How a Rapidly Changing Market is Affecting the Value of ASCs

The ambulatory surgery center (ASC) market has seen a lot of growth and success since first arriving on the scene over 40 years ago. While the ASC market has grown significantly over this time, that growth has slowed in the last 10 years and ASCs now appear to be operating in a “maturing” market. At the same time we are seeing rapid change in the market where ASCs operate and many of these changes may have a significant impact on the value of ASCs. Below are some of those areas that could have tremendous impact on ASC values.

Reduction of Physician Investors

Traditionally, the ASC market has been driven by independent, entrepreneurially-minded physicians. However, over the last several years the physician market has trended towards hospital consolidation and employment. For physician-owned ASCs, this trend has left them with fewer physician recruitment opportunities. In its 2013 report to Congress, MedPAC noted that one of the reasons for a slowing in the growth of ASCs is because physicians are increasingly choosing to be employed by hospitals. MedPAC at the time noted, “Physicians employed by hospitals are more likely to provide ambulatory surgical services in their HOPDs [hospital outpatient departments] than in a freestanding ASC”. Without a trend towards new physicians entering the physician-owned ASC market it may be difficult for these facilities to continue growing which could lead to fewer opportunities to leverage in the market, which in turn could lead to declining entity value.

ASC Reimbursement Market

Reimbursement prognostications for ASCs and the impact of policy changes on HOPD rates are also noteworthy. The 2016 federal budget proposes lowering HOPD rates to ASC rates, impacting the attractiveness of many ASCs for hospital purchase and HOPD conversion. Additionally, MedPAC expressed concerns that CMS’ methodology used to set ASC reimbursement does not reflect actual costs; MedPAC therefore recommended that CMS collect cost data and freeze future ASC Medicare increases. Moreover, health insurance exchanges are forcing lower reimbursement rates on ASCs. All of these factors could lead to future declines in revenue, affecting ASC values predicated on revenue and EBITDA.

Changing Nature of the Patient and Payment Market

Maybe the single biggest area that has the potential to radically change profitability of ASCs, and thus their value, are potential changes in the patient and payment market. There are at least 3 areas of note in this arena: (1) the movement in the market to high deductible plans; (2) consolidation in the insurance market and; (3) proliferation of ACOs.

We may already be seeing a rapid movement in the market, particularly in certain markets, towards high deductible plans. Several factors are driving this trend and it is not likely to abate or return to the lower deductibles seen in the past. The extent of the affect will be different by market and could be severe in some cases. What this will do is likely cause patients to delay (or even altogether avoid) certain procedures that they would have traditionally sought without question. It will also lead to price shopping as consumers look to maximize their healthcare dollars. This trend has the potential to reduce volume, and thus revenue and EBITDA, in areas most affected.

Another trend of concern is the consolidation in the traditional insurance market. Historically, ASCs have been heavily dependent on commercial reimbursement. As payors consolidate this will obviously lead to fewer payors with which to negotiate. Less payors to negotiate with leads to less bargaining leverage. In markets more heavily affected this could lead to accepting reduced reimbursement or dealing with out-of-network issues. Depending on the market this could have a tremendous impact on reimbursement and volume, thus negatively affecting revenue and EBITDA.

The proliferation of ACOs (or for that matter market consolidation in general) is another area for ASCs to watch. ACOs will work to secure market share size necessary to meet patient population management goals. If ACOs are successful in securing a significant portion of the patient population this could negatively affect volume, and thus revenue and EBITDA, of ASCs in affected markets.

A Word on Multiples

There is a lot of press about the use of multiples to value ASCs, particularly those using EBITDA. Multiples are often used to value inter-doctor transfers of minority interests and for majority interest purchases of ASC by ASC management companies. While multiples may be a standard market tool, they are derived using historical data. It is probably worth noting that in markets experiencing rapid market changes, multiples derived under radically different market conditions may produce less meaningful values.

The factors discussed above can all have an impact on the marketability and value of an ASC. This is true whether in the application of EBITDA multiples by ASC management companies to arrive at value or through the use of generally accepted methodology by valuation analysts, such as in the case of hospital acquisitions of physician-owned ASCs. The extent to which any of these factors affect a specific ASC’s value will have to be assessed on a market-by-market basis, as the degree of impact will likely range tremendously based on geographic location (remember healthcare is local).

With the maturity of the ASC market, hospitals and physicians considering ASC purchases or sales should consider the most recent and local market conditions and pay careful attention to the regulatory environment when transactions are between referral sources. Healthcare legal counsel and valuation analysts with ASC experience should be among the list of advisors to be engaged early in the process.