How do your operating expenses match up?

Achieving higher outpatient surgery center valuation and financial performance through benchmarking

For physicians considering selling their ASC, even if it’s only a distant consideration, analyzing and optimizing expenses is an important step in achieving the highest sale price for your business and improving near-term financial performance. This process starts with understanding and categorizing your expenses; comparing reoccurring expenses with industry benchmarks; and finally, identifying opportunities for improvement. Here’s where to start:

Payroll costs
Workforce-related costs usually make up more than one-third of a facility’s expenses, with salaries and wages representing 30 percent of the total operating expenses for an average multispecialty outpatient surgery center and taxes and benefits adding another 7 percent.[1] At the same time, these expenses often present significant opportunities for improvement when it comes to achieving the highest sale price.

It’s also critical to benchmark an ASC’s staffing model to determine if the workforce structure is optimized relative to case type and volume. Positive adjustments can be made prior to marketing a facility, the benefits of which will accrue to the seller. These changes can include realignment of day-to-day job duties or adjustments in the staffing model.

Supply chain and facilities
Occupancy and clinical supply costs are nearly as high as workforce expenses for most outpatient surgery centers. For an average facility, lease payments make up 9 percent, while medical and surgical expenses total almost 30 percent.[2] Between these two P&L line items, there’s often considerable room for optimizing financial performance, lowering costs and achieving a higher valuation in the event of a sale.

For example, outpatient surgical facilities specializing in orthopedics have high medical and surgical supply costs, often making up one-third or more of the total operating expenses.[3] With so much overhead, overpaying for anchors, screws and implants necessary for these procedures can quickly erode the bottom line. Many of these issues can be addressed through participating in the right group purchasing organization, which offer ASCs access to lower-cost supply options through bulk-purchasing arrangements. Inventory control systems, too, can help facilities improve their P&L by limiting the ordering and storage of unnecessary supplies.
ASCs also are equipment-dependent businesses. While many of the clinical and operational tools and machines used in outpatient surgery centers are financed or bought outright, some are not. For a variety of reasons, facilities may lease rather than purchase equipment. How these leases are structured and defined may inadvertently lower the value of a center in the event of a sale.

How and when an ASC pays its rent also can have an effect on its sale price. An average multispecialty outpatient surgery center spends about 8 percent, or $490,000, of its total operating expenses on occupancy costs.[4] Depending on the timing of these payments, it’s not uncommon for an ASC to inadvertently make 13 rent or lease payments during a 12-month period, throwing off an ASC’s P&L—and lowering its valuation.

When reviewing expenses, it’s also important to identify any nonrecurring, nonoperational expenses such as legal fees, consulting work and marketing expenses that can lower the valuation of a surgery center. Why is the money being spent? Will it be spent again next year? Answering these questions before a potential buyer does will help your team determine how to account for these outlays in financial statements and achieve the highest sale price.

 

Interested in learning more? Please feel free to contact us.

 

About Merritt Healthcare Advisors

Merritt Healthcare Advisors is the leading provider of M&A consultative services for healthcare organizations across the country. In an era of increased competition for patients, shifting market dynamics, declining reimbursements and a heightened emphasis on costly technology, Merritt Healthcare Advisors is the proven partner for physician and hospital leaders seeking to optimize their value. Given the recent dramatic change throughout healthcare in both national and local markets, hospitals, health systems and physicians navigate a complex landscape when it comes to buying or selling a healthcare organization. As the only M&A advisory organization with active clinical operations, we have an unmatched perspective when it comes to coordinating beneficial transactions within the highly complex healthcare industry. http://merrittadvisory.com/

[1]Ambulatory Surgery Center Financial and Operational Benchmarking Study,” VMG Health

[2] Ibid.

[3] Ibid.

[4] Ibid.

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