7 Industry Experts Discuss Surgery Center Transactions Outlook for 2013

Seven ambulatory surgery center industry experts discuss whether there will there be more or fewer ambulatory surgery center transactions this year.

Timothy Baker, President of Principle Valuation
: Based upon the amount of activity in the beginning of the year it appears as though there will be more transactions this year. It seems more and more imperative to take hold of market share and [I] believe consolidation will be the most practical tactic — whether it be purchasing a competitor or purchasing an ASC as well as physician practices.

Marc Koch, MD, President and CEO of Somnia:
Implementation of the requirements within the Healthcare Accountability Act brings with it many expected uncertainties; but there is also the certitude of unexpected uncertainties that can and will erode decision-making confidence. A sector afflicted uncertainty, lack of confidence and muddled expectations will not be conducive to hospital transactions.

Mike Lipomi, President and CEO of Surgical Management Professionals:
Based on development activity so far this year I think it will be a very active transaction year for both hospitals and for surgery centers. Interestingly we are also working on two new surgery center developments as well. I think the newest trend in our industry will be consolidation. I think some of the smaller companies will be bought up by the larger players.

Tom Mallon, Founder and CEO of Regent Surgical Health:
We are seeing tremendous interest by hospitals in purchasing and developing ASCs, especially in markets that historically hospitals have not embraced ASCs. They are playing catchup in order to meet their goals of cost reduction.

Kevin Phillips, Partner at Jarrard Phillips Cate & Hancock:
Future successful health systems will have scale and breadth, which is driving acquisitions and consolidation between healthcare providers at almost every level -- from hospitals to ASCs to physician practices to post-acute care facilities and more. You can treat a single illness or disease at a facility, but you manage the wellness of a community by being pervasive throughout that community.

Acquisitions will only intensify in 2013. There may be fewer for-profit acquisitions of not-for-profits than in the past 18 months, but more joining of two not-for-profits. Conventional wisdom proclaims that bigger is better. More and more, hospitals (particularly small to medium-sized hospitals) are realizing they need critical mass to be successful in the face of healthcare reform. Reform almost forces partnerships -- but that is counter to the scrutiny of the FTC, so something will need to give and rules will need to catch up with the modern definition of service area and market share.

Why partner? Because hospitals need access to sophisticated IT infrastructure and systems, as well as a financial buffer to deal with increased patient volume and declining reimbursements. Those things are hard to do when you’re a stand-alone organization.

As for surgery centers, they’re an increasingly important piece of the local healthcare delivery system for health systems and hospitals who are trying to build networks of care to serve their patients. That’s one of the reasons why health systems and hospital companies (HCA for example) have been acquiring them so rapidly. Also, of course, hospital acquisitions of ASCs will certainly continue as long as hospitals receive a sharp increase in reimbursement for procedures simply because the center is owned by a hospital instead of physicians.

Blayne Rush, President of Ambulatory Alliances:
We get asked often about the future of ambulatory surgery centers and the current transactional market for ASCs. We are bullish on the ASC space. We have seen a significant uptick in inquiries about our services and engagements in the fourth quarter of 2012 and year to date in 2013. We have witness more money being raise by some of the buyers and new money coming into the market. There are currently a few of the management companies looking for a buyer (or investors if you will) in hopes that the synergies of the management company and investors will allow them to grow through additional ASC acquisitions. One of the biggest hurdles to the current single ASC transactions market that we are currently seeing is the profiles of some of the many ASCs. Some of the ASCs need help getting to the point where they will garner interest from more of the buyers and we are seeing more client engagements around this.

The reasons behind the increase interest from surgeons owners wanting to sell [are] as varied as the reasons the stock markets fluctuates. Some want their life back and want someone to help with the day-to-day management, some are nervous about the increasingly complexities of growing and managing an ASC and some just want to take money off the table and diversify their investments. Like the stock market some are selling at the upper end of their rapid growth cycle and some missed that spot and are selling on the stagnant or declining stage.

We believe that the outpatient surgical center and the ambulatory services market in general [have] a bright future. There will be more higher-acuity cases being done in the ASCs. These ASCs will increasingly partner with post operative care providers such as home health, rehab facilities and observation suites. Aggressive direct to patient marketing will become the norm, because surgeons owners of ASCs will come to realize that if they get to the patients first then they can influence that patient and where the doctor performs the cases.

Robert Zasa, Managing Partner of ASD Management:
We are seeing another trend of consolidation of ASCs and hospital transactions. We have experienced this over the last year and expect it to continue for the next three to four years. We are seeing hospital add ASCs and other ambulatory care services to their systems. This is now happening at a fast pace. Gaining market share of a large number of diverse services, both inpatient and outpatient is the trend for hospitals' development activity.

We are seeing more JVs with hospitals taking 51 percent and buying doctors' 49 percent for a partial cash out of their EBITDA; MDs keep 49 percent, hospital pushes payors to give them higher reimbursements closer to, but not same as, HOPD rates. We have done three of these this year with reimbursement improvement of 20 to 30 percent for same cases being affiliated with a hospital system. We will see more of this.

Also, the needed improvement in net revenue will be stimulated by the Affordable Care Act increasing access to Medicare patients and therefore to healthcare providers. This will reduce the net revenue per case ASCs have experienced in the past due to lower Medicare reimbursement compared to other payors. Hospital/ASC JVs will increase driven by a move to increase the net revenue and counterbalance the increased Medicare patients and less out-of-network being forced by the major national payors. Hospital programs such as spine programs can be combined with outpatient ASC spine programs to offer payors, [workers compensation] and TPAs more comprehensive, one source provider centers placing the patient in the most cost-effective delivery vehicle with high quality results.

Finally, since the ASC can be an important part of any [accountable care organization] or other network solution for gaining market share in the service area, they are attractive targets for hospital systems to affiliate, JV or buy them.

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