ASC acquisition 'frenzy' slows, chains get creative for growth

Surgery center chains have consolidated in the last decade to five mega-companies and a handful of small regional chains with growth prospects simmering.

The five largest chains are:

1. USPI (Dallas): 475+
2. SCA Health (Deerfield, Ill.): 320
3. AmSurg (Nashville, Tenn.): 256
4. HCA Healthcare (Nashville): 150+
5. Surgery Partners (Brentwood, Tenn.): 127

These companies may be able to grow a bit through acquiring the few remaining regional chains or partnering with large physician groups, but there is less momentum for developing de novo centers and one-off partnerships with physicians. Instead, they are partnering with hospitals and health systems to develop an outpatient strategy and grow their companies overall.

Alfonso del Granado, administrator and CEO of Covenant High Plains Surgery Center in Lubbock, Texas, shared his outlook on the industry with Becker's.

Alfonso del Granado: I’m starting to think that the curve is going to flatten for the large ASC operators. We've seen reports from several over the past couple of years that they have cut back on their five-year projections. I’ve also had the opportunity to speak to frontline leaders at several of the large groups, and all have expressed some level of frustration that the corporate infrastructure is behind the times and unable to keep up with current demands, which makes me wonder whether continued rapid growth is reasonably sustainable.

Excluding founders seeking to cash out, the main selling points of chain operators are: access to cash for growth, better management, better contracts, and volume discounts on supplies and employee benefits packages.

Access to cash is not always a clear-cut proposition. Well-run centers should have little trouble attracting advantageous financing terms to fuel their growth strategies, whether new equipment, new service lines, or physical expansion. Our own centers have been able to invest heavily in the last couple of years with an effective negative interest rate, for example. There is also something to the argument that if nobody will lend you the money, it’s probably not a good investment to begin with, and ASC groups would be foolish to throw money down a well. And, because investors expect a return, which amounts to a tax on profits, there is a chance that a failure to meet performance targets will result in cutbacks in other areas that ASC founders may find less desirable.

The second proposition may still hold water for small independent ASCs, but advances in technology and education are making professional management accessible to many more ASCs. If my concerns about corporate growing pains are valid, management services may not be as compelling an argument as it once was.

With regards to contracts, over a decade with a small ASC group in Chicago, half a dozen merger and acquisition offers from large players faltered because their contracts were not as good as what we had already. Today I’m impressed by the way Optum has built their network, which I think they can leverage to better effect than some of the competitors have. Beyond that, hospital joint ventures hold significant promise for improved reimbursements — if the physician partners and hospital leaders can reach mutually beneficial and respectful agreements, and I expect that to become a larger share of the consolidation activity in the next few years.

Finally, large groups do continue to offer value propositions in the area of cost controls for supplies and benefits, relying on their larger purchasing power for both. These are especially relevant today and I believe hold the greatest benefit to attract ASCs.

In short, the ASC acquisition frenzy has shown signs of slowing already, and I expect that trend to continue. The larger, more successful — and more attractive — ASCs may not see a tremendous benefit in being acquired, and will likely remain independent. Smaller centers may still see a reason to join, but may not be as attractive for acquisition. By contrast, most of the consolidation activity I’m expecting is horizontal, between operators and health systems, which feature many of the benefits listed above plus access to system-owned physician groups. I believe the most troubling development for independent ASCs in the last few years has been the increase in hospital employment of physicians, and I’ve seen several instances of ASCs shrinking because their feeder sources have been cut off.

A three-way partnership among physicians, a hospital system, and an ASC operator is a model that, done right, holds all of the benefits above with few of the risks. Our own joint venture is a successful example of this model, so perhaps I’m biased, but our management company National Cardiovascular Partners offers the ASC management expertise we need, our managing partner Covenant Health System provides access to payer contracts and purchasing power, and our physician partners continue to enjoy autonomy and self-direction. Although I cannot comment with inside knowledge, I was pleased to see a recent notice that USPI is partnering with Providence — a parent of CHS — in California and Washington.

The bottom line is that there will still be consolidation, but a growing percentage of the activity will likely be small-to-large ASC operators acquiring or merging with each other, or partnering with health systems, while the growth rate of straight ASC acquisitions will continue to soften. The question of where PE fits into all of this is a topic for another day.

Over the next five years in the ASC industry, I expect facility consolidation to experience a slight increase.

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