Perceived Value and Longevity for Surgical Specialties and CONs

This article is written by Todd Mello, Partner and Co-Founder of HealthCare Appraisers, and Nicholas Newsad, Senior Associate at HealthCare Appraisers.

Many ASC operators perceive increased economic value for those centers with certificate of need protection, multiple practice specialties, and the participation of orthopedic surgeons. While these factors may indicate relatively higher economic value, they do not necessarily correlate with business longevity.

CON State Effect


A majority of respondents to Healthcare Appraiser's 2013 ASC Valuation Survey indicated they are willing to pay a premium for an ambulatory surgery center ("ASC") with a certificate of need ("CON"). Fifty-seven percent (57 percent) of respondents say they would apply a premium of 0.26 to 0.75 to the typical EBITDA multiple. The popular belief is that CON states afford existing ASCs protection from new competitors because the state approval process is a barrier to entry. This decreases the risk profile for ASCs in CON states and increases their perceived value.

While this may indeed be the case, this market protection does not appear to correlate strongly with improved long-term sustainability. Approximately 35 percent of all ASCs identified in Medicare's Provider of Services data file are located in states requiring CON approval for new ASC developments. The average lifespans of ASCs in CON states are only 4.6 percent longer than ASCs located in non-CON states.

This small difference is somewhat counterintuitive. Rationally, less competitive pressure from new market entrants should result in a significant increase in business longevity. The relatively small difference in average business age indicates that other factors affect the ASC life cycle more than CON protection. However, it should be noted that longevity by itself does not necessarily indicate higher earnings or economic value.

CON state chart

Specialty Mix

According to Healthcare Appraiser's 2013 ASC Valuation Survey, ASC operators tend to place higher economic value on multispecialty ASCs compared to their single-specialty ASC counterparts. When purchasing a controlling interest in a multispecialty ASC, 78 percent of the respondents reported prevailing valuation multiples of 6.0 to 7.9 times EBITDA. When purchasing a controlling interest in a single-specialty ASC, 71 percent of the respondents reported prevailing valuation multiples of 5.0 to 6.9 times EBITDA. Based on the survey, the premium for multi-specialty ASCs is a full multiple of EBITDA.

Further analysis of all 7,045 ASCs that have participated in the Medicare program during the last 27 years indicates that there is not a very evident correlation between the lifespan of single-specialty ASCs versus multi-specialty ASCs. The data, in fact, indicates longevity is polarized with single-specialty ASCs and ASCs with six or more specialties staying in business longest. ASCs reporting two to five surgical specialties averaged shorter life cycles than single specialty ASCs. Speculatively, this may demonstrate the merits of the opposing "focus factory" business strategy and the economies scale achieved by the largest centers.

life of ASC chart

Orthopedic Surgery

Orthopedics was the highest rated specialty in the Healthcare Appraiser's 2013 ASC Valuation Survey, with 100 percent of respondents identifying it as a desirable addition to their ASC. Most ASC operators in the U.S. would probably identify orthopedic surgery as a major success factor in ASCs because orthopedic cases have relatively high contribution margins, and orthopedic surgeons can perform hundreds of outpatient surgeries per year. Conversely, plastic surgery was the lowest rated specialty, with 82 percent of respondents identifying it as an undesirable addition to their ASC. As it relates to cosmetic plastic surgery, this is likely related to an aversion to the long operating case times for some cosmetic cases, a plastic surgeon's motivation to minimize facility fees paid to a third party (and hence retain more of the fee), and the need to collect fees directly from patients.

However, according to Medicare statistics, the 2,826 ASCs that reported orthopedics as one of their specialties actually had somewhat lower lifespans (10.8 years) than the 4,220 ASCs that did not report orthopedics in their specialty mix (11.3 years). The reported specialty that had the most significant correlation with ASC lifespan wasactually ophthalmology. The 3,009 ASCs reporting ophthalmology services averaged 12.7 year lifespans versus the 4,036 ASCs that did not report ophthalmology with 9.9 years. This trend is further supported by comparing the 230 single-specialty orthopedic ASCs, which averaged 9.4 year lifespans, to the 881 single-specialty ophthalmology ASCs, which averaged 13.9 year lifespans.

surgical specialty ASC chart

It is difficult to explain the high correlation of ophthalmology to ASC longevity relative to orthopedics. From an operational perspective, outpatient ophthalmology surgery is highly uniform, with cataract surgery representing the vast majority of cases. Outpatient orthopedic surgery cases are significantly less uniform, comprising of a variety of types of knee, shoulder, wrist, and ankle surgery. Furthermore, ophthalmology is reported to have been performed in more ASCs than any other specialty dating back to the mid-1980s. The longer average age of ASCs offering ophthalmology services may simply reflect the specialty's greater prevalence in an outpatient surgery setting over a longer period of time. Speculatively, the difference in longevity may also be attributable to the referral habits of the different types of surgeons. Ophthalmologists appear to have a stronger tendency to operate single-specialty ASCs which may be wholly-owned or physically attached to their practice offices. This is evidenced by comparing the number of single-specialty ophthalmology ASCs (881) to the number of single-specialty orthopedic ASCs (230).

ASCs opened chart


Conclusion


It should be considered that perceived economic value and business longevity do not necessarily coincide. Single-specialty orthopedic ASCs may, in fact, be much more profitable than single-specialty ophthalmology ASCs, despite the evidence that single-specialty ophthalmology centers tend to stay open 4.5 years longer. This analysis may also be somewhat skewed because it cannot account for fundamental changes in ASC reimbursement that occurred between 2007 and 2010. Medicare reimbursement for orthopedics has increased substantially since 2007, so ASC trends prior to this period may be irrelevant when compared to current perceptions of value.

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