The Surgery Center Market: 5 Observations for 2012

We have several different observations as we look at the market for surgery centers this year. These are as follows:

1. Strong interest from buyers. There remains very strong interest from a handful of national company buyers that are looking to invest in robust high earning centers as well as turn around centers. "ASC merger and acquisition activity in 2011 was strong, with transactions happening across the size spectrum," says Aaron Murski, senior manager with VMG Health. "This should definitely continue into 2012, as appetite for growth remains strong among the management companies, considering the continued maturation of the ASC industry." There still remains substantial private equity investment in the surgery center market and great interest in company growing earnings. Thus, we have not seen a tapering off of interest in solid earning centers.  Multiples for serious, very strong centers remain in the 6.5 to 7.5 times EBITDA range.  Multiples for out of network centers are much lower and transactions are difficult to complete. According to VMG Health's Value Driver 2011 survey, 93 percent of management and development companies consider high reliance on out-of-network payors a "very high" risk, rating higher than dominance of a single payor, significant number of aging physicians and local hospital employment.

The ability to acquire centers at significant multiples is also assisted by an improved lending and finance environment as compared to the last few years.

2. Pace to close deals is slower. The pace to close deals is now measured in multiple months versus one to two months.  We find more and more often the transaction takes three to six months to close versus the typical 30 to 90 days.  This is often the case both on the hard core large scale acquisitions as well as the turn around centers.  We used to say that when you involved a hospital it expanded the time line by three to six months. The same extension of timeline is true of many turn around centers today.  In the turn around centers, time length may have slowed due to less optimism as to the ease of turning around the center. However, we do note that some of the best acquiring parties are still great at expediting transactions and are willing to do so.

According to data from HealthCare Appraisers, interest in turnaround opportunities decreased in the last several years, with 29 percent of management companies seeking turnaround centers in 2010 compared to 82 percent seeking de novo opportunities. Joe Clark, EVP and CDO for Surgical Care Affiliates, believes there may be more interest in turnaround opportunities in 2012 due to overbuilt markets damaging surgery center profitability. "There are a high number of centers that are not functioning very well," he says. "I think most management companies are going to have turnaround capabilities — at least the more substantial management companies with sophisticated processes and tools."

3. Hospitals remain interested as buyers. Hospitals, where they have a heavily employed presence, are often looking to buy 100% of a center and convert it to a hospital outpatient department.  In contrast, where hospitals have not fully engaged in an employment strategy, they are still very anxious to align more closely with physicians and look at surgery centers as potential profit lines and alignment opportunities. 2011 saw a great deal of joint venture activity between hospitals and physicians.  In a market by market basis, we saw increased effort by hospitals to invest in or buy ASCs outright.  Further, hospital pricing on acquisitions is generally very competitive with national company pricing. Luke Lambert, CEO of ASCOA, predicts multi-specialty centers will be most commonly targeted by hospitals, and the availability of high-risk centers in the industry may lead hospitals to consider turnaround opportunities as well.

4. Activity in CON states is brisk. Because of the amount of available physicians in certificate of need states where surgery center development has not been over developed and particularly in CON states where there is not the heavy presence of an employed model, there is tremendous interest in physician alignment through joint venture surgery centers.  We see a tremendous amount of activity in some of the Southeastern United States as well as in the greater New York area and New Jersey area. In 2011, we reported on 13 new surgery center developments in New York, 11 in Florida, 10 in New Jersey and 9 in North Carolina, in addition to three North Carolina joint ventures and three Florida joint ventures.

5. Spine, orthopedics, pain management, gastroenterology and ophthalmology. The key specialties for surgery centers tend to remain the three to five key specialties that have been the key specialties for a substantial period of time. Orthopedics, gastroenterology and ophthalmology are the top three specialties. Spine and pain management are also very important. According to data from HealthCare Appraisers, 94 percent of management companies view general orthopedics as desirable, compared to 88 percent for orthopedic spine, 82 percent for ophthalmology, 76 percent for ENT and pain management and 70 percent for GI. There remains tension with spine between performing procedures in the hospital or the surgery center.  In contrast with pain management, the tension lies between the surgery center and the office of the physician.

Related Articles on Surgery Center Trends:
ASC Transaction Growth to Continue in 2012: Q&A With Aaron Murski of VMG Health
10 Predictions on ASC Merger & Acquisition Activity in 2012
Achieving Success at ASCs in 2012: Q&A With Genascis Senior Vice President Jim Freund

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