4 Top Issues Facing ASC and Hospital Valuation

A difficult economic climate has led many healthcare providers, including ASCs and hospitals, to make significant efforts to cut costs and improve revenues. Although providers have done well in adapting to this climate, some factors still have made an impact on the value of hospitals and ASCs.

Jon O'Sullivan, senior partner of VMG Health, discusses the following four major issues currently facing and affecting ASC and hospital valuation.

1. Physician employment. As a result of a variety of issues from lower prospective reimbursement to onerous administrative burdens, many physicians leaving medical school are looking for employment by a hospital or hospital system rather than by private practices or physician groups. Likewise, with looming cuts in professional reimbursement and expected limitations on in-office ancillary services, many practices are approaching hospitals and hospitals are purchasing private practices at an accelerating rate. According to Mr. O'Sullivan, this trend is becoming a great opportunity for hospitals but may pose a long term problem for ASCs.

"Hospitals can use this as an opportunity to align physicians directly with the hospitals," says Mr. O'Sullivan. "Many hospital systems are anticipating that payors are going to be more willing to pay for a bundled service fee, which hospitals can more effectively contract and redistribute under the umbrella of one institution, or integrated delivery network. Clearly, ASCs do not have this opportunity and the long term impact on ASCs can be negative."

ASCs, conversely, are faced with more challenges as a result of this increased trend toward physician employment by hospitals. Mr. O'Sullivan notes that this trend is decreasing the base of potential physician investors for ASCs. "This can impact ASCs and ASC valuation because they are driven by specialist reimbursements," he says. "As specialists find it more difficult to stay in private practice, ASCs will feel the impact."

Mr. O'Sullivan says ASCs must be prepared to generate more revenue off of fewer cases. "Combating this trend is hard," he says. "ASCs will have to continue to be more cost-effective to maintain their margins."

2. Corporate investors. Mr. O'Sullivan says that most ASCs have learned to adapt to the new economic climate, and over the past year or so, while corporate buyers are more disciplined in their approach to the market, not much has happened to affect the fair market value of an ASC in regards to the general economic downturn. However, corporate investors have been very prudent when entering into ownership agreements with ASCs.

"Companies have been more careful in purchasing a controlling interest in an ASC," Mr. O'Sullivan says. "Where companies previously responded to intense competition by offering higher purchase prices, often on centers that might have underlying challenges, the current market is characterized by more rational pricing and a much more diligent review of the operating dynamics of the ASC."

3. Hospitals purchasing ASCs. Although some hospitals continue to enter into ownership agreements with ASCs in direct partnership with physicians, Mr. O'Sullivan says that the recent trend has been for hospitals to buy underperforming or market-challenged ASCs outright. In most cases, hospitals tend to focus on ASCs that can be restructured to become a part of the hospital provider entity, as opposed to centers that continue to run successfully.

"These ASCs are underutilized, poorly managed or have out-of-network contracts that are no longer viable. Hospitals look to consolidate their services and can negotiate higher rates under the hospital's provider number and the HOPD payment schedule," Mr. O'Sullivan says.

Part of this trend to purchase surgery centers is related to hospitals returning to an integrated delivery system model, according to Mr. O'Sullivan. Whereas in recent years many hospitals were stripped of their ancillaries by physicians seeking participation in ancillary revenues, now they are looking to recapture services such as imaging and outpatient surgical services as hospitals once again position themselves to deliver a full range of care.

Hospitals have also had the benefit of increased interest in physician employment to help them employ integrated care models. "Physicians are experiencing reduced reimbursements, which may lead them to align more closely with hospitals," Mr. O'Sullivan says. "For instance, cardiovascular nuclear studies are far less profitable to do in an office setting and orthopedic in-office MRI services are under attack. Hospitals are stepping in to purchase these ancillary services, and if physicians align with the hospital, they may be more inclined to perform these services as part of the provider based services."

Mr. O'Sullivan notes that hospitals are still relatively early in this cycle of increased integrated care, so the benefit or ultimate success of these strategies cannot yet be seen.

4. Restrictions on physician-ownership. Surgical hospitals face different issues regarding valuation. One major concern is any healthcare legislation that would prohibit physician-owned hospitals from obtaining Medicare or Medicaid certification after Aug. 1, 2010. Surgical hospitals may see value improve or worsen due to many factors, according to Mr. O'Sullivan.

Physician-owned surgical hospitals that are located in areas with a large population and are affiliated with a health system stand the best chance for success if restrictive legislation passes as they will have means for replacing physicians that retire or move out of the area. "Affiliation may help to keep the hospital viable if expansion is limited," Mr. O'Sullivan says.

Hospitals located in areas where restrictive legislation on physician ownership in hospitals essentially create a certificate of need — that is, those located in areas where no other surgical hospitals can build and/or those that face little competition from acute-care hospitals — will also protect their value should the legislation pass.

Surgical hospitals that are in highly competitive areas and/or have no affiliations are at a higher risk of seeing their value decrease over time.

Mr. O'Sullivan notes that this will be a case-by-case basis, depending on the surgical hospital, competitive environment, and affiliation strategy

Contact Jon O'Sullivan at osullivan@vmghealth.com or call (214) 369-4888. Learn more about VMG Health.

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