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5 Big Factors in ASC Merger & Acquisition Activity Today

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Here are five big factors in the ambulatory surgery center growth, mergers and acquisitions market today and projections for the future.

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1. Implementation of the Patient Protection and Affordable Care Act.
Healthcare reform implementation is now in full swing, and declining reimbursement coupled with additional compliance costs have driven consolidation throughout the industry. The reforms also encourage quality over quantity in caseload and incentivize low cost options for care.

Joseph Ibrahim on surgery centers"The Affordable Care Act drives the need for hospitals to lower their cost structures and provide more value-based services for their geographic regions," says Joseph Ibrahim, Principle, Healthcare, The Riverside Company, a global private equity firm. "As a result of this trend, ASCs are a way for hospital systems to provide services in a lower cost setting."

Some hospitals are working with physicians on joint venture surgery centers, or purchasing stake in existing centers, while others are establishing their own ASCs. The two groups may also consider bringing a third party investor, such as an ASC management company, to hold equity in the joint venture.

"I definitely see most surgery centers in the future somehow joint ventured with hospitals," says Lee Lasris, Founding Partner of Florida Health Law Center. "The new ASCs I've had experience with involve a hospital investment. They are expensive to put together and still require a sizable investment."

2. Increased demand for low cost healthcare providers.
As high deductible plans and health savings accounts become more popular, patients will search for the lower cost care setting that can provide high quality care.

"People are going to look at the ASC as the hospital for the future," says Mr. Lasris. "They are going to go to the ASC for their healthcare while hospitals will be available for patients who definitely need inpatient care. If you can go home or to a skilled nursing facility after surgery, you are better off than staying in the hospital. I think patient care will definitely improve as more people are kept out of the hospital, as that's the goal of healthcare today."

However, the ASC's ability to remain a low cost care setting will depend on reimbursement trends in the future. "The centers are still a low cost provider, which is why they are still a good option, but no one knows yet how compressed Tom Aronson on surgery centersthe reimbursement rates are going to get," says Tom Aronson, Managing Director at Monroe Capital. "As long as ASCs can be the low cost provider, I think these centers will prove to be a growth area in the industry."

3. Large aging population.
As the baby boomer population ages, there is a demand for increased care provided in the outpatient ambulatory setting, such as colonoscopies, cataract surgeries and minor orthopedics procedures. Especially with this population, a quick procedure with less risk for infection will be important to return patients to their daily lives.

"The aging population drives the need for more procedures in the ASC, and technology is improving to allow surgeons to perform more complex surgery in the outpatient setting versus the acute care setting," says Mr. Ibrahim. "From a cost perspective, ASCs are a lower cost site versus an acute care setting and patients often prefer ASCs if they have local access to one."

Medicare may also direct more patients to the outpatient setting; auditors are already scrutinizing Medicare claims for inpatient procedures they think could have been performed cheaper in the outpatient setting.

4. End of the ASC lifecycle.
There was a boom in ASC development in the early 2000s, and now these ASCs are maturing. The average lifecycle for an ambulatory surgery center is 10 to 12 years, at the end of which surgeons must decide whether to purchase new equipment and bring on new partners, or sell their center and move on.

"A third of the ASCs in this country were open between 2003 and 2007, amounting to about 1,800 new centers during that time," says Nicholas Newsad, MHSA, Senior Associate at HealthCare Appraisers. "With the average lifecycle being around 10 to 12 years, a lot of them are going to hit that age between 2013 and 2019, and with the first generation ownership coming to an end, we sometimes see the surgeons either selling down or holding a liquidation event. Nick Newsad on surgery centersBased on that, we expect to see robust action over the next few years."

While it's hard to speculate exactly who the buyers will be — management companies, hospitals, private equity or other entities — ASC owners must find the right strategy for them.

"Sellers looking for a pure liquidity event tend to gravitate more toward the best financial deal they can get," says Mr. Newsad. "Another type of seller is really looking for a partner and they are going to stay involved with the center; they are just looking for additional owners. Those types of sellers are looking for partners that can bring the most value for their business."

5. Retiring surgeons look for an exit strategy.
Surgeons at the end of their careers who are looking for an exit strategy will consider selling their ASC to other interested organizations instead of spending money to update equipment and systems for the healthcare reform overhaul.

"Many centers that have aged need to purchase new equipment, or investment in new electronic systems, and that is the impetus for some of these events," says Mr. Newsad. "Owners are either looking to bring in new ownership or sell it completely. They will look at all their options and make a decision based on what is best for them."

Surgeons who choose to sell to the hospital may continue practicing as a hospital employee during the last few years of their career.

"To the extent that a hospital has a joint venture opportunity, I think it could be an exit strategy for some of these surgeons," says Mr. Aronson. "The industry started 30 years ago and some of these surgeons are primed and ready for joint venture relationships. However, we haven't seen a strong proliferation of these types of joint ventures as of yet."

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