% Median 75% 90%Cash $930 $359 $631 $1,172 $1,849

% of Total Operating Expenses 13.7% 6.5% 10.1% 17.1% 25.8%Days Cash on Hand 50.1 23.7 37.0 62.3 94.3

Net A/R $998 $513 $797 $1,229 $1,782% of Total Net Operating Revenue 9.9% 7.4% 9.1% 11.4% 14.4%Days A/R Outstanding 36.2 27.0 33.2 41.4 52.7

Net Working Capital $1,515 $699 $1,276 $1,923 $3,244% of Revenue 13.6% 9.7% 13.3% 17.2% 24.2%

Net Working Capital Less Cash $551 $180 $435 $853 $1,315% of Revenue 4.4% 2.7% 5.3% 8.3% 11.0%

Current Ratio 3.1 1.9 2.8 3.9 4.9

Liquidity Analysis

0

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< 8% 8%-10% 10%-12% 12%-14% 14%-16% > 16%

# of

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Working Capital as a Percentage of Net Revenue

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Specialty

Otolaryngology 8%Gastroenterology 29%General Surgery 7%Obstetrics & Gynecology 4%Ophthalmology 20%Oral Surgery 7%Orthopedics 16%Pain Management 16%Plastic Surgery 4%Podiatry 3%Urology 6%

Case Volume as a Percent of Total Cases

All FacilitiesENT, 8%

GI, 29%

GEN, 7%

GYN, 4%OPH, 20%

ORA, 7%

ORT, 16%

PM, 16%

PLS, 4%

POD, 3%URO, 6%



Mean Median 75% 90%

Total Cases per Center 4,858 2,951 4,303 6,332 8,287 Cases per Day (250 Days) 19.4 11.8 17.2 25.3 33.1

Surgical Cases per ORper Year 1,212 792 1,094 1,527 2,025 per Day (250 Days) 4.8 3.2 4.4 6.1 8.1

Non-Surgical cases per PRper Year 1,653 822 1,372 2,175 3,047 per Day (250 Days) 6.6 3.3 5.5 8.7 12.2

% of Cases Performed byTop 2 Physicians 31% 22% 28% 38% 49%Top 5 Physicians 54% 42% 52% 63% 78%Top 10 Physicians 73% 63% 73% 84% 93%

Top 15 Physicians

25%

Case Volume Summary

0%

10%

20%

30%

40%

50%

60%

70%

80%

Top 2 Physicians Top 5 Physicians Top 10 Physicians

% o

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Top Producing Physicians

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Mean Median 75% 90%

Medicare 27% 15% 24% 37% 48%Medicaid 7% 3% 5% 8% 15%Commercial 56% 47% 58% 69% 75%Worker's Comp 10% 3% 5% 12% 18%Self Pay 5% 2% 3% 5% 10%Other Pay 7% 2% 4% 9% 14%

Top 15 Physicians

25%

Payor Mix as a Percent of Gross Charges

0%

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20%

30%

40%

50%

60%

Medicare Medicaid Commercial Worker's Comp Self Pay Other Pay

Mean Payor Mix - Charges

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Mean Median 75% 90%


Top 15 Physicians

25%

Payor Mix as a Percent of Cases

0%

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20%

30%

40%

50%

60%


Mean Payor Mix - Cases

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Mean Median 75% 90%


Top 15 Physicians

25%

Payor Mix as a Percent of Collections

0%

10%

20%

30%

40%

50%

60%

70%


Mean Payor Mix - Collections

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22


Specialty

Otolaryngology $2,591Gastroenterology $1,004General Surgery $2,156Obstetrics & Gynecology $2,344Ophthalmology $1,434Oral Surgery $1,217Orthopedics $3,133Pain Management $1,074Plastic Surgery $1,797Podiatry $2,506Urology $2,368

Median NRPC

Net Revenue per Case

$0 $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500

ENT

GI

GEN

GYN

OPH

ORA

ORT

PM

PLS

POD

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Median Net Revenue per Case

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Mean 25% Median 75% 90%

Net Revenue Per Case $2,854 $1,807 $2,591 $3,713 $4,873

Otolaryngology Revenue per Case

05

101520253035404550

$1,200 $1,800 $2,400 $3,000 $3,600 $4,200 >$4,200

# of

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Otolaryngology Frequency Distribution


Net Revenue Per Case $1,117 $805 $1,004 $1,331 $1,613

Gastroenterology Revenue per Case

05

1015202530354045

$600 $800 $1,000 $1,200 $1,400 $1,600 >$1,600

# of

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Gastroenterology Frequency Distribution

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General Surgery Revenue per Case

0

5

10

15

20

25

30

35

40

$1,200 $1,600 $2,000 $2,400 $2,800 $3,200 >$3,200

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General Surgery Frequency Distribution

Obstetrics and Gynecology Revenue per Case



0

5

10

15

20

25

30

35

$1,400 $1,800 $2,200 $2,600 $3,000 $3,400 >$3,400

# of

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OB/GYN Frequency Distribution

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Ophthalmology Revenue per Case



05

101520253035404550

$1,000 $1,200 $1,400 $1,600 $1,800 $2,000 >$2,000

# of

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Ophthalmology Frequency Distribution

Oral Surgery Revenue per Case



0

2

4

6

8

10

12

14

16

$800 $1,000 $1,200 $1,400 $1,600 $1,800 >$1,800

# of

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Oral Surgery Frequency Distribution

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Orthopedics Revenue per Case



0

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$2,000 $2,500 $3,000 $3,500 $4,000 $4,500 >$4,500

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Orthopedics Frequency Distribution

Pain Management Revenue per Case



0

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$600 $900 $1,200 $1,500 $1,800 $2,100 >$2,100

# of

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Pain Management Frequency Distribution

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Plastic Surgery Revenue per Case



0

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50

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$1,200 $1,600 $2,000 $2,400 $2,800 $3,200 >$3,200

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Plastic Surgery Frequency Distribution

Podiatry Revenue per Case



05

1015202530354045

$1,400 $1,800 $2,200 $2,600 $3,000 $3,400 >$3,400

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Podiatry Frequency Distribution

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Urology Revenue per Case



0

5

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25

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35

$1,200 $1,600 $2,000 $2,400 $2,800 $3,200 >$3,200

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Urology Frequency Distribution

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EBITDA Margin Analysis


Less than $3mm 5.4% -3.6% 7.4% 16.1% 20.6%$3mm to $4.9mm 10.4% 3.6% 10.6% 18.5% 26.1%$5mm to $6.9mm 19.9% 12.2% 19.9% 26.7% 36.1%$7mm to $8.9mm 23.7% 15.8% 23.2% 31.1% 36.1%Greater than $9mm 33.0% 23.7% 32.1% 41.0% 47.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%


EBITDA Margin Analysis

Less than $3mm $3mm to $4.9mm $5mm to $6.9mm $7mm to $8.9mm Greater than $9mm

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Nurse FTE 14.9 9.5 12.7 18.8 25.2Tech FTE 6.7 3.8 5.8 8.8 11.4Administrative FTE 9.1 6.0 8.2 11.0 15.1

Total FTE 31.1 19.7 27.5 38.8 51.4

Staffing Summary

14.9

6.7

9.1

Nurse FTE Tech FTE Administrative FTE


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Nurse Staff $36.47 $30.91 $35.61 $40.95 $47.07Tech Staff $23.69 $20.10 $23.00 $26.47 $30.07Administrative Staff $26.44 $22.82 $25.74 $29.63 $34.47

Total Hourly $30.70 $27.02 $30.02 $33.92 $38.55

Nursing Salary $75,855 $64,289 $74,071 $85,173 $97,902

Hourly Salaries & Wages

0

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100

<$50,000 $50,000-$65,000 $65,000-$80,000 $80,000-$95,000 $95,000-$110,000 >$110,000

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Nursing Salary Frequency Distribution

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Nurse HPC 6.8 5.2 6.5 7.6 9.4Tech HPC 3.1 2.2 2.8 3.7 4.8Administrative HPC 4.4 3.1 3.9 5.2 6.2

Total HPC 14.4 11.3 13.6 15.7 19.8

Staff Hours per Case

6.8

3.1

4.4

Nurse HPC Tech HPC Administrative HPC


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33


Operating Expense Analysisas a % of Net Revenue Mean 25% Median 75% 90%Employee Salaries & Wages 22.2% 17.9% 21.6% 25.9% 29.9%Taxes & Benefits 5.2% 3.9% 4.8% 6.1% 7.8%Occupancy Costs 7.1% 4.0% 6.1% 9.9% 11.9%Drugs & Medical Supplies 23.8% 18.6% 23.0% 28.2% 33.5%Other Medical Costs 0.9% 0.2% 0.3% 0.8% 1.7%Insurance 0.7% 0.4% 0.6% 0.9% 1.3%General & Administrative 16.7% 13.3% 16.4% 19.8% 23.0%

Total Operating Expenses 76.3% 66.0% 76.2% 86.2% 95.6%

per Square FootEmployee Salaries & Wages $137 $94 $126 $163 $219Taxes & Benefits $32 $21 $29 $37 $56Occupancy Costs $39 $30 $38 $46 $55Drugs & Medical Supplies $155 $95 $138 $199 $261Other Medical Costs $5 $1 $2 $4 $11Insurance $5 $2 $3 $6 $9General & Administrative $107 $66 $89 $137 $191

Total Operating Expenses $479 $309 $426 $592 $803

per OR ($'s in thousands)Employee Salaries & Wages $493.7 $342.0 $454.8 $628.3 $775.7Taxes & Benefits $115.9 $76.0 $105.3 $141.4 $184.0Occupancy Costs $143.6 $100.7 $132.8 $173.8 $234.9Drugs & Medical Supplies $545.6 $356.4 $491.9 $716.5 $888.6Other Medical Costs $19.9 $4.5 $7.4 $15.8 $44.2Insurance $16.0 $8.0 $12.6 $19.7 $29.6General & Administrative $384.6 $238.6 $333.8 $488.6 $660.3


per CaseEmployee Salaries & Wages $436 $335 $412 $516 $600Taxes & Benefits $101 $74 $94 $117 $151Occupancy Costs $138 $79 $114 $177 $260Drugs & Medical Supplies $491 $330 $456 $577 $784Other Medical Costs $17 $4 $7 $15 $38Insurance $13 $7 $11 $19 $24General & Administrative $346 $229 $305 $420 $597


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Facility Statistics


Gross PP&E per OR ($'s in thousands) $1,179 $762 $1,083 $1,525 $1,914Gross PP&E per Sq Ft $306 $184 $296 $418 $520

Operating Rooms 4.17 3.00 4.00 5.00 6.00 Procedure Rooms 1.89 1.00 2.00 2.00 3.00

Square Feet per Facility 15,447 10,614 14,000 18,533 24,810 Rental Rate per Sq Ft $30.58 $23.87 $30.09 $36.08 $43.19Rent & Occupancy Cost per Sq Ft $39.59 $31.07 $38.20 $46.29 $55.30

0

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30

40

50

60

70

80

90

<5,000 5,000-10,000 10,000-15,000 15,000-20,000 20,000-25,000 >25,000

# of

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Facility Size Frequency Distribution

NUMBER OF CENTERS BY REGION


REGIONAL ANALYSIS

35


REG

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AL A

NAL

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$'s in thousands All Facilities Atlantic Midwest Mountain Northeast Pacific SouthNet Operating Revenue $8,446 $7,677 $8,259 $7,646 $8,078 $7,252 $9,147

Employee Salaries & Wages $1,673 $1,647 $1,312 $1,730 $1,912 $1,625 $1,731Taxes & Benefits $385 $392 $299 $411 $386 $374 $419Occupancy Costs $505 $428 $392 $563 $464 $554 $534Drugs & Medical Supplies $1,908 $1,796 $1,803 $2,105 $1,673 $1,906 $2,204Other Medical Costs $29 $37 $28 $36 $88 $30 $24Insurance $48 $59 $47 $39 $43 $50 $47General & Administrative $1,327 $1,256 $1,231 $1,336 $1,541 $1,041 $1,421 Management Fees $388 $332 $391 $378 $322 $390 $457 Billing Fees $224 $275 $219 $216 $258 $264 $184

Total Operating Expenses $6,076 $5,906 $5,440 $6,650 $6,188 $5,613 $6,438

EBITDA $2,019 $1,339 $1,933 $1,243 $1,765 $1,584 $2,807

Note: Billing & Management Fees are included in General & Administrative

Income Statement

All Facilities Atlantic Midwest Mountain Northeast Pacific SouthNet Operating Revenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Employee Salaries & Wages 21.6% 24.0% 18.1% 23.3% 23.5% 24.6% 19.1%Taxes & Benefits 4.8% 5.2% 3.9% 5.2% 4.5% 5.5% 4.6%Occupancy Costs 6.1% 6.9% 5.8% 7.3% 6.1% 7.2% 5.7%Drugs & Medical Supplies 23.0% 24.8% 21.7% 26.3% 22.2% 22.5% 22.5%Other Medical Costs 0.3% 0.3% 0.4% 0.4% 1.0% 0.4% 0.2%Insurance 0.6% 0.8% 0.8% 0.5% 0.6% 0.5% 0.5%General & Administrative 16.4% 17.0% 16.7% 15.4% 17.0% 13.9% 16.6% Management Fees 5.0% 5.0% 6.2% 5.0% 4.0% 5.0% 5.4% Billing Fees 2.8% 3.2% 3.2% 3.5% 3.0% 4.0% 2.0%

Total Operating Expenses 76.2% 81.9% 71.7% 83.6% 78.9% 77.8% 71.1%

EBITDA 23.8% 18.1% 28.3% 16.4% 21.1% 21.6% 28.9%

Values presented above represent median for each region.

Common Size Income Statement

36

REG

ION

AL A

NAL

YSIS



$'s in thousands All Facilities Atlantic Midwest Mountain Northeast Pacific SouthCash $631 $497 $592 $428 $614 $608 $715

% of Total Operating Expenses 10.1% 7.6% 9.8% 9.1% 8.4% 10.1% 11.7%Days Cash on Hand 37.0 27.8 35.7 33.3 30.8 37.0 42.6

Net A/R $797 $561 $875 $945 $920 $867 $721% of Total Net Operating Revenue 9.1% 8.8% 10.7% 10.0% 10.4% 11.2% 7.5%Days A/R Outstanding 33.2 32.2 39.0 36.3 37.8 41.0 27.4

Net Working Capital $1,276 $942 $1,286 $1,315 $1,454 $1,411 $1,274% of Revenue 13.3% 13.9% 13.2% 14.4% 12.0% 13.6% 13.2%

Net Working Capital Less Cash $435 $393 $479 $839 $565 $434 $321% of Revenue 5.3% 5.9% 6.4% 8.9% 5.8% 5.3% 4.0%

Current Ratio 2.8 2.8 2.9 3.4 1.9 2.9 2.7


Liquidity Analysis

0%

4%

8%

12%

16%

All Facilities Atlantic Midwest Mountain Northeast Pacific South

Working Capital as a Percentage of Net Revenue

37

REG

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AL A

NAL

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Specialty All Facilities Atlantic Midwest Mountain Northeast Pacific South

Otolaryngology 8% 8% 10% 11% 6% 4% 8%Gastroenterology 29% 30% 31% 24% 33% 33% 29%General Surgery 7% 6% 8% 5% 10% 7% 7%Obstetrics & Gynecology 4% 5% 4% 3% 2% 3% 6%Ophthalmology 20% 20% 21% 12% 16% 22% 20%Oral Surgery 7% 9% 3% 13% 3% 5% 12%Orthopedics 16% 17% 22% 14% 20% 22% 12%Pain Management 16% 11% 18% 19% 14% 18% 16%Plastic Surgery 4% 5% 5% 3% 6% 5% 4%Podiatry 3% 3% 6% 3% 3% 4% 3%Urology 6% 5% 6% 5% 6% 6% 6%


Case Volume as a Percent of Total Cases

38

REG

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AL A

NAL

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Total Cases per Center 4,303 4,984 3,648 4,285 5,219 3,394 4,749 Cases per Day (250 Days) 17.2 19.9 14.6 17.1 20.9 13.6 19.0

Surgical Cases per ORper Year 1,094 1,122 1,022 1,097 1,430 1,044 1,078 per Day (250 Days) 4.4 4.5 4.1 4.4 5.7 4.2 4.3

Non-Surgical cases per PRper Year 1,372 1,362 1,153 1,427 2,314 1,781 1,367 per Day (250 Days) 5.5 5.4 4.6 5.7 9.3 7.1 5.5

% of Cases Performed byTop 2 Physicians 28% 28% 30% 25% 32% 30% 27%Top 5 Physicians 52% 54% 53% 48% 53% 53% 51%Top 10 Physicians 73% 73% 76% 69% 76% 75% 73%

Top 15 Physicians


Case Volume Summary

0%

20%

40%

60%

80%


Top Producing Physicians

Top 2 Physicians Top 5 Physicians Top 10 Physicians

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Medicare 16% 27% 12% 15% 16% 17% 14%Medicaid 3% 3% 3% 7% 2% 4% 4%Commercial 66% 57% 67% 64% 71% 66% 70%Worker's Comp 5% 9% 8% 4% 10% 4% 3%Self Pay 4% 4% 3% 3% 3% 6% 3%Other Pay 4% 6% 4% 3% 5% 5% 4%

Top 15 Physicians


Payor Mix as a Percent of Collections

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Medicare & Commercial as % of Total Collections

Medicare Commercial

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Specialty All Facilities Atlantic Midwest Mountain Northeast Pacific South

Otolaryngology $2,591 $2,048 $2,168 $2,010 $2,644 $3,528 $3,146

Gastroenterology $1,004 $826 $957 $980 $1,133 $1,140 $1,185

General Surgery $2,156 $1,758 $2,295 $2,019 $1,777 $2,160 $2,495

Obstetrics & Gynecology $2,344 $2,089 $2,359 $1,960 $1,678 $2,359 $2,977

Ophthalmology $1,434 $1,298 $1,216 $1,344 $1,466 $1,642 $1,525

Oral Surgery $1,217 $1,639 $1,388 $1,112 $1,300 $1,736 $833

Orthopedics $3,133 $2,980 $3,345 $2,815 $2,534 $3,583 $3,292

Pain Management $1,074 $1,065 $1,138 $988 $1,095 $976 $1,135

Plastic Surgery $1,797 $1,536 $1,791 $1,628 $1,699 $2,360 $1,948

Podiatry $2,506 $2,123 $2,364 $2,209 $2,142 $2,819 $2,862

Urology $2,368 $2,456 $2,033 $2,007 $2,011 $2,350 $2,628



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YSIS




Nurse FTE 12.7 12.6 11.5 14.7 13.7 10.6 13.2Tech FTE 5.8 6.1 4.8 5.8 6.6 5.3 6.5Administrative FTE 8.2 9.0 7.0 8.0 8.7 8.0 8.6

Total FTE 27.5 30.0 23.3 29.3 28.8 24.6 27.7


Staffing Summary

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Number of FTEs By Position

Nurse FTE Tech FTE Administrative FTE

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Nurse Staff $35.61 $34.61 $31.69 $36.97 $41.98 $43.38 $34.12Tech Staff $23.00 $21.19 $22.27 $24.99 $24.62 $26.62 $21.98Administrative Staff $25.74 $24.64 $25.52 $26.76 $28.60 $27.38 $24.71

Total Hourly $30.02 $28.71 $28.30 $30.90 $33.46 $34.79 $28.99


Hourly Salaries & Wages

$0

$9

$18

$27

$36

$45


Hourly Wages By Position

Nurse Staff Tech Staff Administrative Staff

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NAL

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Nurse HPC 6.5 6.1 6.6 6.6 5.8 6.5 6.7Tech HPC 2.8 2.6 2.8 2.5 2.3 3.1 2.9Administrative HPC 3.9 3.8 3.9 4.2 3.8 5.2 3.7

Total HPC 13.6 12.3 13.1 13.6 11.9 14.7 13.9


Staff Hours per Case

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Staff Hours Per Case By Position

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Operating Expense Analysisas a % of Net Revenue All Facilities Atlantic Midwest Mountain Northeast Pacific SouthEmployee Salaries & Wages 21.6% 24.0% 18.1% 23.3% 23.5% 24.6% 19.1%Taxes & Benefits 4.8% 5.2% 3.9% 5.2% 4.5% 5.5% 4.6%Occupancy Costs 6.1% 6.9% 5.8% 7.3% 6.1% 7.2% 5.7%Drugs & Medical Supplies 23.0% 24.8% 21.7% 26.3% 22.2% 22.5% 22.5%Other Medical Costs 0.3% 0.3% 0.4% 0.4% 1.0% 0.4% 0.2%Insurance 0.6% 0.8% 0.8% 0.5% 0.6% 0.5% 0.5%General & Administrative 16.4% 17.0% 16.7% 15.4% 17.0% 13.9% 16.6%

Total Operating Expenses 76.2% 81.9% 71.7% 83.6% 78.9% 77.8% 71.1%

per Square FootEmployee Salaries & Wages $126 $120 $113 $122 $153 $159 $116Taxes & Benefits $29 $29 $25 $29 $31 $38 $26Occupancy Costs $38 $36 $38 $35 $38 $47 $36Drugs & Medical Supplies $138 $119 $132 $117 $138 $177 $137Other Medical Costs $2 $3 $3 $2 $6 $3 $2Insurance $3 $4 $4 $2 $3 $5 $3General & Administrative $89 $88 $98 $75 $112 $102 $100

Total Operating Expenses $426 $398 $412 $382 $481 $531 $421

per OR ($'s in thousands)Employee Salaries & Wages $454.8 $413.7 $399.3 $450.0 $596.1 $530.8 $433.4Taxes & Benefits $105.3 $106.4 $89.6 $101.1 $126.5 $125.9 $96.1Occupancy Costs $132.8 $122.3 $124.8 $139.3 $144.9 $144.5 $130.7Drugs & Medical Supplies $491.9 $451.7 $499.4 $420.6 $513.4 $526.6 $497.1Other Medical Costs $7.4 $8.9 $10.9 $7.4 $29.4 $9.7 $5.8Insurance $12.6 $15.7 $14.4 $9.6 $13.3 $16.1 $10.6General & Administrative $333.8 $314.4 $341.2 $265.5 $443.2 $342.4 $361.9


per CaseEmployee Salaries & Wages $412 $362 $357 $449 $393 $516 $393Taxes & Benefits $94 $91 $83 $102 $87 $132 $93Occupancy Costs $114 $97 $108 $122 $118 $124 $120Drugs & Medical Supplies $456 $391 $463 $429 $425 $492 $486Other Medical Costs $7 $6 $9 $7 $15 $9 $6Insurance $11 $13 $17 $8 $11 $15 $9General & Administrative $305 $272 $336 $289 $253 $325 $333



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Facility Statistics


Gross PP&E per OR ($'s in thousands) $1,083 $1,144 $1,130 $812 $1,362 $981 $1,031Gross PP&E per Sq Ft $296 $305 $296 $197 $307 $312 $304

Operating Rooms 4.00 4.00 4.00 4.00 4.00 4.00 4.00 Procedure Rooms 2.00 2.00 2.00 2.00 1.00 2.00 2.00

Square Feet per Facility 14,000 14,320 12,386 16,818 12,269 11,000 15,837 Rental Rate per Sq Ft $30.09 $26.75 $29.51 $29.99 $28.23 $37.43 $28.30Rent & Occupancy Cost per Sq Ft $38.20 $35.86 $39.16 $35.47 $39.00 $46.97 $36.47


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Average Facility Cost per Square Foot

Rent & Occupancy Cost per Sq Ft Rental Rate per Sq Ft

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KEY DEFINITIONSAccumulated Depreciation: The sum of all depreciation expense incurred in prior accounting periods for all tangible fixed assets utilized in the normal course of operations. Depreciation is a non-cash expense representing a decrease in value of the PP&E center due to age, wear, and other market conditions.

Administrative Staff: All non-clinical staff employed by the center including but not limited to: front desk, scheduling, insur-ance verification, medical records, materials management, and administration.

Billing Fees: Defined as third party contract billing fees. These expenses are included in the General & Administrative Ex-pense line item.

Case Mix: Defined as the median percentage of total cases performed within the designated specialty for all centers per-forming cases in such specialty. Stated differently, it is the median percentage of total cases for all centers which perform the designated specialty. Individual centers included in the sample do not perform cases in all of the specialties listed, therefore the sum of the individual specialties will not equal 100%.

Cash & Equivalents: All cash and cash equivalent securities (e.g. certificates of deposit) which are used to pay the normal operating expenses of the center. Excludes cash held for distribution to shareholders.

Cash as a Percentage of Total Operating Expenses: The Cash & Equivalents divided by the Total Operating Expenses of the center. This metric is utilized to measure the relative amount of cash held by the center.

Common Size Income Statement: An income statement which displays all expense line items as a percentage of total Net Operating Revenue.

Common Size Balance Sheet: A balance sheet which displays all balance sheet line items as a percentage of Total Assets.

Current Liabilities: All non-debt liabilities incurred by the center in the normal course of operation which are expected to be paid within one year (e.g. accrued salaries, accounts payable, etc.).

Current Portion of Long-Term Debt (“LTD”): All debt liabilities which are expected to be repaid by the center within one year.

Current Ratio: Defined as Current Assets divided by Current Liabilities. It is a liquidity ratio which measures the centers ability to pay short term obligations.

Days of Cash on Hand: Calculated by dividing the Cash & Equivalents by the Total Operating Expenses multiplied by the number of days in the period (365). This is another metric which measures the relative amount of cash held by the center.

Days of Accounts Receivable Outstanding: Calculated by dividing the Net Accounts Receivable by the total Net Operating Revenue multiplied by the number of days in the period (365). This is a metric which measures the relative amount of ac-counts receivable outstanding.

Drugs & Medical Supplies: Represents the cost of all supplies directly utilized during surgery, including implants and minor supplies (e.g. gauze, bandages, etc.).

EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization): Financial metric utilized to quantify the center’s operating profitability before taking into consideration leverage, capital requirements, or tax expenses. EBITDA is used as a simplified accrual based estimate of cash flow.

EBITDA Margin: Defined as the center’s EBITDA divided by total Net Operating Revenue.

Employee Salaries & Wages: Total salaries for all full time, part time, and contract staff, including overtime and paid time off (“PTO”).

Full Time Equivalent (“FTE”) Employee: Defined as number of paid hours divided by 2,080.



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General & Administrative Expenses (“G&A”): Includes all other expenses incurred in the operation of the center including contract Management & Billing fees.

Gross Plant, Property, and Equipment (“PP&E”): Defined as the original acquisition cost of all tangible fixed assets utilized in the normal course of operations. This includes but is not limited to building improvements, medical equipment, office equipment, computer hardware, software, etc. Excludes items such as inventory and other supplies which have a useful life of less than one year.

Hours per Case: Calculated as the total full time equivalent (“FTE”) staff multiplied by 2,080 divided by the total number of cases.

Insurance Expense: Defined as expenses incurred to maintain general liability coverage. Insurance expense does not include professional liability insurance for the center’s physicians.

Long-Term Debt (“LTD”): Balance of the center’s debt liabilities excluding the amount classified as the Current Portion of LTD.

Management Fees: Defined as third party contract management fees. These expenses are included in the General & Admin-istrative Expense line item.

Net Accounts Receivable: Outstanding amounts owed by patients for services provided after adjusting for contractual al-lowances and expected bad debt. It should be noted this does not include non-patient receivables.

Net Accounts Receivable as a Percentage of Total Net Operating Revenue: Net Accounts Receivable divided by the total Net Operating Revenue of the center. This metric is utilized to measure the relative amount of accounts receivable outstand-ing.

Net Operating Revenue: Represents gross charges less adjustments for contractual discounts and bad debt expense. Net Operating Revenue represents the amount of revenue available for collections.

Net Fixed Assets: Represents the net value of the tangible fixed assets after adjusting the gross value to account for Accu-mulated Depreciation.

Net Revenue Per Case: Total net operating revenue received for surgical services provided in the designated specialty divid-ed by the number of surgical cases performed in that specialty.

Net Working Capital: Defined as Cash & Equivalents, Net Accounts Receivable, and Other Current Assets less Non-Debt Current Liabilities. It should be noted that centers with cash basis financial statements and abnormally large cash balances (i.e. greater than one year) have been excluded from the working capital analysis.

Net Working Capital Percent of Revenue: Net Working Capital divided by total Net Operating Revenue. This is a metric uti-lized to measure the relative amount of working capital held by the center.

Net Working Capital Less Cash: Defined as Net Accounts Receivable and Other Current Assets less Non-Debt Current Lia-bilities. It should be noted that centers with cash basis financial statements have been excluded.

Net Working Capital Less Cash Percent of Revenue: Net Working Capital less Cash divided by total Net Operating Revenue. This is a metric utilized to measure the relative amount of working capital less cash held by the center.

Non-Surgical Cases: Defined as cases that can be performed in a procedure room (i.e. gastroenterology, ophthalmology, and pain management).

Nursing Staff: Defined as all registered nurses (“RNs”) employed in a clinical capacity at the center. This category includes clinical managers and OR supervisors.

Occupancy Cost: Comprised of the center’s facility rental expenses and all other occupancy cost (e.g. utilities, property tax-es, janitorial expense, common area maintenance expense, etc.).



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Operating Rooms ("OR"): Total active operating rooms currently utilized by the center.

Other Current Assets: Includes all other assets used in the normal operation of the center which are expected to be convert-ed to cash within one year (e.g. inventory, prepaid expenses, etc.).

Other Long-Term Liabilities: All other non-debt liabilities which are not expected to be repaid within one year. Typically is comprised of deferred rent and other long term liabilities.

Other Medical Cost: Includes outsourced medical services (e.g. transcription, laundry & linen, etc.).

Payor Mix: Defined as the percentage of total cases, charges, or collections performed or received from the designated pay-or. Individual centers included in the sample do not always accept all of the payors listed, therefore the sum of the individual payors will not equal 100%.

Procedure Rooms ("PR"): Total active procedure rooms currently utilized by the center. Procedure rooms are defined as rooms used for the performance of procedures that do not require an aseptic field but may require use of sterile instruments or supplies.

Rental Rate: Defined as the rate paid by the center to lease the facility including all build-outs. The facility rental rate includes common area maintenance and property taxes but excludes other occupancy cost such as janitorial and utilities expense.

Shareholder’s Equity: A center’s Total Assets minus its Total Liabilities.

Square Feet: Defined as the total area utilized in the normal operations of the facility. Excludes storage areas.

Surgical Cases: Includes all individual procedures performed on the patient during the course of the surgery.

Taxes & Benefits: Includes all federal & state income taxes (i.e. FICA, FUTA, SUTA) paid by the center. The expense line item also includes all benefits provided to the center’s support staff including but not limited to health, dental, vision, retirement, and workers compensation insurance.

Technical Staff: All non-RN staff employed in a clinical capacity at the center. This category includes OR scrub techs and perioperative assistants.

Total Assets: Total of all Current Assets and Net Fixed Assets utilized in the normal course of operations.

Total Current Assets: Total of all Cash & Equivalents, Accounts Receivable, and Other Current Assets.

Total Current Liabilities: Total of all debt and non-debt liabilities incurred in the normal course of operations which are ex-pected to be repaid within one year.

Total Long-Term Liabilities: Total of all long-term debt and long-term non-debt liabilities incurred in the normal course of operations that will not be repaid within one year.

Total Liabilities: All current and non-current liabilities incurred in the normal course of operations.

Total Operating Expenses: Defined as all normal operating expenses required to operate the center. Excludes one-time expenses and capital purchases.



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2017


intellimarker multi-specialty asc study 2017 · payor mix analysis ... the same is true for the...

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