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The ASC Transaction Market Overview & What to Expect in the Future

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There are several big trends in ambulatory surgery center valuation that are making an impact on mergers and acquisitions today.

At the 12th Annual Spine, Orthopedic and Pain Management-Driven ASC Conference in Chicago on Thursday, June 12, VMG Health Senior Manager Chance Sherer, CVA, and Clinton Flume gave a presentation titled “Key Trends in Valuing ASCs and Practices.”

Healthcare spending is trending down at the local and national level as the payers transition from fee-for-service to more performance-based care reimbursement. “In the past, physicians and hospitals acted largely independently and were focused on revenue and revenue growth as well as creating capacity,” said Mr. Sherer. “As things have matured and healthcare changed, fee-for-service is shifting to population management and in most markets we are seeing collaboration between physicians and hospitals. Something that should be thought through is whether we should move away from a fee-for-service model; there will be more uncertainty regarding revenue and providers wonder how to maintain their margins by cutting costs.”

Transaction trends in the ASC industry are consistent with the general trends of a mature industry, but recently there has been a revival of de novo development that could continue. Here are the key factors demonstrated in today’s mature ASC market:

1. ASC development growth leveled off
2. Same center growth flat-lined
3. ASC supply exceeds physician demand in most markets
4. Many ASCs report significant capacity
5. Growth in mergers and acquisitions
6. Initial consolidation among ASC management companies

One of the biggest issues for ASCs today negatively impacting valuation is physician employment by hospitals; hospitals are employing specialists and primary care physicians at a higher rate than ever before. That means potential referral sources drying up and the pool of independent physicians to bring cases, and potentially invest in the ASC, is drying up.

“We are looking at the entire business where physicians are employed in the community whnt from 18.7 percent in 2000 to 25.3 percent being hospital-based in 2012,” said Mr. Flume. “You dry up a potential pool of investors and you may run on a few physicians in the extended market for a period of time without bringing new blood into the center.”

In the future, the maturing ASC industry can expect to see:

1. The greatest challenge being attracting new physician investment and case volume
2. Increased ASC mergers
3. Hospitals increasing their involvement in the ASC industry
4. Expected return for ASC investors will be moderated
5. Existing ASCs will need to focus on implementing inefficiencies

“The ASC management companies are actively trying to consolidate,” said Mr. Flume. “We’ve seen more transactions recently in ASC companies trying to find a smaller niche or lower volume ASCs where there are eight or nine physicians investing in the center. There are some markets where competing ASCs are consolidating, but that’s not prevalent right now. There is a new wave of de novos looking for opportunities to create and expand the ASC marketplace in a community. There are a few groups coming together and establishing a new ASC with new capital investment.”

There are still several underperforming ASCs available to partner with management companies to consolidate efforts and become profitable. As a result, Mr. Flume sees a lot of activity in the ASC market for the next two or three years.

The key factors mentioned that affect risk for the ASC valuation include: whether the investors are older and whether current investors are purchasing new technology to keep the centers up-to-date. Buyers want to see growth potential with a range of investors and updated equipment so they won’t have to purchase new post-transaction.

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