ASCs are seeing more uncertainty than at any time in the last decade. This article provides several observations related to the ASC market.
1. Key questions being asked by ASCs. Three key questions we are often asked are 1) will healthcare be dominated by vertically integrated systems? 2) will reduced reimbursement of specialties drive more physicians towards employment? 3) are we seeing the extinction of entrepreneurial physicians?
2. Private equity interest. The ASC market remains of great interest to several private equity funds. There continues to be significant interest in the ambulatory surgery business. However, investors seem to be more interested in ambulatory surgery center chains with a specific focus — e.g. pain management, orthopedics, or spine — than in general surgery chains. While the ASC industry faces certain challenges, tremendous consolidation opportunities and significant cost benefits associated with moving surgeries from inpatient to outpatient venues exist. In the last 24-36 months, TPG Capital invested in Surgical Care Affiliates and H.I.G. Capital invested in Surgery Partners. One year later, in January 2011, Surgery Partners then bought NovaMed, AmSurg Corp. bought National Surgical Care and LLR Partners invested in a platform of fertility driven ASC businesses.
3. Health systems. We still see health systems with ASC strategies. As a core strategy, we see some health systems attempt to develop or acquire, often with a management company, 5-7 ASCs. There, they try and develop a broader market alternative to physician employment and use it as a means to align with physicians and earn income. In the past two months, health systems across the country have added surgery centers to their list of facilities in an attempt to expand market share and build relationships with physicians.
A joint-venture partnership between United Surgical Partners International and San Francisco-based Catholic Healthcare West added three Arizona ambulatory surgery centers to its portfolio in July, and an HCA acquisition of The Colorado Health Foundation gave the hospital operator full ownership of 13 ASCs in the metro Denver area. Kaiser Permanente San Diego recently broke ground on a new ambulatory surgery center included in a $60 million medical office building, which will house specialty care providers, nuclear medicine and a GI procedure suite.
4. Two key headwinds/three biggest challenges. The ASC industry faces two serious headwinds. First, on the revenue side cases are harder to come by as there is a reduction of available independent doctors. There are approximately 100,000 surgeons in the United States that would be available for ASC ownership. There are close to 5,000 plus surgery centers, many of those having 10 to 30 physicians per center. This means that a large number of the independent physicians are surgeons already spoken for.
Regent Surgical Health estimated in an August presentation that the number of available investors per surgery center has dropped in recent years from an average of 40-60 to an average of 12-20. The 2011 Medscape Physician Compensation Report found that more than 25 percent of orthopedic surgeons have already invested in a surgery center; for ophthalmologists, the number jumps to 27 percent, and for gastroenterologists, to 40 percent.
On the reimbursement side, we are also seeing negative trends from out of network and general reductions in reimbursement. In states like New Jersey, surgery centers continue to move in-network as legislation threatens to impose additional requirements on out-of-network ASCs. This means physicians and surgery centers must adjust their profit expectations as they negotiate less profitable in-network contracts or face significant reductions to OON reimbursement levels.
The three biggest challenges in large part overlap with these headwinds are 1) challenges with reimbursement from payors; 2) challenges relating to physician employment by hospitals and recruitment of physicians; and 3) increased CMS and state regulation.
In terms of physician employment, we are seeing key differences from market to market and specialty by specialty. In some specialties, there is rapid evolution toward employment — e.g. cardiology, primary care, obstetrics and gynecology and certain other specialties. According to Merritt Hawkins' 2011 Review of Physician Recruiting Incentives, family practice was the most requested physician search by medical specialty last year, gaining substantial traction over its popularity in 2006. Family practice was followed by internal medicine, hospitalists, psychiatry, orthopedic surgery and OB/GYN. The recruiting incentives for these specialties are also increasing as demand spikes: The average income offered to orthopedic surgeons in 2010/11 was $521,000, compared to $519,000 in 2009/10 and $413,000 in 2006/07. Once a hospital in one county or area starts to employ physicians, the other system often needs to respond to that effort.
5. Six best specialties. It is often perceived that the six best specialties for surgery centers are orthopedics, spine, GI, ENT, ophthalmology and pain. According to the 2010 ASC Valuation Survey, conducted by HealthCare Appraisers, general orthopedics is the most desirable specialty for ASC management companies, earning a 94 percent approval rating. General orthopedics is closely followed by its sister specialty, orthopedic spine, which received an 88 percent approval rating in the survey. ENT, ophthalmology and pain management followed close behind with 76 percent each, and GI rounded out the top six with a 70 percent approval rating. These specialties are prized for different reasons, namely profitability and efficiency. For example, both general orthopedics and spine command high reimbursement per case, whereas ophthalmology offers short case and turnover times.
6. Turnarounds. As far as the turnaround market goes, there is an increasingly number of centers that need to be turned around. However, it is harder and harder to actually turn them around due to lack of available physicians and the lack of upside reimbursement. According to HealthCare Appraisers' ASC Survey 2010, 29 percent of surgery center management companies prefer to acquire turnaround centers at lower multiples and asset values. However, this percentage is significantly lower than the number (41 percent) who are now looking to acquire established facilities with immediate cash flow.
7. Pricing of deals. We often see majority centers still selling at 6-7.5 EBITDA range. Out of network centers see much lower multiples, often 3-4 times EBITDA. Hospitals most often buy at reasonably high prices if they wish to convert to HOPD and/or reap higher reimbursement. Finally, hospitals recognize that every loss of an in-patient case takes six to eight outpatient cases to make up the revenues. Thus, as hospitals do see decreases in inpatient cases, they are more aggressive about trying to find outpatient cases and implant ASC strategies.
8. Co-management and 100 percent hospital-acquired ASC. There are a great number of questions as to what can be paid and is a co-management company truly needed. There are several different models that hospitals and physician groups can pursue around co-management. In a direct contract model, for example, the hospital owns the service line and enters into a management agreement with the physician group. The physician group then provides management services for a fee, and a governance committee is appointed to oversee the relationship. In this scenario, the governance committee is present only to provide oversight, not to serve as an active manager. In a joint venture model, on the other hand, the hospital and physicians form a "newco" which contracts with the hospital. The profits from the newco are then split between the hospital and the physician group. The type of arrangement sometimes depends on the number of physician groups involved.
Compensation for co-management services is generally divided into two levels of payment: a base fee and a bonus fee (based on quality and performance). Both fees must be consistent with fair market value, and to meet safe harbors for the Anti-Kickback Statute, compensation must be set in advance. This means hospitals can only reward physicians with bonuses if the minimum and maximum bonus amount is decided in advance, rather than based on a percentage of collections. Physicians should also not be compensated for clinical duties through a co-management arrangement.
9. Accountable care organizations. It remains unclear whether ASCs will have a positive role with ACOs. On the one hand, the development of ACOs will tend to favor lower cost providers such as ASCs. However, many of the ACOs will be driven by hospital systems that are much more focused on steering all possible cases to hospitals.
Related Articles on the ASC Market:
6 Observations From the 2011 Healthcare Appraisers Report: A Review of 2010 Trends and Transactions
5 Must-Have Technologies for Physician Recruitment
What Management Companies Want: 10 Statistics on Surgery Center Owners and Operators
1. Key questions being asked by ASCs. Three key questions we are often asked are 1) will healthcare be dominated by vertically integrated systems? 2) will reduced reimbursement of specialties drive more physicians towards employment? 3) are we seeing the extinction of entrepreneurial physicians?
2. Private equity interest. The ASC market remains of great interest to several private equity funds. There continues to be significant interest in the ambulatory surgery business. However, investors seem to be more interested in ambulatory surgery center chains with a specific focus — e.g. pain management, orthopedics, or spine — than in general surgery chains. While the ASC industry faces certain challenges, tremendous consolidation opportunities and significant cost benefits associated with moving surgeries from inpatient to outpatient venues exist. In the last 24-36 months, TPG Capital invested in Surgical Care Affiliates and H.I.G. Capital invested in Surgery Partners. One year later, in January 2011, Surgery Partners then bought NovaMed, AmSurg Corp. bought National Surgical Care and LLR Partners invested in a platform of fertility driven ASC businesses.
3. Health systems. We still see health systems with ASC strategies. As a core strategy, we see some health systems attempt to develop or acquire, often with a management company, 5-7 ASCs. There, they try and develop a broader market alternative to physician employment and use it as a means to align with physicians and earn income. In the past two months, health systems across the country have added surgery centers to their list of facilities in an attempt to expand market share and build relationships with physicians.
A joint-venture partnership between United Surgical Partners International and San Francisco-based Catholic Healthcare West added three Arizona ambulatory surgery centers to its portfolio in July, and an HCA acquisition of The Colorado Health Foundation gave the hospital operator full ownership of 13 ASCs in the metro Denver area. Kaiser Permanente San Diego recently broke ground on a new ambulatory surgery center included in a $60 million medical office building, which will house specialty care providers, nuclear medicine and a GI procedure suite.
4. Two key headwinds/three biggest challenges. The ASC industry faces two serious headwinds. First, on the revenue side cases are harder to come by as there is a reduction of available independent doctors. There are approximately 100,000 surgeons in the United States that would be available for ASC ownership. There are close to 5,000 plus surgery centers, many of those having 10 to 30 physicians per center. This means that a large number of the independent physicians are surgeons already spoken for.
Regent Surgical Health estimated in an August presentation that the number of available investors per surgery center has dropped in recent years from an average of 40-60 to an average of 12-20. The 2011 Medscape Physician Compensation Report found that more than 25 percent of orthopedic surgeons have already invested in a surgery center; for ophthalmologists, the number jumps to 27 percent, and for gastroenterologists, to 40 percent.
On the reimbursement side, we are also seeing negative trends from out of network and general reductions in reimbursement. In states like New Jersey, surgery centers continue to move in-network as legislation threatens to impose additional requirements on out-of-network ASCs. This means physicians and surgery centers must adjust their profit expectations as they negotiate less profitable in-network contracts or face significant reductions to OON reimbursement levels.
The three biggest challenges in large part overlap with these headwinds are 1) challenges with reimbursement from payors; 2) challenges relating to physician employment by hospitals and recruitment of physicians; and 3) increased CMS and state regulation.
In terms of physician employment, we are seeing key differences from market to market and specialty by specialty. In some specialties, there is rapid evolution toward employment — e.g. cardiology, primary care, obstetrics and gynecology and certain other specialties. According to Merritt Hawkins' 2011 Review of Physician Recruiting Incentives, family practice was the most requested physician search by medical specialty last year, gaining substantial traction over its popularity in 2006. Family practice was followed by internal medicine, hospitalists, psychiatry, orthopedic surgery and OB/GYN. The recruiting incentives for these specialties are also increasing as demand spikes: The average income offered to orthopedic surgeons in 2010/11 was $521,000, compared to $519,000 in 2009/10 and $413,000 in 2006/07. Once a hospital in one county or area starts to employ physicians, the other system often needs to respond to that effort.
5. Six best specialties. It is often perceived that the six best specialties for surgery centers are orthopedics, spine, GI, ENT, ophthalmology and pain. According to the 2010 ASC Valuation Survey, conducted by HealthCare Appraisers, general orthopedics is the most desirable specialty for ASC management companies, earning a 94 percent approval rating. General orthopedics is closely followed by its sister specialty, orthopedic spine, which received an 88 percent approval rating in the survey. ENT, ophthalmology and pain management followed close behind with 76 percent each, and GI rounded out the top six with a 70 percent approval rating. These specialties are prized for different reasons, namely profitability and efficiency. For example, both general orthopedics and spine command high reimbursement per case, whereas ophthalmology offers short case and turnover times.
6. Turnarounds. As far as the turnaround market goes, there is an increasingly number of centers that need to be turned around. However, it is harder and harder to actually turn them around due to lack of available physicians and the lack of upside reimbursement. According to HealthCare Appraisers' ASC Survey 2010, 29 percent of surgery center management companies prefer to acquire turnaround centers at lower multiples and asset values. However, this percentage is significantly lower than the number (41 percent) who are now looking to acquire established facilities with immediate cash flow.
7. Pricing of deals. We often see majority centers still selling at 6-7.5 EBITDA range. Out of network centers see much lower multiples, often 3-4 times EBITDA. Hospitals most often buy at reasonably high prices if they wish to convert to HOPD and/or reap higher reimbursement. Finally, hospitals recognize that every loss of an in-patient case takes six to eight outpatient cases to make up the revenues. Thus, as hospitals do see decreases in inpatient cases, they are more aggressive about trying to find outpatient cases and implant ASC strategies.
8. Co-management and 100 percent hospital-acquired ASC. There are a great number of questions as to what can be paid and is a co-management company truly needed. There are several different models that hospitals and physician groups can pursue around co-management. In a direct contract model, for example, the hospital owns the service line and enters into a management agreement with the physician group. The physician group then provides management services for a fee, and a governance committee is appointed to oversee the relationship. In this scenario, the governance committee is present only to provide oversight, not to serve as an active manager. In a joint venture model, on the other hand, the hospital and physicians form a "newco" which contracts with the hospital. The profits from the newco are then split between the hospital and the physician group. The type of arrangement sometimes depends on the number of physician groups involved.
Compensation for co-management services is generally divided into two levels of payment: a base fee and a bonus fee (based on quality and performance). Both fees must be consistent with fair market value, and to meet safe harbors for the Anti-Kickback Statute, compensation must be set in advance. This means hospitals can only reward physicians with bonuses if the minimum and maximum bonus amount is decided in advance, rather than based on a percentage of collections. Physicians should also not be compensated for clinical duties through a co-management arrangement.
9. Accountable care organizations. It remains unclear whether ASCs will have a positive role with ACOs. On the one hand, the development of ACOs will tend to favor lower cost providers such as ASCs. However, many of the ACOs will be driven by hospital systems that are much more focused on steering all possible cases to hospitals.
Related Articles on the ASC Market:
6 Observations From the 2011 Healthcare Appraisers Report: A Review of 2010 Trends and Transactions
5 Must-Have Technologies for Physician Recruitment
What Management Companies Want: 10 Statistics on Surgery Center Owners and Operators