10 Predictions on ASC Merger & Acquisition Activity in 2012
1. De novo surgery center development will continue to decrease. Mr. Clark believes development of de novo centers will continue to drop in 2012, as the pool of surgeons interested in ASC investment shrinks. "I think most surgeons who are interested in investing are already involved in surgery centers, so I think that's going to quell demand for new centers," he says. "My guess is that there will be limited de novo activity next year, and I think any transactions will be either acquisitions or mergers of centers as overbuilt markets tend to consolidate."
2. Hospital interest in acquiring surgery centers will increase. Mr. Lambert predicts hospitals will increasingly look to acquire surgery centers to grow market share and solidify relationships with community physicians. He believes multi-specialty centers will be most commonly targeted. He says the availability of under-performing or high-risk centers in the ASC industry may lead hospitals to consider turnaround opportunities. "Sometimes there are surgery centers that are failing, and hospitals will pick them up cheap and are happy to do so," he says. Mr. Clark adds that hospitals are looking at surgery centers as a way to prepare for payment reform.
3. Relationships between hospitals and management companies will increase. Mr. Clark believes hospitals will look to bring ASC management companies into surgery center acquisitions to create a three-way joint venture. Management companies can provide much-needed guidance about managing and profiting from surgery centers. He says while most hospitals will be looking for majority interest in a surgery center, they may give up some operational control if they can form a joint venture with a trusted management company. "Hospitals bring a certain amount of benefit, and I think a hospital partnered with a management company with a specific focus on managing surgery centers will be the best option," he says.
4. More turnaround opportunities. Mr. Clark says there are plenty of turnaround opportunities available for hospitals and management companies because most markets are overbuilt and many surgery centers are suffering due to economic pressures. "There are a high number of centers that are not functioning very well," he says. "I think most management companies are going to have turnaround capabilities — at least the more substantial management companies with sophisticated processes and tools."
5. Surgery center mergers may occur, but issues stand in the way. Mr. Clark and Mr. Lambert believe 2012 will see more mergers between individual surgery centers, though there are several common obstacles to a successful merger. First, competing physician groups in the same community may not want to merge their centers and contribute to each other's business. Second, centers may have long-standing commitments — such as a long-term lease or outstanding debt — that prevents physicians from leaving an existing center to merge with a competitor. "Some of the fixed costs don't go away even if you merge centers," Mr. Lambert says. Despite these issues, however, Mr. Lambert says discussions of mergers are becoming "more common."
6. ASC prices are moving upward. Mr. Lambert believes pricing is moving upward because of a significant dearth of low-risk surgery centers for sale. "When I say low risk, I mean those that are larger, profitable, multi-specialty, in-network facilities, and there aren't a lot of them out there," he says. "Those that are there, in my experience, have been realizing very attractive valuations."
But he says the pricing climb isn't limited to high-performing centers. Historically, surgery centers dependent on out-of-network reimbursement have not been well valued and, as a result, almost no transactions in this segment have occurred. He said the industry is starting to see this change with more out-of-network center transactions occurring at higher valuations. He says the buyers want these centers and have to pay a price that is acceptable to the current owners. "At the end of the day, people have realized that no one sells for a three multiple," he says. "There are out-of-network transactions occurring at multiples similar to those of the low end of in-network facilities. People realize that even though out-of-network is somewhat threatened, there are situations where it is likely to continue for some time."
7. Management companies will exit management and ownership of some ASCs. Mr. Murski believes that some surgery centers will part ways with their existing management company and look for more suitable options. "This is happening in cases where the ASC is marginally performing or, for strategic reasons, the ASC really does need to affiliate with a hospital partner or a different management company to thrive," he says.
8. Higher-risk centers can still be attractive. Mr. Lambert says riskier centers may still attract buyers — just not the typical "timid" buyer who is owned by institutional investors. Even if these riskier centers can be purchased relatively cheaply, executives find it untenable to have to explain revenue declines to their boards a couple of years after an acquisition, even if they were priced with that expectation. "There are plenty of well-run out-of-network facilities out there, but most have risk," he says. "Just because you have reimbursement risk doesn't mean you're not well-run. Timid buyers just don't have stomach for them." Other center characteristics that contribute to center risk include physician age,one or two payors dominating the market and hospital employment of referral sources and specialists.
He says in 2012, the biggest risk factors for surgery centers will be reimbursement and physician hospital employment. If a surgery center is located in a market where the local hospital is employing physicians and buying up practices, the value of the center will be less to those entities not having a presence in the community, but may increase for those battling for share in the community.
A perennial source of risk for many surgery centers results from not having solid non-compete agreements with their physician owners. It's natural that a center's big producers look for ways to capture a greater share of the profits they generate and that can lead them to consider competitive investment opportunities.
9. Private equity-backed companies may acquire in preparation to go public. Mr. Lambert believes private equity backed ASC companies may have greater urgency to increase their rate of acquisitions so as to improve their growth trends in preparation for going public.
Additionally, there may be an increase in the number of ASC owners looking to sell an interest in their centers towards the end of the year, given the planned expiration of the federal tax cut extensions. "I think that may drive some activity where people say, 'If we're going to do this, let's do it now at the lower tax rates,'" he says.
10. Lack of physician investors will drive ASC merger consideration. Mr. Murski believes that ASCs may consider merging or forming a partnership between two centers as the pool of available physician investors becomes smaller. However, he says while ASC leadership may be supportive of a merger or partnership, convincing physician investors may be more challenging.
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