In the continuously changing healthcare arena, the development of and investment in ambulatory surgery centers remained high in 2017 and indicated deal volume will remain strong in 2018. Within the general healthcare industry, care continues to shift to lower-cost outpatient settings, and ASCs remain at the forefront of this shift. In addition to sustained deal volume, experts expect the ongoing drive to explore new complex affiliation models, such as joint ventures, will continue into 2018.
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2017 ASC Industry Trends
Operators in the ASC market have come to know that the only certainty in the industry is change. The relationship between changes in reimbursement, market dynamics (eg., competition, population growth/declines, demographics) and the advancement of surgical technology, combined with the focus on providing quality care efficiently and at a lower cost, has driven the need for ASC participants to collaborate and explore more complex transaction structures beyond the more common acquisition model. One example of a complex transaction structure that HealthCare Appraisers, Inc. (HealthCare Appraisers or HAI), a valuation and consulting firm specializing in healthcare and life sciences transactions, observed in 2017 was the joint venture model. HealthCare Appraisers believes that the joint venture model has gained momentum because it allows participants to retain their independence while expanding their respective operations. The ability for partners to combine operations and focus on their respective core competencies alleviates the pressure from changing market dynamics and allows for more coordinated care between healthcare providers in their respective markets. HealthCare Appraisers outlined the following key considerations related to the changing ASC landscape:
- Remaining independent appears to present long-term challenges for surgery centers as they are increasingly competing with larger, more diverse ASC peers and hospital outpatient departments. This can impact a center’s surgical volume as physicians join larger centers that are able to better utilize operating room block times, purchase state of the art equipment and encourage collaboration between former competitors. As independent ASCs become a smaller percentage of the ASC market, their negotiating position with payors and suppliers may also weaken.
- Joint ventures also bring together physicians, health systems/hospitals and management companies which can scale surgical operations to meet patient demand in a cost-effective and efficient manner. In a healthcare industry that is demanding further collaboration between participants, the joint venture model appears to meet the demands of today’s industry.
- Joint ventures between independent ASCs and hospitals can serve to benefit both parties as well as the community in which they serve. Joint ventures help facilitate the recruitment and retention of top-tier physicians for the hospital while increasing the economic upside for the physicians. Additionally, and most importantly, both physicians and hospitals report that there is an increase in quality outcomes post affiliation.
- Contributions to a joint venture must be at fair market value, the sum of which will result in a value different from the value of the resulting joint venture. HealthCare Appraisers notes that it is important to focus the respective contribution valuations on what each party is contributing, on an “as-is” basis, absent any strategic considerations such as reimbursement or expense efficiencies that may be realized once the joint venture is in place. Strategic valuations are often performed separately by the participants and should not be used as the basis for each party’s ownership in the new joint venture.
HAI 2018 ASC Valuation Survey
In addition to its observations concerning the shift toward more complex affiliation models, HealthCare Appraisers recently released its 2018 ASC Valuation Survey which provides further insight into ASC industry and valuation trends. Since 2003, HealthCare Appraisers has surveyed the ASC industry to determine trends in the value and characteristics of ASC ownership interests and management fees charged to ASCs. 15 respondents, representing well over 700 surgery centers throughout the country, responded to this year’s survey. The following are the key takeaways from HAI’s 2018 ASC Valuation Survey:
- Acquisition Activity: Survey responses indicated an increase in ASC acquisition activity in 2017 as compared to 2016 activity. In 2017, a similar percentage of respondents reported the acquisition of between one and five centers (41 percent in 2016 as compared to 40 percent in 2017); however, 20 percent of respondents reported the acquisition of between six and ten centers (9 percent made a similar level of acquisitions in 2016) and 13 percent of respondents reported the acquisition of 16 or more centers (compared to 10 percent reporting the acquisition of eleven or more centers in 2016). Lastly, 41 percent of respondents in 2016 did not make an acquisition, as compared to only 27 percent of respondents in 2017. For 2018, acquisition activity is expected to remain high although somewhat tempered from 2017 levels. Based on HAI’s 2018 ASC Valuation Survey, 47 percent of respondents indicated that they plan to purchase between one and five ASCs, 20 percent plan to purchase between six and ten ASCs, and 14 percent plan to purchase 11 or more ASCs. Only 3 of the respondents are not planning to make an acquisition in 2018.
- Valuation Multiples: HAI’s 2018 ASC Valuation Survey provided the following information regarding valuation multiples throughout the industry:
- Minority interest – single-specialty surgery centers: 38 percent of respondents indicated valuation multiples between 4.0x and 4.9x EBITDA during 2017. This is slightly below the valuation multiples reported in the previous year’s survey which indicated 50 percent of respondents experienced transactions between 4.0x and 4.9x EBITDA during 2016. A larger portion of the responses were below 4.0x EBITDA in the 2018 survey compared to the 2017 survey which indicates a decrease in the multiples for minority interests in single specialty surgery centers.
- Majority interest – single-specialty surgery centers: 76 percent of respondents indicated valuation multiples between 6.0x and 7.9x EBITDA during 2017. In total, this is in-line with valuation multiples reported in the previous year’s survey which indicated 78 percent of respondents experienced transactions between 6.0x and 7.9x EBITDA during 2016. However, HAI notes the distribution within the overall range was more heavily skewed toward 6.0x to 6.9x EBITDA in 2016 compared to a balanced distribution between 6.0x and 6.9x EBITDA and 7.0x and 7.9x EBITDA, which indicates a large number of transactions were greater than or equal to 7.0x in 2017 compared to 2016.
- Minority interest – multispecialty surgery centers: 50 percent of respondents indicated valuation multiples between 4.0x and 4.9x EBITDA during 2017. This is larger than the valuation multiples reported in the previous year’s survey, which indicated 38 percent of respondents experienced transactions between 4.0x and 4.9x EBITDA during 2016. The distribution of responses in 2017 is heavily skewed at less than or equal to 4.9x EBITDA, with a lower percentage of respondents indicating transactions were greater than or equal to 5.0x EBITDA. Compared to the 2017 survey, the 2018 survey responses indicate a decrease in the multiples for minority interests in multispecialty surgery centers.
- Majority interest – multispecialty surgery centers: 64 percent of respondents indicated valuation multiples between 7.0x and 7.9x EBITDA during 2017. This is less than the valuation multiples reported in the previous year’s survey, which indicated 75 percent of respondents experienced transactions between 7.0x and 7.9x EBITDA during 2016. Despite the decreased response percentage for this valuation multiple transaction range, the overall distribution of responses related to 2017 transactions did shift upward as all responses ranged from 6.0x to 8.0+x EBITDA. Compared to the prior year’s survey where 25 percent of responses indicated valuation multiples transacted at less than 6.0x EBITDA, the distribution range has a higher floor in the 2018 survey, which indicates an increase in the multiples for majority interests in multispecialty surgery centers.
- ASC Characteristics: Based on the 2018 Survey, 80 percent of respondents prefer between 6 and 15 physician owners in a single-specialty ASC while 60 percent of respondents prefer between 11 and 20 physician owners in a multispecialty ASC. From an equity standpoint, the survey respondents preferred varying levels of physician ownership, with 13 percent of respondents preferring less than 10 percent ownership, 40 percent of respondents preferring between 11 percent and 50 percent ownership and 47 percent of respondents preferring between 51 percent and 75 percent ownership.
- Management & Billing Fees: Based on the 2018 Survey, 60 percent of respondents reported typical management fees range from 5 percent to 6 percent of net revenue, while 40 percent of respondents reported typical management fees range from 3 percent to 3.994 percent of net revenue. Additionally, 60 percent of respondents reported observing typical fees for billing and collection services range from 4 percent to 5.99 percent of net revenue, while 40 percent of respondents reported observing typical fees between 3 percent and 3.99 percent.
All signs continue to point to high levels of interest for ASCs in 2018 among physicians, health systems and management companies. While increased attention has been par for the course over the last few years, transactions and ownership structures are expected to increase in both their availability and complexity.
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