8 Observations on Current Surgery Center Transaction and Valuation Trends

Todd J. Mello, ASA, AVA, MBA, partner with HealthCare Appraisers, shares eight observations on current ambulatory surgery center transaction and valuation trends. Editor's note: Hear Mr. Mello discuss "ASC and Healthcare Transactions — The Year in Review" on Thursday, June 9, at the 9th Annual Orthopedic, Spine and Pain Management-Driven ASC Conference in Chicago.


1. Consolidation of large management and development companies. As the opportunities to acquire individual ASCs become tougher, the larger M&D companies with capital are looking to acquire other M&D companies and their portfolio of ASCs, Mr. Mello says. The most recent example of this growing trend is the recently announced acquisition of National Surgical Care by AmSurg.


2. Diversification of M&D companies. The AmSurg acquisition may indicate M&D companies are looking not only to grow but also to diversify their portfolios, Mr. Mello says. "AmSurg has traditionally been a single-specialty company — predominantly GI and ophthalmology — and with the acquisition of NSC, that represents a bit of change in strategy for AmSurg to look toward multi-specialty."


3. Out-of-network ASCs still under the spotlight. OON ASCs have been a hot topic for quite some time, and the "resistance" within the marketplace for purchasing OON centers has heightened. "There's still a lot of discussion and concern about the ability of these OON centers to sustain the income stream," Mr. Mello says. "The question is when will that earning stream stop? There's so much uncertainty. We know it's going to come down. But we don't know when and we don't know to what magnitude, so from a valuation perspective, that translates into additional risk … which would drive down value."


4. Valuation of OON ASCs under projected in-network rates. "We're seeing anybody who might be willing to buy a predominantly OON ASC to essentially convert, on paper, to in-network and then put a typical market multiple, as opposed to putting a typical market multiple on the OON earning stream," Mr. Mello says.


5. Hospitals buying ASC physicians outright. More hospitals are looking to acquire all of an ASC as opposed to a percentage of the physician-owners' shares. "The hospital's expectation is once they can buy it outright, it becomes a department of the hospital, and they can bill cases at the hospital fee schedule, which is typically higher than the ASC rate for most procedures."


6. Creation of management arrangements to maintain acquired physicians' interest. Hospitals cannot legally pay physicians for the increase in revenue that usually occurs when an ASC becomes a department of a hospital following an acquisition. "This leads to a concern regarding how the hospital keeps the doctors interested if the physicians no longer own equity in the center," Mr. Mello says. "What we're seeing there is basically creation of certain management companies whereby the physicians may provide certain services to what formerly was the ASC but now operates as a department of the hospital post-acquisition. This helps keep the physician tied in to the success of the department."


7. Compensation tied to productivity. Unlike the employment-model trend last seen in the 1990s, Mr. Mello says hospitals are becoming more disciplined in tying compensation paid to employed physicians to productivity requirements, probably based on advice of counsel and valuation firm alike, to help keep physicians motivated to work.


8. Increase in hospital-employed physician deals. Mr. Mello says he is seeing more physician employment deals with hospitals. This is occurring not as frequently with surgical specialists commonly found in ASCs but primarily in the cardiology area. While this does not necessarily have a huge impact on ASCs, as hospitals continue to employ physicians, Mr. Mello expects to see an even greater increase in activity of hospitals buying out physician/hospital ASCs because the hospital will wants to keep all specialties under its umbrella.


"With pressure in reimbursement, we do see the employment model picking back up," Mr. Mello says. "The cardiology ones are predominantly driven by the changes in diagnostic imaging reimbursement. But we are also seeing large, multi-specialty groups being acquired — surgical, family practice and non-surgical acquisitions. Over the last 24 months, physician practice acquisition activity has really picked up. I think it's fear of reimbursement and the unknown."


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