9 Points on Transactions and Valuations of ASCs With Kevin McDonough of VMG Health

Kevin McDonough, senior manager at the Dallas office of VMG Health, makes nine points on transactions and valuations of ambulatory surgery centers.


1. More ASCs on the block. More ASCs are experiencing financial struggles. "For an ever-growing number of ASCs, the period of big profits is behind them," Mr. McDonough says. "The market has matured and we have entered the era of survival of the fittest." Lucrative out-of-network payments are drying up and it is more difficult to find a replacement and keep volume from falling when a physician retires or leaves. There are few surgeons not already associated with one or multiple ASC or hospital investments.


2. More buyers for centers. After a relatively slow period during the past year or two, management companies are showing renewed interest in acquiring centers. "They have decided the world is not going to end," Mr. McDonough says.


3. More hospitals in the game. "I'm seeing a lot more activity of hospitals acquiring surgery centers," Mr. McDonough says. Either the hospital enters a partnership with the physician-owners or buys them out completely. In the latter case, the ASC can be converted to a hospital outpatient department and qualify for higher reimbursements.


4. Many ASCs bought and closed. When ASCs are merged, typically one center is closed and its volume is used to bolster the other one. "In many cases, centers are valuable for the volume, not the real estate," Mr. McDonough says.


5. Small ASC networks up for sale. Small management companies with three to 10 ASCs are joining larger companies. In some cases hospitals are buying more than one ASC, but the centers all have to be in the hospital's service area.


6. Many new ASCs have high debts. Centers that opened as recently as two to three years ago have high levels of debt because they took advantage of the cheap financing of a few years ago and overleveraged themselves. "Now they are drowning in their own debt," Mr. McDonough says. That makes it difficult to find a buyer.


7. Some high-debt centers can be sold. High debts can be a death sentence, but if a failing center that can show good profits may still be able to find a buyer. High volume and a positive bottom line suggest debts can be paid off relatively quickly.


8. Inefficient centers may still find a buyer. Even a very inefficient center could attract buyers if they believe some very elementary management mistakes were made and it would be easy to turn the center around.


9. Larger ASCs have greater risk. Financial and operational problems are multiplied by the number of ORs. The fixed costs are higher and it will take more time and effort to turn it around. But in transactions involving the merger of several centers, the excess capacity at the larger facility may be of benefit.


Learn more about VMG Health.


Read more insight from Kevin McDonough:


- Surprising Factors That Impact an ASC's Value


- Is There 'Hidden Value' in a Poorly Performing ASC?

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