majority interest. In addition, the physician practice in which AmSurg acquired
a majority interest in January 1997, had capitated payment contracts which are
expected to generate approximately $2.2 million in annual revenues during 1997.
These contracts require the practices to provide specialty physician and certain
outpatient surgery services for the HMO members on an exclusive basis. These
contracts do not require the practices to provide or to be at risk for hospital
or other ancillary services such as lab or imaging. The services required by
these contracts are provided almost solely by surgery centers and the physician
practices in which AmSurg owns a majority interest. Because AmSurg is only at
risk for the cost of providing relatively limited healthcare services to these
HMO members, AmSurg's risk of overutilization by HMO members is limited to the
cost of the physician's time and the supply, drug and nursing staff expense
required for outpatient surgery.
AmSurg encounters competition in two separate areas: competition with other
companies for its physician partnership relationships, and competition with
other providers for patients and for contracting with managed care payors in
each of its markets.
Competition for Partnership Relationships. AmSurg believes that it does
not have a direct competitor in the development of practice-based ambulatory
surgery centers across the specialties of gastroenterology, ophthalmology,
otolaryngology, urology, and orthopaedic surgery. There are, however, several
large, publicly held companies, or divisions or subsidiaries of large publicly
held companies, that develop freestanding multi-specialty surgery centers, and
these companies may compete with AmSurg in the development of centers.
Many physician groups develop surgery centers without a corporate partner.
It is generally difficult, however, in the rapidly evolving healthcare industry,
for a single practice to create effectively the efficient operations and
marketing programs necessary to compete with other provider networks and
companies. Because of this, as well as the financial investment necessary to
develop surgery centers, physician groups are attracted to corporate partners,
such as AmSurg. Other factors that may influence the physicians' decisions
concerning the choice of a corporate partner are the potential corporate
partner's experience, reputation and access to capital.
There are several companies, many in niche markets, that acquire existing
practice-based ambulatory surgery centers and specialty physician practices.
Many of these competitors have greater resources than AmSurg. Most of AmSurg's
competitors acquire centers through the acquisition of the related physician
practice. The principal competitive factors that affect the ability of AmSurg
and its competitors to acquire surgery centers are price, experience and
reputation, access to capital and willingness to acquire a surgery center
without acquiring the physician practice.
Most networks are either multi-specialty or primary care based. There are a
few national networking companies that specialize in the establishment and
operation of networks. The primary competitive factors AmSurg experiences in the
development of specialty networks include the attraction of physician practice
groups to the network, market penetration and geographic coverage.
Competition for Patients and Managed Care Contracts. AmSurg believes that
its surgery centers can provide lower-cost, high quality surgery in a more
comfortable environment for the patient in comparison to hospitals and to
freestanding surgery centers with which AmSurg competes for managed care
contracts. In addition, the existence of the AmSurg specialty physician networks
provide the geographic access that managed care companies desire. Competition
for managed care contracts with other providers is focused on pricing of
services, quality of services, and affiliation with key physician groups in a
The healthcare industry is subject to extensive regulation by a number of
governmental entities at the federal, state and local level. Regulatory
activities affect the business activities of AmSurg, by controlling AmSurg's
growth, requiring licensure and certification for its facilities, regulating the
use of AmSurg's properties, and controlling reimbursement to AmSurg for the
services AmSurg provides.
CONs and State Licensing. CON regulations control the development of
ambulatory surgery centers in certain states. CONs generally provide that prior
to the expansion of existing centers, the construction of new centers, the
acquisition of major items of equipment or the introduction of certain new
services, approval must be obtained from the designated state health planning
agency. State CON statutes generally provide that,