This Week in Surgery Centers: Jeff Peo – Evaluating Ownership Options: Selling a Minority Stake

Evaluating Ownership Options: Selling a Minority Stake

Here’s what to expect on this week’s episode. 🎙️

Selling a minority share of your ASC can be very overwhelming. Many physician owners will question whether it’s the right move, the right amount, and the right partner before the process begins.

Minority interest is typically when physicians retain majority control and 20-35% is sold. Jeff Peo, Managing Partner at Lifeline, breaks down the pros and cons of selling a minority share, the typical ownership split, how it impacts physician autonomy, the financial advantages, and more.

3️⃣ Advantages of a Minority Model:

• Physicians receive management support without losing control.
• Facilities gain access to the management company’s experience and resources.
• Partners assist in scaling the business by increasing profitability.

3️⃣ Challenges of a Minority Model:

• The facility may lose some operational flexibility.
• Physicians must share a portion of the profits with the investor.
• Differences in vision or strategy can cause friction.

⭐ A bonus is the double-sale opportunity: physicians might sell a minority stake, grow their business, and then sell a majority stake later for a higher valuation.

Listen to the full episode for more details!

#SurgeryCenters #TWISC #ASC

Episode Transcript

[00:00:00] Welcome to this week in Surgery Centers. If you are in the ASC industry, then you are in the right place every week. We’ll start the episode off by sharing an interesting conversation we had with our featured guest, and then we’ll close the episode by recapping the latest news impacting surgery centers.

We’re excited to share with you what we have, so let’s get started and see what the industry’s been up to.

Erica: Hi everyone, here’s what you can expect on today’s episode. Today is part two of our three part series on evaluating ownership options. Last week we covered what it is like working with a management services organization, or better known as an MSO. And today we’re covering the benefits of selling a minority share.

Erica: So Jeff Pale from Lifeline sat down with our other hosts, Nick Latz, to cover what a typical ownership split could look like physician autonomy, financial advantages, and more. And [00:01:00] after my conversation with Jeff, we’ll wrap up the episode with our fourth installment of our AI segment. So we’ve covered all sorts of topics already, like how you can use generative AI to create staff schedules write patient education materials, improve your website, analyze data, and a ton of other examples.

Erica: And today, we’ll take it one step further and talk about how you can use. What’s called a custom GPT to further the impact AI can have on your day to day operations. So if you’re not familiar with the custom GPT, it’s basically like having a super smart assistant available 24 seven that knows everything about your surgery center, your data and your work.

Erica: So we’ll look at how you can create one and three scenarios where it could come in handy. Hope everyone enjoys the episode and here’s what’s going on this week in surgery centers.

Nick: Jeff, [00:02:00] welcome to the show. Thank you. Glad to be here. Jeff. Do you mind giving our listeners a little bit of a background on you and your organization? Lifeline?

Jeff: Sure. My name is Jeff Pao. I’m the CEO of Lifeline. Have been the owners of Lifeline since May of 2020, just as COVID started.

Jeff: My business partner, Linda Rom and I acquired Lifeline. From Davida. Before that, Linda and I both had worked for way longer than we care to admit, probably 15, 17 years at Ambulatory Surgical Centers of America. We’ve been in the industry for quite a long time. Lifeline Vascular Care was initially what we acquired, and they focused on taking dialysis access centers and either in an EOP type scenario or an ASC scenario.

Jeff: And helping those doctors get those cases done profitably and to turn some kind of a profit after helping their physicians. For us we are have a multi specialty approach and do not only dialysis access but we also partner with [00:03:00] other physicians, spine surgeons, orthopedic surgeons, podiatry GI pain management to deliver a multi specialty ASCs.

Jeff: Across the country.

Nick: Fantastic. Thanks for that background. I think one of the things we wanted to touch on today is investment options for ASCs and taking kind of a management company lens of that. And so you look across the industry at the common management company investment models or ownership models.

Nick: What do you see to be most common industry overall?

Jeff: There’s really three models that are out there for When you have a surgery center company a management company invest in you as a physician group the first is really the minority interest where a Company comes in and takes typically 20 to 35 percent Pay as a minority multiple of three to five of EBITDA to buy into your existing center.

Jeff: That gives the physician group majority access majority ownership and controlling interest, [00:04:00] which is important to physicians and should be then you have also the majority interest where a corporation or a non physician entity comes in and owns 51 percent or more of your center.

Jeff: Typically to do that, you have someone paying a majority multiple, which in right now is seven to nine times EBITDA most publicly traded or companies that want to be publicly traded fall into that category so that they can report those revenues up to the. To, of those centers up in their financials.

Jeff: And then you have the last, which is really a hundred percent ownership which typically comes in this form of hospitals or health systems or insurers that own a hundred percent. And the physicians just come in and do their cases there in those locations.

Nick: Got it. That’s a helpful overview. And.

Nick: Across those three models, does Lifeline focus on one of those buckets in particular?

Jeff: Yeah we’re privately held. And so we actually choose to take minority interests. We think it’s important for the [00:05:00] physicians to have a majority say they’re the ones that bring the cases. They’re the ones that need to have the control from a medical perspective over the decisions and the the steps that need to be made that way.

Jeff: So for us that’s a really important thing that our physicians have control. So we’re minority.

Nick: Got it. And so for that minority model. That you guys do, how would you describe the pros and cons of that type of an investment approach?

Jeff: For the physicians or for us for lifeline. Let’s start with the physicians Yeah I think the one of the benefits of it for the physicians is that they get to have Someone that focuses on the management the day to day management of the center so they can focus strictly on Doing the cases that they need to do The physicians are brilliant, right?

Jeff: They, there’s no doubt in my mind that a physician can run an ASC and can learn what they need to learn. But it takes a lot of time in addition to the things that they’re already doing. Seeing [00:06:00] patients, have family time, those sorts of things. In addition to seeing, doing the cases themselves, they could learn it.

Jeff: There’s no doubt about it. But what a company can do, especially a minority company share is that they can retain the majority ownership, but have somebody that does this on a daily basis, take this off their plate and allow them to focus on something else that they want to do. I think that’s one of the biggest advantages of having this partner in the surgery center.

Nick: Okay, great. So that’s the pro from the physician’s perspective, right? You get to help with the management side from a physician’s perspective. Are there any cons? Yeah.

Jeff: I think there’s always, you’ll always find some cons that are in there. And one of them is that you have somebody that focuses on the business.

Jeff: Like we just said, as a pro, it’s also a con in the fact that you might not be able to have the flexibility to do the things that you wanted to do before that you did before. One, they might not have been exactly the right thing to do from a business perspective. They also might not have been the most legal thing to do.

Jeff: There are sometimes you find that [00:07:00] physicians don’t understand all the laws that are regulating the surgery center industry. So there is some work that has to be done from a management perspective to make sure that everything is in compliance. And that’s not always as fun.

Jeff: Oftentimes a hundred percent physician on own center is behind in, in some of those things. And so to get caught up can, can take a little bit of effort and time. Sure. Got to do

Nick: your push ups a little bit as you become more sophisticated. That makes sense. So that’s the minority investment approach.

Nick: How would you contrast that with the majority investment approach? And take that same lens from a physician angle, maybe what are some pros and cons of taking a majority investment?

Jeff: Yeah, I think the nice thing about a majority purchase from the perspective of the physicians is.

Jeff: It’s a lot more cash right up front. You’re getting a a seven, eight, nine times multiple, which can be really good in the short term. We can talk a little bit later [00:08:00] about the other alternatives to that and ways that you can actually improve your profitability much more than that.

Jeff: But I think that’s a nice thing for them. Oftentimes you will be told by companies that have a majority ownership that they can get you better contracts. They can just immediately put their contracts into place. And very rarely does that actually come through, even if it’s a hospital partner, just based on some of the restrictions that they have within those contracts that they have, but it will get promised.

Jeff: And so that’s one thing that might be a negative is that it doesn’t always work out the way that you think it might and the way it should. I guess it could be true for all business relationships, but in this case, more often than not, we see that it doesn’t. Doesn’t always work the way it’s promised.

Nick: Okay, great. And that’s helpful context. And then it, so that’s, from the physician perspective, if we circle back to lifeline in particular, and you guys do primarily [00:09:00] minority investments you guys have been successful doing that with a broad portfolio, how do you feel like physicians have responded to your approach in particular, and does it help?

Nick: Differentiate you over other management companies that are doing things differently.

Jeff: That’s a great question. Most of our competitors take a majority ownership model. And so for us, that’s one of the things that we use to differentiate ourselves is that we do take just a minority share and leave the majority of the profits for the physicians to be able to distribute to themselves.

Jeff: It’s nice to have that one time payday, but there’s a model that you can use when you choose to grow, right? Let’s look at it this way. If you take let’s say you just have a, your center that is going and you want to grow it and sell it to somebody or a part of it to somebody so that they can help you grow and help you take some of the efforts off of your plate.

Jeff: There’s a model that can allow you to actually sell twice. Okay. And that’s using a combination of a minority sale and then [00:10:00] later a majority sale. So the model really looks like this. You sell a minority share to somebody that can help you build and grow. That can help you increase the volume.

Jeff: There can help you increase your profitability, can help you become more efficient and then make you more attractive to somebody that might be interested in a majority. Purchase of you. And then you reach more people that want bigger centers so that they can add those to their bottom line. And they’re usually the publicly traded companies.

Jeff: Like I mentioned And so that you can then taste not just the minority purchase at a three to five multiple, but then later on when you’ve built your EBITDA up, you can then taste the majority ownership. So that’s really, I think, the biggest differentiator that we try to bring to the table. Let us come in, let us help you grow, let us help you become more efficient.

Jeff: And then if you want, then we can explore selling this to a publicly traded company or someone that wants to buy a majority.

Nick: I like that. So it’s not only, hey, in the next turn [00:11:00] you get a higher multiple, but you get a higher multiple on a, a larger EBITDA number. Yeah, it’s really

Jeff: simple math, honestly.

Jeff: So let’s say that you have a million dollars.

Jeff: In EBITDA and you’re going to sell a minority share, let’s say 30 percent to a company that can help you grow that to, let’s just say 2 million for round number sake, that enterprise value then of a four multiple of 1 million of EBITDA would then be 4 million. If you’re selling 30 percent of that, then you would be able to distribute 1.

Jeff: 2 million to your existing partners. You would then have 700, 000 a year in distributions to your physician partners, not ignoring the 30 percent that you’re selling off to someone else. If you can grow that to 2 million and then sell a majority ownership to somebody that wants to buy, let’s just say 65 percent of that.

Jeff: At a eight multiple somewhere between seven and nine, [00:12:00] that would yield a 5. 6 million number on top of the 1. 2 million that the physicians got earlier and still have 700, 000 a year in distributions. So the total for going through that to sale type of methodology would be 6. 8 million. And 700, 000 a year in distributions, as opposed to a one time sale opportunity of, 5 million with 350, 000 a year in distribution.

Jeff: So it makes significant difference.

Nick: Yeah. And that seems really compelling to position owners. It seems like the key there to making the model work is growing the EBITDA from, in your example, a million to 2 million, what are some of the ways that you work with. Centers to do that.

Jeff: It’s hard in surgery centers because there’s really only two things you can do, right?

Jeff: You can increase your revenue or you can decrease, your expenses. So in, in surgery centers, there’s only a couple of ways really to increase your revenues and that’s either increase your volumes. Which is, takes a lot [00:13:00] of work to do, but it’s really important. That’s one of the things we really have to focus on increasing the the awareness around of what you can do, who you’re marketing to you, to people to send you referrals, but also increasing the contract rates and the rates that are out there with the different insurance companies.

Jeff: On the other side of it is really to decrease the supplies cost, which is really important to have a very active group within that organization that you’re partnering with that really goes out and focuses on how you can reduce those supply costs. Supplies are going up all the time but a significant focus on that.

Jeff: Is really important. Then you have improving efficiencies with staffing with scheduling, be only open when have the lights on when you have a full day of cases, and compress the schedule. Otherwise it’s really important to not be all things to everyone.

Jeff: You cannot be open, six days a week, 12 hours a day. If you only have the case volume to stay open three days a [00:14:00] week for sure. 10 hours a day. It, you have to be able to shut the doors, turn the lights out and become more efficient. I think really the most important thing that you can do is to case cost every case to really know what each case is costing you to do.

Jeff: You may find that cases you thought weren’t profitable really are because they have low supplies costs and they don’t take you very long to do cases in the OR. And the cases that you thought were going to be, fantastic for you because they reimbursed a lot, the supplies chew it up and it’s not really worth you doing those cases.

Jeff: And it might just be better for you to do those cases in a hospital setting. But unless your case costing, unless you know how long it takes you to do those cases, how many, how much in supplies it takes you to do those cases how much money it costs you to do that. You don’t know. And so you really have to put in a program to case cost to make sure that you’re

Nick: insightful when you truly get to look at full profitability at the case level.

Nick: We see a lot in the industry that focus on [00:15:00] revenue per case and use that as a way to, prioritize case volume and kind of decide, what’s generating the most revenue, but it’s really profitability at the case level that adds up to profitability at the center level. And we see all the time we missed an implant.

Nick: Here, there, we didn’t take this into consideration. It can swing

Jeff: it wildly. You can’t build profitability by digging yourself a deeper hole. If you’re doing, if you’re losing money on every case and you do more cases. That doesn’t help you. Yeah.

Nick: Yeah. Okay. And the other thing you mentioned in there is Is on the supply side the supply cost side.

Nick: Have you seen any good tips and tricks that help there?

Jeff: It’s really important to have an organization that focuses on that looks at that very specifically that really Drives that and knows what these costs are across the country and to do that The onesie twosie shops really struggle You know, it really becomes difficult.

Jeff: You need to have somebody that’s your partner that has enough size that they can [00:16:00] go to the suppliers of the world in and say to them. I need this type of a cost. I need, I need these things and this is what I, offered from someone else and really be able to fight for that price to drive that down and to hold off on supply cost raises that, seem to come every quarter right now.

Jeff: You have to have somebody that really focuses on that and knows what that knows how to play that game. And it’s really important.

Nick: And do you guys help your centers? Do you guys have the data of working across, multiple centers to be able to tell any individual center? Okay, here’s where your supply costs have room for opportunity or improvement.

Jeff: Yeah, we have 40 centers across the country and we do the supply acquisition for everyone. So we, we know what every supply is going in. And as we see and have opportunity to figure out what some of our competitors are, getting price wise we’re grateful to be beating them. It comes from a relentless focus on what those costs are.

Jeff: Absolutely. Okay. And if somebody, when we’re looking at a new opportunity, to acquire into somebody, that’s [00:17:00] one of the other things that we differentiate ourselves with. And we say to them, look, just by switching to us and being able to use our acquisition tie into, to our group here, we’ll save you immediately.

Jeff: and that’s a big deal. It really is.

Nick: Yeah. Yeah. Okay. For position listeners that that are contemplating investment, and thinking through how to approach this, what should they look for in partnership agreements regarding ownership and control? Are there any gotchas or things to keep in mind from a documentation perspective?

Jeff: Yeah. I think that it’s really important to, Talk to multiple people and to find somebody that you like their style, their management style, find out who’s going to be there with you, who’s going to be coming in and doing onsite visits and helping to train your staff and those sorts of things.

Jeff: Find somebody who you mesh with who you like that you can partner with and sit across the table with because I’ve seen some really ugly relationships that both sides can’t wait to get out. So [00:18:00] it’s really important that you, that you like the people that you work with and that you think and you believe them when, what they tell you.

Jeff: It’s really important to be able to understand what can you really do for me? What is a realistic timeframe as you’re putting this together? For if you’re, building an ASC, what does this look like? How long does it take? How long will it take till we, have the construction done? How long till we have occupancy?

Jeff: How long until we actually have Medicare certification? How long till we start to get contracts? How long till, just really understand what the steps are in a realistic fashion, because, cash calls will come very quickly after that if you haven’t, if you don’t have a realistic expectation.

Jeff: If you’re looking at a partner that is a majority partner that is saying that they can get you good contracts. Understand what those contracts are. Understand how quickly those contracts will come into place. Understand what they’re projecting for you in a proforma. And ask questions. And all of them will answer these questions for you.

Jeff: There are lots of good management companies out there. They [00:19:00] all have something that they do a little bit differently. They all have something that they, specialize in, or strengths that they have. Find someone you bond with. Find someone you like. Find someone that has, good references for you and partner with them and jump in and recognize, I guess this is one thing I would say, recognize that there are going to be bumps in the road.

Jeff: There are, there’s just going to, that’s business relationships. There’s going to be bumps in the road. But if you’ve chosen your partner well, you’ll get through those and and it can be a positive for you. So I think, really get a good attorney that understands what all the nuances are of that contract that’s being given to you the MSA, the management services agreement, the operating agreement and make sure that you have a say in, in what’s going on.

Jeff: There are certain things that a company that takes majority ownership will have to have just for legal reasons. But you want to make sure that you have a way to be heard and that you’re not just swept under the rug. It’s really important.

Nick: Got it. That’s great advice. Jeff, final question for you.

Nick: And we do this each week with our guests. What’s [00:20:00] one thing our listeners can do this week to improve their surgery centers?

Jeff: Oh, I think the most important thing is to start. Okay. Case costing now, even if it’s a simple way, even if it’s a simple thing and not a sophisticated model, you can get more sophisticated.

Jeff: You can have, huge spreadsheets that determine everything, but just start, even if it’s just simple case costing. So you know what each case is costing you, what you’re being reimbursed for those cases. And if it’s profitable or not, it’s not profitable. Then you really have to look into if you should do the case or not.

Jeff: And that’s, I think, the number one thing. And if somebody’s not sure how to start a simple case costing program, I’d be happy to shoot them an email and give them a couple ideas. I’m not going to give you some huge, long thing, but you need to do something. And I can give you a couple ideas. I’d be happy to help.

Nick: I appreciate that. I’m sure a couple of our listeners will take you up on that. So thank you, Jeff. Jeff, thanks for joining us today. Really enjoyed the conversation. [00:21:00] Thank you. Thank you very much.

Yeah.

Erica: Welcome to our AI segment, where I share safe and helpful ways you can start using generative AI at your surgery center today. The following examples don’t include any PHI or pose any data risks to you at all, so you should feel very comfortable getting started. In today’s example, we’re going to use ChatGPT to create a custom GPT.

Erica: First, what is it? If you’re like me, maybe six months ago, I didn’t know what it was either, so you’re certainly not alone. GPT stands for Generative Pre trained Transformer. Yes, it sounds like an action figure. I can definitely envision a GPT to the rescue cartoon who’s just going around answering everyone’s questions all day.

Erica: But anyway. A custom GPT is like having a highly knowledgeable assistant that you’ve trained completely and they can help you with very specific tasks, [00:22:00] questions, or anything you need based on your specific information. So when you use ChatGPT or any AI tool, it pulls information from everywhere and looks through what we can call general knowledge, but a custom GPT is tailored specifically to you.

Erica: So you can upload your own documents, data, and rules for teaching purposes, such as your ASC’s policies, patient data schedules, financial reports and then ask it questions or request help based on that information alone. And creating a custom GPT is really easy. Extremely easy. You do not need any tech experience, anything like that.

Erica: The only kicker is that you do need to have the paid version of chat GPT in order to create a custom one. But it’s only 21 95, I think per month and totally worth it. So here are the steps to do and I’ll also include them in the episode notes if you want to follow along, but they’re super simple.[00:23:00]

Erica: So go to ChatGPT and log in. In the sidebar, you’ll click Explore. You can then click the black Create button that’s in the top right corner. And then click the Configure tab. And then this is really where the work comes in. So you’re going to enter your, what’s called instructions and upload all of your documents.

Erica: Now in the scenarios I give coming up next, it’ll tell you, what documents you should be uploading for each of the three custom GPTs I’m going to walk you through. But in this case, you would upload any of the data, spreadsheets, CSV files, whatever you have. Click save, click confirm.

Erica: Super simple. The hardest part is just gathering the data and all of the documents you want to upload. But actually creating the GPT takes a few minutes.

Erica: So now that you have those basic steps to create a custom GPT, here are three different use cases. Scenario number one, let’s talk about your policies and procedures. How many [00:24:00] times have you had to go digging through your policies and procedures trying to find an answer for either yourself, maybe a new staff member, maybe a surveyor who came by unexpected, or a physician?

Erica: Using a custom GPT can save you a ton of time. So all you have to do is upload your policies and procedures. Then use AI as this on demand assistant for your team to answer any questions you have. And you can also, even if you create one, you can share your custom GPT with other users as well.

Erica: So your staff can use it as much as they need to as well. So staff can ask questions about compliance, regulatory requirements, specific protocols, without having to manually flip through pages to get the answer. It could definitely help with training new employees by providing step by step guidance and answering kind of those what if scenarios.

Erica: So for example, a nurse could ask, what is our process for reporting a patient safety incident? What are guidelines [00:25:00] for patient consent before surgery? What’s the policy for storing patient records after discharge? The options are really endless and you’ll immediately get an accurate answer.

Erica: I love this scenario. I can picture a ton of examples where it would come in handy. You can also, Use it to update your policies and procedures. If you need to, let’s say you go from paper based charting to implementing an EMR, you can use chat, chat, GPT to help you update the policies as well.

Erica: Of course, you’d want to review them very closely. But hopefully you’re getting the vision here for all the scenarios where you can have digital access to your policies and procedures. And not only be able to search for some, the section you want, but also But get answers to the questions you have as well.

Erica: All right. Scenario number two. So two weeks ago, I did a segment all about how you can use AI to help you analyze data and predict trends at your surgery center. Now [00:26:00] that those scenarios that I gave were using, um, the general chat GPT and not a custom one. So this kind of takes it one step further.

Erica: You can still analyze data and predict trends. And predict trends, but this time it’s in your own custom GPT. So in this case, you would upload all of your historical data. So maybe you can get into a routine of uploading your data every 30 to 60 days so that your custom GPT is always up to date. And then you can take, use it to analyze key operational metrics in seconds, like billing cycles, case cancellations, physician productivity.

Erica: It could also provide insights into optimizing these metrics. or spotting patterns that are maybe leading to delays or issues. And then you can even set up alerts for data anomalies if you wanted to as well. So after you upload all your data, you could ask a few questions. Here’s just some examples. What are the three most common reasons for case cancellations in the last quarter?[00:27:00]

Erica: Which payers have the longest payment delays? Which surgeons consistently have the shortest case times for knee replacements? What is the correlation between case volume and staffing levels? There are tons of different scenarios. Now, what you can do, let’s say you didn’t want to use the custom GPT to do this, you can absolutely use the generic one, or the general one, to upload a spreadsheet and ask specific questions.

Erica: But what, The benefit of having the custom GPT is that it’s going to have all of this historical data for you as well. So instead of just looking at a snapshot of one spreadsheet that you’ve just uploaded today, it’s going to go and look at all of your historical trends as well. And of course, it’s specific to you and the scenarios it gives, the physicians it talks about all, it’s all going to be just your surgery center.

Erica: So really endless possibilities there in terms of analyzing historical data as well. [00:28:00] And then scenario number three is similar to the above one, but a little more niche. So you can create a custom GPT just for your patient satisfaction survey results, or even your OAS CAHPS results if you wanted to.

Erica: So same thing, let’s say every 30 or 60 days, you upload the results from your surveys. So you’re building over time. This could really help you get ahead of any downward trends that might not be glaringly obvious. So a few examples of questions you could ask, what are the top three most common complaints from patients this quarter?

Erica: Or if you were the administrator, which area would you focus on improving next? Or has there been an improvement in wait time satisfaction scores since we implemented the new scheduling system in June? Or based on the past 12 months of data, what is the predicted patient satisfaction score for next quarter and [00:29:00] with all of these three scenarios.

Erica: So the policies and procedures the data and then the patient satisfaction survey results. I could also see a world where these come in handy when a surveyor drops by unexpectedly or maybe you’re in a board meeting. Imagine a physician asks you a question you weren’t anticipating, such as what days of the week are.

Erica: ORs most underutilized? Or how do satisfaction scores vary between morning and afternoon surgeries? Or what’s our policy on overtime for clinical staff? Anything that might come up. If you have this custom GPT set up, you can Pull it up right then and there and answer her questions immediately.

Erica: So there you have it, three ways that AI can help you today. And if you try any of these, please let me know in the comments on LinkedIn or YouTube. I would love to hear more use cases or things that you’ve learned along the way. And that officially wraps up this week’s [00:30:00] podcast. Thank you, as always, for spending a few minutes of your week with us.

Erica: Make sure to subscribe or leave a review on whichever platform you’re listening from. I hope you have a great day and we will see you again next week.