At the 9th Annual Orthopedic, Spine and Pain Management-Driven ASC Conference in Chicago, Evelyn Miller, CPA, vice president of mergers and acquisitions for United Surgical Partners International, Michael Weaver, vice president of acquisitions and development for Symbion, Thomas J. Chirillo, senior vice president of corporate development for NovaMed, and Jon O'Sullivan, senior partner with VMG Health, gave a panel presentation titled "Selling Your ASC – a Process and Plan – What Can You Expect?" The panel was moderated by Scott Becker, JD, CPA, Partner, McGuireWoods, and addressed the following questions.
Q: How are centers being priced?
A: The presenters said buyers are still offering strong prices for good centers, meaning facilities that have a good number of physicians (approximately 20 is preferable for a multi-specialty center), a strong specialty mix and profitable payor contracts. He said these types of centers may see pricing of 6x EBITDA. At the same time, however, more centers are being marked without these components due to the toll of the economy, physician shortages or other issues plaguing ASCs. Low-performing centers will see lower multiples of EBITDA, the presenters said.
Q: When do centers receive valuation of 7-8x EBITDA?
A: Several factors can contribute to high pricing for a center, the presenters said. The best centers will have a diverse mix of surgeons so that the retirement or departure of a single physician has limited impact on the surgery center's profits. The center will also have a good mix of specialties — orthopedics and spine are particularly desirable because of their high profitability, but specialties with shorter procedures can work if the center is efficient. He said high-priced centers will also present a history of stability and opportunities for growth; if the local market is completely saturated, the center may be unattractive to buyers despite a history of profitability.
Q: How are single-specialty centers being priced?
A: The presenters said single-specialty centers are less attractive to buyers because they put "all their eggs in one basket," so to speak. If reimbursement drops for the specialty, the center suffers a large hit to its profitability, rather than being able to lean on another specialty.
Q: How much do one-time cost cuts impact pricing?
A: Many centers can improve their profitability through one-time cost cuts or efficiency improvements, such as revamping the staffing model or standardizing supplies. While buyers will tackle this "low-hanging fruit" first when a center is purchased, the opportunity to implement one-time improvements does not drive center value. Instead, buyers look for ways to improve revenue over the long term by recruiting new physicians, expanding specialties and attracting more patients.
Q: What difference do specialties make to center valuation?
A: According to the presenters, 3-4 years ago, there was a huge bias in the ASC industry towards orthopedics and a negative attitude towards pain and GI. These preferences still exist to some extent, but buyers are generally willing to look at an ASC if the cases are performed efficiently and payor contracts are well-negotiated. A multi-specialty ASC is still more attractive than a single-specialty ASC, especially in cases where all the surgeons perform plastics or another undesirable specialty.
Q: Are multiples up for 2011?
A: The presenters said multiples are about the same in 2011 compared to the previous few years, though multiples have dropped for some centers where quality has degraded over time.
Q: What number of physicians could hurt a deal or cause concern?
A: The presenters said the age of physicians is always a factor in ASC risk. If the majority of the ASC's physicians are nearing retirement, the leadership should know how the center will bring in new physicians and when the physicians' shares will be sold. This process can be easier for ASCs that see many physician-owners from the same practice; when one physician retires, he or she can easily "pass the torch" to a younger practice member. The presenters also said that buyers generally shy away from ASCs where one physician holds a disproportionate number of shares.
Q: How much concern is there around physician employment?
A: The presenters said they are fielding more calls from orthopedists concerned about employment than in the past, indicating that even less-susceptible specialties are feeling the pressure. Physicians may be attracted to a better and more reliable compensation structure with the hospital, so ASCs in hospital-dominated markets are at risk of losing their investors.
Q: How many deals concern hospitals — rather than management companies — acquiring ASCs?
A: According to the presenters, hospitals are more attractive to ASCs that struggle to achieve strong payor contracts. While a management company can also be useful in providing negotiation expertise, hospital partnerships are basically proven to strengthen ASC payor contracts due to their existing relationships with the insurance companies.
Q: What is the typical ASC management fee?
A: The presenters said that management fees typically range from 5-6 percent of net revenue to ensure that the management company profits from increasing the center's revenue stream.
Learn more about Symbion.
Learn more about VMG Health.
Learn more about United Surgical Partners International.
Learn more about NovaMed.
Related Articles on Surgery Center Transactions and Valuation:
The 3 Tiers of Surgery Center Deals
Insights Into Business and Financial Relationships Between Surgery Centers and Hospitals
5 Initial Steps to Selling a Surgery Center
Q: How are centers being priced?
A: The presenters said buyers are still offering strong prices for good centers, meaning facilities that have a good number of physicians (approximately 20 is preferable for a multi-specialty center), a strong specialty mix and profitable payor contracts. He said these types of centers may see pricing of 6x EBITDA. At the same time, however, more centers are being marked without these components due to the toll of the economy, physician shortages or other issues plaguing ASCs. Low-performing centers will see lower multiples of EBITDA, the presenters said.
Q: When do centers receive valuation of 7-8x EBITDA?
A: Several factors can contribute to high pricing for a center, the presenters said. The best centers will have a diverse mix of surgeons so that the retirement or departure of a single physician has limited impact on the surgery center's profits. The center will also have a good mix of specialties — orthopedics and spine are particularly desirable because of their high profitability, but specialties with shorter procedures can work if the center is efficient. He said high-priced centers will also present a history of stability and opportunities for growth; if the local market is completely saturated, the center may be unattractive to buyers despite a history of profitability.
Q: How are single-specialty centers being priced?
A: The presenters said single-specialty centers are less attractive to buyers because they put "all their eggs in one basket," so to speak. If reimbursement drops for the specialty, the center suffers a large hit to its profitability, rather than being able to lean on another specialty.
Q: How much do one-time cost cuts impact pricing?
A: Many centers can improve their profitability through one-time cost cuts or efficiency improvements, such as revamping the staffing model or standardizing supplies. While buyers will tackle this "low-hanging fruit" first when a center is purchased, the opportunity to implement one-time improvements does not drive center value. Instead, buyers look for ways to improve revenue over the long term by recruiting new physicians, expanding specialties and attracting more patients.
Q: What difference do specialties make to center valuation?
A: According to the presenters, 3-4 years ago, there was a huge bias in the ASC industry towards orthopedics and a negative attitude towards pain and GI. These preferences still exist to some extent, but buyers are generally willing to look at an ASC if the cases are performed efficiently and payor contracts are well-negotiated. A multi-specialty ASC is still more attractive than a single-specialty ASC, especially in cases where all the surgeons perform plastics or another undesirable specialty.
Q: Are multiples up for 2011?
A: The presenters said multiples are about the same in 2011 compared to the previous few years, though multiples have dropped for some centers where quality has degraded over time.
Q: What number of physicians could hurt a deal or cause concern?
A: The presenters said the age of physicians is always a factor in ASC risk. If the majority of the ASC's physicians are nearing retirement, the leadership should know how the center will bring in new physicians and when the physicians' shares will be sold. This process can be easier for ASCs that see many physician-owners from the same practice; when one physician retires, he or she can easily "pass the torch" to a younger practice member. The presenters also said that buyers generally shy away from ASCs where one physician holds a disproportionate number of shares.
Q: How much concern is there around physician employment?
A: The presenters said they are fielding more calls from orthopedists concerned about employment than in the past, indicating that even less-susceptible specialties are feeling the pressure. Physicians may be attracted to a better and more reliable compensation structure with the hospital, so ASCs in hospital-dominated markets are at risk of losing their investors.
Q: How many deals concern hospitals — rather than management companies — acquiring ASCs?
A: According to the presenters, hospitals are more attractive to ASCs that struggle to achieve strong payor contracts. While a management company can also be useful in providing negotiation expertise, hospital partnerships are basically proven to strengthen ASC payor contracts due to their existing relationships with the insurance companies.
Q: What is the typical ASC management fee?
A: The presenters said that management fees typically range from 5-6 percent of net revenue to ensure that the management company profits from increasing the center's revenue stream.
Learn more about Symbion.
Learn more about VMG Health.
Learn more about United Surgical Partners International.
Learn more about NovaMed.
Related Articles on Surgery Center Transactions and Valuation:
The 3 Tiers of Surgery Center Deals
Insights Into Business and Financial Relationships Between Surgery Centers and Hospitals
5 Initial Steps to Selling a Surgery Center