ASCs ripe for hospital & PE investment under 2020 CMS rule — 3 insights

There were 62 ASC and physician practice management transactions in the third quarter of 2019, up from 37 in the previous quarter, according to research from Hammond Hanlon Camp.

It's safe to bet that this upward trend will continue, according to H2C director Nick Beale, who shared key transaction insights with Becker's ASC Review.

Note: Responses were lightly edited for style and clarity.

Question: Why do you think there was such a significant increase in ASC and physician practice management deals from the second quarter to the third quarter?

Nick Beale: The ASC and physician practice management space continues to benefit from a shift toward lower-cost care settings. Treating lower-acuity cases in the outpatient setting creates value for all stakeholders from a cost-management perspective. Coupled with a push toward population health management, utilizing outpatient centers is seen as an efficient method to provide care for patients. Both health systems and private equity sponsors alike are seeing strong economies of scale through creating integrated networks. These integrated networks can spread out the increasing costs of technology while realizing the benefits. We expect these trends to continue in the future.

Q: H2C's recent report says small transactions are the norm, but "a number of established networks are growing." Could you specify some of these established networks and explain why their growth is important?

NB: Nearly every transaction that occurs is a platform or operator acquiring a single practice or a small group of two to three practices. This has been the norm for some time, as larger players expand their networks through individual acquisitions. On occasion, we have seen some particularly large M&A deals, such as New Jersey Urology and Urology Management Associates partnering with Premier Urology Group in the third quarter. This created one of the largest urology groups in the United States, with 124 providers in 52 locations. Retinal Consultants of Arizona, with 25 offices, partnered with American Vision Partners — the eighth partnership for AVP within the past two years.

PE groups, with the right funding, are taking a fast track to consolidation through some of these larger plays. For the third quarter, this also includes Sentinel Capital Partners acquiring SSJA Bariatric Management, with 15 surgery offices, which Sentinel intends to continue expanding through acquisitions. Jacobs Holding also created a trans-Atlantic dental group with the acquisition of North American Dental Group, which has a network of over 200 dental practices. These large players with strong funding are gaining efficiency by acquiring larger networks at once amid a trend of consolidation and are using this trend to their advantage as they expand their presence.

Q: How do you think changes that CMS recently finalized for 2020 will affect consolidation/deals in the ASC space going into next year?

NB: CMS proposed new reimbursement rates for procedures in 2020, which boosted the overall ASC payment rates by 2.7 percent. CMS proposed the addition of six coronary intervention procedures to the ASC covered procedures list, the addition of total knee replacement to the ASC covered procedures list, and the removal of total hip replacement from the inpatient-only list. These proposals highlight the continued trend of shifting surgeries to the outpatient space and increase the value of owning an ASC. As such, ASCs will particularly be targets for hospitals looking to maintain a strong case mix and for PE platforms seeking to invest in a space with a consistent increase in demand and reimbursement potential. We believe these changes will have a positive impact on ASC consolidation in the future.

Want to participate in future Becker's Q&As? Email Angie Stewart:

More articles on transactions/valuation:
UPMC partners with ophthalmology surgery center to acquire Irish hospital — 4 insights
How 4 big ASC operators fared in Q3
With $60B+ deals this year, what's in store for private equity in the future?

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