Surgery Center Transactions: Outlook for Today's Market
At the 11th Annual Orthopedic, Spine & Pain Management-Driven ASC Conference in Chicago on June 13, a roundtable of ambulatory surgery center industry experts discussed the outlook for investment merger and acquisition activity in the ASC sector. The roundtable included Vice President of Business Development for United Surgical Partners International Mike Stroup; Managing Partner at Merritt Healthcare Matt Searles; Manager with HealthCare Appraisers Stuart A. Neiberg; and Senior Vice President of Development at Surgery Partners Christy Heald. The panel was moderated by Scott Becker, a partner at McGuireWoods.
The biggest roadblock to new surgery center development and transactions today are regulatory issues, such as certificate of need laws, according to the panel. However, many surgery centers at all stages of development are looking for new valuations to stay current and prepare for the future. The panel highlighted some of the biggest factors impacting an ASC's value.
"The valuations from multispecialty centers were increasingly steady, according to our survey from last year, and definitely staying in-network keeps the center value stronger," said Mr. Neiberg. "Additionally, diverse physician and specialty mix and payer mix is important. As physician owners and management companies are more aware of these factors, we are definitely seeing multiples getting higher."
The competitiveness in ASC transactions is growing, according to Ms. Heald, and there is an increase in three-way joint venture opportunities. For struggling centers, there is an opportunity to partner with management companies for turnarounds and increasing value.
"We've been successful in targeting facilities that are somewhat troubled," said Ms. Heald. "We see what levers we can pull. On the cost side, we are looking to see if we can add value. It depends on where your company's competencies are; one of the big areas we look at is implants because we understand there will be opportunities to drive down costs there."
Red flags that could negatively impact the valuation include:
• Out-of-network contracts;
• Significant amount of workers' compensation at the center;
• Low volume of available physicians in the community to bring future cases.
"We usually purchase centers that are more mature," said Mr. Stroup. "If they don't have a hospital partner, we bring one on. That can stabilize growth and add new employed or non-employed physicians. Don't wait too long to sell because we aren't in the state planning business; we are in the growth business."
With competition for surgeons and cases intense in many markets, ASC owners must sell shares at fair market value to new investors. "We are protected by regulations against selling shares at lower than fair market value, so we explain to surgeons that this is fair market value and we can't incentivize anyone to come," said Ms. Heald. "That's standardized across the industry. The larger players are cognizant of that and play by the rules. This isn't even a conversation we entertain."
The panel also discussed the types of deals they like to see most going forward. "A center that would be attractive to a lot of purchasing companies are creeping up higher to six and even seven, nearly eight times multiple," said Mr. Searles. "For our de novo deals, we are all investing in the physicians and we like to see non-competes with two- or three-year tails."
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