The Future of ASC M&A: 5 Key Factors Driving Activity
The ambulatory surgery center market is buzzing with merger and acquisition activity, and don’t look for it to slow down in the near future.
At the 12th Annual Spine, Orthopedic and Pain Management-Driven ASC Conference + The Future of Spine, a panel of industry experts discussed the outlook for investment and merger and acquisition activity in the ASC sector. The panel included Meridian Surgical Partners President and Chief Development Officer Kenny Hancock; Managing Partner at Merritt Healthcare Matt Searles; Partner and Co-Founder of HealthCare Appraisers Todd J. Mello, ASA, CVA, MBA; and Partner at McGuireWoods Melissa Szabad. The panel was moderated by Becker’s Healthcare Publisher and Chairman at McGuireWoods Scott Becker.
The ASC industry is now a mature industry, and coupled with the side effects of changing healthcare legislation, there are several factors driving the increase in ASC transactions today:
• Physician and specialist employment
• Fewer ASCs driving competition in the market
• Multiples have been pushed up
• Hospitals desire to bring ASCs into their network
• Leverage in managed care contracts
“There is a feeling among strategic and financial advisers that ASCs fit well into the healthcare reform landscape,” said Mr. Searles. “If I had to peg one reason for the higher multiples in a maturing market, that would be it.”
There are several factors that could impact ASC valuation, including market saturation, certificate of need status, out-of-network contracting and growth potential. However, every center should be valued individually because certain situations could buck the trend.
“There are a few ways to deal with out-of-network from a valuation perspective,” said Mr. Mello. “The problem with OON is uncertainty. If you are projecting out, you can’t assume out-of-network rates will remain the same. We want to adjust the projection accordingly.”
The panel also discussed ASC company purchasing and consolidation trends. Many companies are looking to acquire more centers, but it has to be the right situation.
“We typically look at 50 to 60 opportunities per year and in the last couple of years we found fewer centers that have a positive movement in terms of cash flow and volume, revenue and EBIDTA,” said Mr. Hancock. “Everyone struggled with headwinds in terms of volume. It’s difficult as the buyer to assess a center based on projections because everyone has a plan to grow and hopes to execute that plan, but in our experience there are many times it is difficult for the center to actually carry out that plan. If there is a business that has a positive trend, we try to figure out what is causing that trend and decide whether it will continue.”
Ms. Szabad said most of the transactions she’s seeing in the market today are corporate buyers, but hospital buyers are also trending up more than in the past. However, there are still opportunities for freestanding ASC success. “The best sign for long term ASC success is physician engagement,” she said. “Having physicians that are committed and devoted to the center is key. We also like to see recruiting and allowing new physicians to buy-in.”
But if physician buyers have been considering a sale, the time may be now, said Mr. Mello. The multiples likely won’t reach much higher, he said, and hospitals are looking to buy.
“I think the recent activity will continue in the foreseeable future,” said Mr. Hancock. “There is still a lot of fragmentation in the marketplace. We’ve talked about consolidation for a number of years and we’ve seen some of that occurring; I think we’ll see more in the future.”
More Articles on Surgery Centers:
How to Deal With Rising Orthopedic Implant Costs at ASCs
5 Statistics on ASC Company Management Fees
Making the Switch: 3 ASCs Implementing EHR
© Copyright ASC COMMUNICATIONS 2016. Interested in LINKING to or REPRINTING this content? View our policies by clicking here.