7 Critical Questions on Surgery Center Transactions and Valuation Issues: Q&A With Stephan Peron of VMG Health

Stephan P. Peron, AVA, is a partner with VMG Health.


1. Q: How are ambulatory surgery centers being priced today?


Stephan Peron: In today's economic environment there has been a greater segregation in pricing based on quality due diligence in the eyes of a buyer to qualify an investment as a high-quality investment versus a low-quality investment. The same holds true for the surgery center market. ASCs considered high quality from a general market perspective must possess certain attributes that surgery center investment companies find to be attractive in regard to the ability to generate a strong return on investment. The prices on the high-quality surgery centers are still strong as compared to the market before the financial crisis in 2008 and 2009. The prices on the lower-quality surgery centers came down a few years back and have remained depressed as compared to times when the debt was readily available.


2. Q: Does pricing depend on type of specialty? If so, which are better, which are worse?


SP: The value of an ASC could depend on the specialty mix as well as the case mix within a certain specialty. What drives prices of ASCs, in a simplistic view, is the ability to generate a return on the investment for long period of time. Therefore, certain specialties such as plastics, in which the price paid to the ASC is heavily negotiated by the referring physician, typically drive a lower return to the ASC. Other specialties that can easily move to a physician in-office suite, such as pain management and diagnostic endoscopy cases could carry a higher risk and lower the value of the ASC if the referring physicians are not owners in the subject center and subject to a non-compete.


3. Q: What are other key factors assessed for pricing?


SP: Upon conducting a fair market value analysis of an ASC there are numerous aspects that one must consider to determine the value relative to the risk of the ASC investment. A few general key factors that need to be considered for pricing an ASC are: a) Understanding the rights being exchanged between the two parties. Control rights of an ASC typically drive a premium in the market versus minority rights. b) Risks surrounding the ability to maintain and grow the revenue of the ASC. As an example, understanding physician ownership in relation to the cases being performed drives different risk profiles. Another example would be determining if the ASC is in-network versus out-of-network. c) Determining if the ASC has the right expense profile in place today and allows the ASC the ability to grow. For example, if the ASC is fully utilized and there is not an ability for the ASC to grow due to physical constraints, that would need to be considered. e) Competition to the ASC. One must consider if the ASC owns a Certificate of Need in a strong CON state. As another example, the subject ASC has strong historical earnings but a new ASC is being built in the same service area of which many current referring physicians have purchased an interest in the new ASC.


4. Q: Is the amount or frequency of transactions up or down over the last 6-12 months?


SP: Our firm works with numerous ASC management/development companies, health systems and physician groups, and it is our opinion that the number of transactions has remained steady to a slight increase. We have seen an increase in the number of health systems acquiring or buying an interest in freestanding surgery centers.


5. Q: Is pricing up or down from last year?


SP: If we assume all factors regarding an average ASC investment opportunity remain equal between the two time periods, the prices being paid for ASCs are consistent with last year. Regarding ASCs that would be considered strong ASC investments, we have seen higher prices now as compared to the same time last year.


6. Q: What are buyers most concerned about?


SP: Many of the buyers concerns would be similar whether the investment carries control rights or minority rights but certain concerns would be viewed differently. A few similar concerns would be a) the ability to maintain the historical physician referral relationships and ability to grow new relationships; b) the risks associated with the ASC generating the expected cash flow relating to the ASC; and c) the general age and condition of the ASC, specifically in relation to maintaining the physician referrals and future capital needs.


7. Q: Is there still a buy and sell market for ASCs?


SP: Yes, there is still a liquid market for ASCs. There are no major ASC reimbursement changes on the near horizon. A strong investment market in ASCs still exists and numerous development companies striving for short- and long-term growth. There is an argument that the overall ASC market is becoming saturated when comparing number of operating rooms relative to number of available surgeons. On the other hand, the ASC market is still largely fragmented, with the largest of ASC owners holding only a 2 -4 percent market share.


Learn more about VMG Health. Contact Mr. Peron at stephanp@vmghealth.com.

More Articles Featuring VMG Health:

Surgery Center Staff Hours Per Case: 40 Statistics to Know

10 Questions About Selling a Surgery Center

5 Factors That Heavily Influence ASC Value

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