Surgery Center Transactions and Valuation: Thoughts From VMG Health's Kevin McDonough

At the 9th Annual Orthopedic, Spine and Pain Management-Driven ASC Conference in Chicago, Kevin McDonough, CFA, senior manager with VMG Health, gave a presentation on surgery center transactions, current market analysis and valuations.

Market observations

Mr. McDonough began the presentation by noting the maturation of the ASC industry in recent years. The development of de novo centers has slowed as markets become saturated, and ASCs are more focused on consolidation and cost control than new development. The economic downturn and the sluggish recovery of the economy have put additional pressures on ASCs as patients opt out of elective surgery. Finally, declining reimbursement rates and the uncertainty of healthcare reform have forced ASCs to consider the future of their revenue streams and options for partnership with hospitals and management companies.

ASC industry maturation
Mr. McDonough said the maturation of the ASC industry means growth has leveled off and the number of available physicians per surgery center has declined. The industry has also seen more mergers and consolidations, among both ASCs and surgery center management companies. The last few years have shown a declining growth in ASC development, with just a 2-3 percent increase since 2008. Growth in the number of surgery centers from the largest ASC management companies — including USPI, HCA, NovaMed and AmSurg — has also declined over the last two years.

This industry maturation means surgery centers are experiencing a "diminished ability to attract new physician investment," Mr. McDonough said. Fewer physicians means more excess capacity in surgery centers, mirrored by the 25 percent drop in OR utilization from 2007-2010. The supply of ASCs currently exceeds physician demand, and as the physician demographic ages, the number of eligible physicians per ASC is dropping.

Of course, the physician shortage is not merely a surgery center issue; medical facilities across the country are battling a lack of providers that is only expected to worsen in the next 10 years. Mr. McDonough said physician enrollment in MD programs has declined, signaling a troubling trend for ASCs and hospitals looking to sustain recruitment for the next few decades.

In a mature ASC industry, Mr. McDonough said ASCs should expect to find it difficult to negotiate reimbursement increases. Surgery centers should also expect greater hospital presence, whether that means competition directed at the ASC or a stronger effort in employing physicians. He predicted the industry will see more mergers and acquisitions, and ASCs that choose to remain free-standing will have to perfect their efficiencies and keep a careful eye on revenue sources and cost.

Who is buying surgery centers?
Mr. McDonough said potential ASC buyers include management companies, many of which are expanding their market presences; acute-care hospitals, which are increasingly looking to acquire ASCs to improve physician relationships; other ASCs, as centers look to consolidate; and physician-owned hospitals, which may be forced to acquire ASCs as a "niche expansion strategy" in light of the limitations placed on the facilities by healthcare reform.

Despite the increasing number of ASC acquisitions, Mr. McDonough said buyers are cautious and keenly aware of ASC challenges. Buyers understand the difficult market for many surgery centers and are very likely to perform thorough "due diligence" before finalizing a deal. He predicted that a "survival of the fittest" trend will favor strong ASCs that can beat out their struggling competitors.

Surgery centers are not alone in the flurry of transactions; Mr. McDonough said ASC management company mergers and acquisitions have increased dramatically and are expected to continue into the future. Recently, AmSurg acquired National Surgical Care, Surgery Partners acquired NovaMed, Sunlink merged with Healthcare Affiliates and USPI acquired HealthMark. Mr. McDonough predicted management companies will continue to consolidate until the market is dominated by a few large players rather than many smaller companies.

Read more about VMG Health.

Related Articles on Surgery Center Transactions and Valuation:
10 Questions About Selling a Surgery Center
The 3 Tiers of Surgery Center Deals
Insights Into Business and Financial Relationships Between Surgery Centers and Hospitals

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