At the 19th Annual Ambulatory Surgery Centers Conference in Chicago on Oct. 26, Kevin McDonough, senior manager for VMG Health, and Colin Park, manager for VMG Health, discussed current trends in the healthcare and ambulatory surgery center industry and how those trends are affecting transactions.
1. U.S. healthcare spending. According to Mr. Park, U.S. healthcare spending is out of control. The United States spends more than $2,000 per person on healthcare than the second highest country. Currently, 17.9 percent of the gross domestic product is spent on healthcare costs, which is growing at three times the rate of inflation, said Mr. Park. Analysts expect that 19.8 percent of the U.S. GDP will be spent on healthcare by 2020.
Interestingly, analysts expect the GDP percentage spent on healthcare to drop in 2013 — by about 0.5 percent drop — due to increases in federal taxes and reductions in federal spending that are to take effect. However, the drop will be fleeting. "This shows there is not a 100 percent correlation between healthcare expenditures and GDP. Expenditures are expected to increase, which shows healthcare spending is not at a sustainable rate," said Mr. Park.
2. Medicare and Medicaid financing. Medicare and Medicaid are the two main sources of public financing for healthcare. "With our aging population, this will only increase and exasperate the spending situation," said Mr. Park.
3. Healthcare changes, regardless of the election. According to Mr. Park, changes are occurring in the healthcare industry, which will continue regardless of the election outcome. These changes include:
• Movement from fee-for-service to value-based reimbursements and bundled payments
• Physicians and hospitals acting independently
• Physicians and hospitals collaborating
• ASCs operating independently as well as becoming part of the continuum of care
4. Greater integration. The healthcare industry is seeing greater integration with ASCs, hospitals and physicians. The drivers for this integration include value-based payments, the economic climate, regulatory and payment complexity, demand for health information technology and capital, an aging population and overall need for efficiency, said Mr. Park.
• Growth in ASC development has leveled off
• ASC supply exceeds physician demand in most markets
• Significant capacity at many ASCs
• Growth in ASC mergers and consolidations
"There are a few market forces driving these trends, such as the diminishing ability of ASCs to attract new physicians. This trend was accelerated by the economic downturn," said Mr. Park.
According to Mr. McDonough, there are four things one can expect from a mature ASC industry:
• Attracting physician investment and volume will be a challenge.
• There will be an increase in ASC mergers.
• There will be an increase in hospital involvement in the industry.
• Existing ASCs will need to focus efforts on implementing efficiencies.
Next, Mr. Park elaborated on the physician challenges likely to arise in the mature ASC industry. "From our perspective, the greatest challenge for the ASC industry isn't so much about reimbursement and costs. It is simply an ability to recruit physicians into an ASC. Primary care physicians are not traditionally eligible for ASCs and are not targeted," said Mr. McDonough.
Why are there not enough physicians for the amount of ASCs?
According to Mr. McDonough, there are not as many new physicians entering the workforce as there are older physicians leaving. In 1980, approximately 20 percent of the physician workforce was over the age of 55. In 2009, 40 percent of physicians were over the age of 55. "As physicians decrease their activity level over the next five to 10 years, how do we replace them? The ASC performance could reduce significantly," said Mr. McDonough.
In addition, there is new competition for ASCs due to the growth in hospital employment among physicians. "It is a relatively recent phenomenon. There has always been more primary care physicians employed with hospitals and health systems. However, from 2000 to 2012, there has been a five-fold increase. Since 2000, the amount of employed primary care physicians has doubled. The amount of employed specialists has increased five-fold," said Mr. McDonough.
Due to the mature state of the market, Mr. McDonough and Mr. Park believe there will continue to be a high level of transaction activity for the following reasons:
• Need for ASC management companies to exhibit growth
• Market consolidation strategies are being pursued aggressively
• Hospitals are joining management companies in the buyers market
• Private equity backed ASC managers aggressively pursuing acquisitions to capture cash flows
Mr. McDonough closed the presentation by discussing who the most likely buyers would be. He predicts that ASC management companies, acute-care hospitals and physician-owned hospitals will be big players. Lastly, ASCs will look to consolidate in markets with multiple ASCs and multiple owners.
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4 trends for the healthcare market
Mr. Park began the presentation by discussing general observations and current macro trends for the healthcare market.1. U.S. healthcare spending. According to Mr. Park, U.S. healthcare spending is out of control. The United States spends more than $2,000 per person on healthcare than the second highest country. Currently, 17.9 percent of the gross domestic product is spent on healthcare costs, which is growing at three times the rate of inflation, said Mr. Park. Analysts expect that 19.8 percent of the U.S. GDP will be spent on healthcare by 2020.
Interestingly, analysts expect the GDP percentage spent on healthcare to drop in 2013 — by about 0.5 percent drop — due to increases in federal taxes and reductions in federal spending that are to take effect. However, the drop will be fleeting. "This shows there is not a 100 percent correlation between healthcare expenditures and GDP. Expenditures are expected to increase, which shows healthcare spending is not at a sustainable rate," said Mr. Park.
2. Medicare and Medicaid financing. Medicare and Medicaid are the two main sources of public financing for healthcare. "With our aging population, this will only increase and exasperate the spending situation," said Mr. Park.
3. Healthcare changes, regardless of the election. According to Mr. Park, changes are occurring in the healthcare industry, which will continue regardless of the election outcome. These changes include:
• Movement from fee-for-service to value-based reimbursements and bundled payments
• Physicians and hospitals acting independently
• Physicians and hospitals collaborating
• ASCs operating independently as well as becoming part of the continuum of care
4. Greater integration. The healthcare industry is seeing greater integration with ASCs, hospitals and physicians. The drivers for this integration include value-based payments, the economic climate, regulatory and payment complexity, demand for health information technology and capital, an aging population and overall need for efficiency, said Mr. Park.
The ASC industry is maturing
According to Mr. Park, the ASC industry is reaching a mature stage, evidenced by the following factors:• Growth in ASC development has leveled off
• ASC supply exceeds physician demand in most markets
• Significant capacity at many ASCs
• Growth in ASC mergers and consolidations
"There are a few market forces driving these trends, such as the diminishing ability of ASCs to attract new physicians. This trend was accelerated by the economic downturn," said Mr. Park.
According to Mr. McDonough, there are four things one can expect from a mature ASC industry:
• Attracting physician investment and volume will be a challenge.
• There will be an increase in ASC mergers.
• There will be an increase in hospital involvement in the industry.
• Existing ASCs will need to focus efforts on implementing efficiencies.
Next, Mr. Park elaborated on the physician challenges likely to arise in the mature ASC industry. "From our perspective, the greatest challenge for the ASC industry isn't so much about reimbursement and costs. It is simply an ability to recruit physicians into an ASC. Primary care physicians are not traditionally eligible for ASCs and are not targeted," said Mr. McDonough.
Why are there not enough physicians for the amount of ASCs?
According to Mr. McDonough, there are not as many new physicians entering the workforce as there are older physicians leaving. In 1980, approximately 20 percent of the physician workforce was over the age of 55. In 2009, 40 percent of physicians were over the age of 55. "As physicians decrease their activity level over the next five to 10 years, how do we replace them? The ASC performance could reduce significantly," said Mr. McDonough.
In addition, there is new competition for ASCs due to the growth in hospital employment among physicians. "It is a relatively recent phenomenon. There has always been more primary care physicians employed with hospitals and health systems. However, from 2000 to 2012, there has been a five-fold increase. Since 2000, the amount of employed primary care physicians has doubled. The amount of employed specialists has increased five-fold," said Mr. McDonough.
Due to the mature state of the market, Mr. McDonough and Mr. Park believe there will continue to be a high level of transaction activity for the following reasons:
• Need for ASC management companies to exhibit growth
• Market consolidation strategies are being pursued aggressively
• Hospitals are joining management companies in the buyers market
• Private equity backed ASC managers aggressively pursuing acquisitions to capture cash flows
Mr. McDonough closed the presentation by discussing who the most likely buyers would be. He predicts that ASC management companies, acute-care hospitals and physician-owned hospitals will be big players. Lastly, ASCs will look to consolidate in markets with multiple ASCs and multiple owners.
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