Single-Specialty ASC Transaction & Valuation Outlook: Bright or Dark?

The ambulatory surgery center acquisitions market experienced a robust year in 2013, and many industry experts expect a similar number of transactions this year. How will single-specialty ASCs, still a significant portion of the market, be valued in the upcoming year?

Kyle TormoehlenKyle Tormoehlen, a Manager with HealthCare Appraisers, and Reed Martin, COO of Surgical Management Professionals, share their observations on single-specialty Reed Martinvaluation and transaction trends for 2014.

Valuation in the ASC space
The valuation process for multispecialty and single-specialty ASCs does not vary greatly. Major factors influencing valuation include:

•    Historical financial trends
•    Market and industry factors
•    Business risks
•    Future opportunities

"While valuation methods do not change, there are certain valuation considerations unique to single-specialty centers such as reimbursement, cost structures and practice patterns," says Mr. Tormoehlen.

In the case of endoscopy centers, valuation may be trending higher due to an increase in case volume stemming from the Medicare Part B coverage expansion for colorectal cancer screening. "However, when assessing an endoscopy center's future financial returns using a discount cash flow analysis, it is critical that a center's average net revenue per case is reduced to reflect any increases in Medicare case volume, as Medicare reimbursement is lower than most commercial payer rates," says Mr. Tormoehlen. "Not factoring in changes to a center's payer mix and the reimbursement are common errors made by inexperienced or unqualified appraisers."

Single-specialty ASC valuation trends
EBITDA multiples for single-specialty ASCs are trending higher, according to the HealthCare Appraisers 2014 ASC Valuation Survey. "Seventy percent of respondents reported controlling valued from 6.0x to 7.9x as compared to 57 percent of respondents reporting controlling values of 6.0x to 7.9x in 2013," says Mr. Tormoehlen.

Majority interests command a higher value than minority interests, as a majority ownership provides control over major business decisions. "We are seeing valuations between 3x and 5x earnings less debt for minority interests and between 4x and 7x earnings less debt for majority interests," says Mr. Martin. "For multispecialty facilities the valuations are a little higher ranging from 3x to 7x earnings for minority interest and 4x to 8x earnings for majority interest."

Surgical Management Professionals managed and owned a minority interest in a number of financially successful ASCs in 2013. "Although this results in high values for existing members, it has caused some concern by those Boards that share values might be too high for potential new members," says Mr. Martin. "Therefore these Boards are evaluating options to reduce share values including stock splits and partial share offers."       

Risks
The risk profile for the business must be analyzed as part of the valuation process. Four considerable risks affecting single-specialty ASCs include:

•    Age and number of physicians. "The higher the number of physicians, the lower the risk associated with the departure of any one physician," says Mr. Martin. "The age of physicians is also important as the value decreases if many of them are at or close to retirement age."
•    Contracting strategy. For example, out-of-network facilities have more risk and thus lower values. More than half, 60 percent, of ASC management companies consider more than 20 percent of out-of-network volume to exceed risk tolerance, according to the HealthCare Appraisers survey.
•    Lack of diversification. Single-specialty facilities are less diversified than multispecialty centers, which spread the risks related to Medicare and commercial reimbursement decreases across a variety of specialties.
•    Referral sources. Single-specialty ASCs may be aligned with a single physician practice, which provides a narrow, specific flow of referrals. If the physician practice were to be purchased by another entity, the ASC would face a major shift in referral patterns that would impact profitability. "I believe this risk is a significant factor as to why single-specialty centers generally have lower valuation multiples than multispecialty centers," says Mr. Tormoehlen.

While an ASC’s risk profile is a major consideration in the valuation process,  it can be offset by a center's financial performance, strengths or future opportunities that a buyer would reasonably factor when making an offer. "[However], many single-specialty facilities become very efficient at their specialty and thus more cost-effective and profitable, which increases value," says Mr. Martin.

Desirable specialties
The ASC industry is host to a number of key specialties, but as higher acuity cases shift to the outpatient environment and reimbursement patterns fluctuate certain specialties become more desirable than others. "We have found that specialties with high reimbursement and high profit contribution demand the highest values," says Mr. Martin. For example:

•    ENT
•    General surgery
•    Orthopedics
•    Pain management
•    Spine

Single-specialty ASCs driven by one of these more desirable specialties will command higher value and attract more interest from potential buyers.

Are buyers interested?
Value for single-specialty ASCs is trending higher, and Mr. Tormoehlen and Mr. Martin have both observed an uptick in activity in the single-specialty sphere. "Our deal flow in the first quarter of 2014 leads me to believe it will be a robust year for endoscopy center acquisitions," says Mr. Tormoehlen. Many single-specialty centers are seeking:

•    New partners. "Some physician-owned facilities may search for management company or hospital partners in order to cash in and take some money off the table for their surgery center investment," says Mr. Martin.
    Service support. "Others may be attracted to services like payer contracting, IT and EMR support, supply cost savings, general management and strategic planning support," he says.

Regardless of a single-specialty center's motivation for entering the transactions market, there are buyers prepared to make the investment. Management companies are a growing market power, and many are eager to expand. The majority of management companies — 88 percent — intend to purchase at least one ASC within the next year, according to the HealthCare Appraisers survey.

Hospitals are also major players in the ASC acquisition market. Joint venture partnerships have markedly increased in popularity within the past few years, and the trend appears to have staying power. "Many hospital systems are seeking to increase their footprint in the outpatient market and thus will look to develop facilities or partner with existing facilities," says Mr. Martin. "The Affordable Care Act will also influence hospital systems in search of high quality and low cost outpatient facilities to meet the needs of their patient networks, which should fuel further activity."

Potential buyers will weigh the risk factors unique to single-specialty ASCs against quality of past earnings and future opportunities, says Mr. Tormoehlen. Many single-specialty ASCs will be seen as desirable acquisition targets. "While the growth in this sector may not be as strong as ASC development in the early 2000s it has benefits to both the ASC management companies and hospitals, and therefore will present acquisition opportunities in 2014," says Mr. Martin.

More Articles on ASC Issues:
ASC Buyers & Sellers: Valuation in 2014
OIG Report: ASCs Save Medicare, Beneficiaries Billions
EMR for Single-Specialty ASCs? Why Single-Specialty Systems Are Beneficial

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