Rusty Shelton of Prexus Health Discusses 4 ASC Mergers and Acquisitions Trends

1. Buyers are looking at a facility’s ability to grow.
From a potential buyer’s perspective, financing for a strong center exists for experienced and successful management companies, but the financier must to be convinced of the management company’s ability to not only implement changes for improvement but also to grow the center’s services and revenue
 
"We are looking at what additional service lines can be added and whether there are physicians in the market that can be brought in either as a new shareholder or medical staff member," Mr. Shelton says. "We do an analysis to see what the market is doing — who the competitors are and their tactics — to see if we can grow in that market. If the facility and physicians can’t work with us, that is not nearly as appealing."
 
He says one of the main focuses of Prexus is increasing the center’s revenue stream, thus making growth opportunities and even opportunities to convert the ASC to a different type of facility an extremely important consideration.
 
"We are looking more and more at a facility’s ability to grow …whether it can be converted into a hospital, add additional service lines or even become a hospital outpatient department," Mr. Shelton says. Prexus also often heavily considers whether the ASC can ultimately be integrated into a regional healthcare network.
 
2. Market dictating a shift toward focused community hospitals.
"Growing companies are going to feel little impact in the next two years [as a result of the market], but weaker facilities will," Mr. Shelton says. "It is my personal opinion that it may take two to three years to get out of current economic cycle. I don’t think we’ve quite hit the bottom yet; there will be layoffs, less people with insurance and erosion of overall healthcare revenue."
 
For this reason, and because, healthcare will be forced to change in the next eight years (which
Mr. Shelton elaborates on further below), Prexus, and many management companies like Prexus, "are moving away from ASCs and more towards focused community hospitals," he says. "They are a more sustainable life-cycle model. There are lots of services and strategies you just can’t implement unless you have an acute care hospital license."
 
3. ASCs have life cycle issues.
"If you look at ASCs, they grow very rapidly the first few years and then they begin to flat-line making it difficult to bring new physicians into the center at a reasonable share value," Mr. Shelton says. "In addition when you start a surgery center you normally have two or three key physician leaders. They get the center built and then the initial founders retire or move on to other endeavors. The younger physicians who come in to replace them lack the leadership and business skill sets they need to take it to the next level, which ultimately hurts the center."
 
It is also hard for an ASC to demonstrate market value when they have an ageing shareholder base or may start to lose market share as a result of younger, less experienced doctors, Mr. Shelton says. Buyers not only notice this but other competitor hospitals and healthcare facilities in an ASC’s region will often take advantage of an ASC’s struggles, luring their doctors and patients away.
 
"We are not seeing many centers taking this [problem] to heart," he says. "Many times they believe ‘I’ve got something good right now’ and neglect to think about tomorrow. ASCs are becoming more of a commodity business. Lack of strategic planning is just one example of their passivity. They should be seeking to develop a five-year plan with an experienced management company. They should be asking themselves, ‘Where am I going and how will we harvest if needed?’ I’m not seeing many surgery centers think enough about these strategies."
 
Mr. Shelton also advises ASCs to look for partners before their growth starts declining.
 
"It’ll be much harder to find a partner once they start to erode," he says. "They should seek buyers during their growth stage when they can still bring additional physicians in."
 
When looking for a potential corporate partner, ASCs need to remember to protect their rights and seek a partner who has a common vision
 
"ASCs also need to make sure they are not overly diluted in their owner’s equity position," Mr. Shelton says. "Since Prexus assumes a minority position we generally like to see protective rights or drag-along rights on our behalf. The majority owner may sell at a majority owner value leaving the minority shareholder in a compromised position. Centers need to ask themselves, ‘If needed, how do I harvest my company when I hold an individual minority position? What am I going to do in the event a majority owner sells? Will I lose my rights?’ There needs to be a shared vision among all parties."
 
4. Healthcare, in general, will have to change in the next eight years.
"There is a lifecycle within the healthcare industry as well," Mr. Shelton says. "There will likely be more and more consolidation down the road. And no, this doesn’t have to do, intrinsically, with healthcare, itself, but rather the United States as a whole. Our country is growing older, we
have a lot of uninsured and undocumented individuals coming to our hospitals, those facilities are old — built during the Hill-Burton era — and they need to be replaced at the current cost structure
 
"Medicare, healthcare benefits — it’s going to get horrendous, there is going to be tremendous pressure, for costs to be lower, which will push reimbursements farther down," he says. "We have a significant problem that ultimately must be dealt with. Healthcare can’t continue as it is. That’s why you are already seeing select outsourcing in an attempt to reduce cost. Some companies are actually beginning to fly people oversees to have surgeries. The healthcare marketplace has to change to become more efficient. Physicians need to begin thinking more on a macro level, and ‘out of the box.’ They need to ask themselves, ‘How do I fit into a larger network? How can I be more than just a surgery center?’"
 
"More and more management companies are beginning to understand the concept," Mr. Shelton says.
 
Surgery centers need to be aware that their business may erode over the next few years firstly because of their center’s natural lifecycle, secondly because of the economy and thirdly because of the need for healthcare reform, Mr. Shelton says.
 
"They need to think about all of this and how it fits together to make a strategic plan," he says.
 
Rusty Shelton (rusty.shelton@prexushealth.com) is the chief investment officer of Prexus Health and is responsible for mergers and acquisitions, strategic planning, capital markets and product development. He has had over 25 years of experience in healthcare development. Prexus health offers a variety of management, operation, and development services. Learn more about Prexus Health.