Becker's ASC Review

14 Executive Briefing: Executive Briefing: Merger & Acquisition Activity for ASCs Research Consultants, independent ASCs capture approximately $24 billion, roughly 63 percent of the market share. 1 In the past several years, we have witnessed some siz- able consolidation activity," says Todd Mello, ASA, CVA, MBA, Partner and Co-Founder of HealthCare Appraisers: 1. AmSurg's acquisition of National Surgical Care in 2011; 2. Graymark Healthcare's acquisition of Foundation Surgical Hospital Af- filiates and Foundation Surgery Affili- ates in 2013; 3. Surgery Partners' acquisition of Symbion in 2014; and 4. Tenet Healthcare's acquisition of USPI in early 2015. "The increased competition for ASCs (i.e., Mello notes that 60 percent of respondents reported increasing acquisition activity and 45 percent reported increasing competition for deals) continues to drive prices up, and recent large transactions (e.g. Symbion) suggest multiples paid of 10 times or more for companies with a large presence in the space. Considering that one can purchase a multispecialty center at a multiple of 7 to 8 times EBITDA, these transactions still ap- pear to be accretive to the acquirer." Hospital Acquisitions, Healthcare Reform and Physician Employment Hospitals have continued to increase their prowess within the ASC industry. Tenet's combination with United Surgical Partners to become the largest provider of ambula- tory surgery in the United States is one pri- mary example. Additional health systems, for-profit and not-for-profit, also continue to look for opportunities within the ASC sector and compete with other non-hospital buyers. "Hospitals' continuing efforts to acquire phy- sician practices and employ physicians is also taking its toll on the industry," Mr. Mello notes. "According to MGMA's 2014 Physi- cian Compensation and Production Survey (i.e., based on 2013 data), over 63 percent of responding physician practices are owned by hospitals or integrated delivery systems, up from 34 percent in 2008. In addition, 67.5 percent of responding internal medicine phy- sicians are hospital-owned, up from approxi- mately 51 percent in 2009. Furthermore, according to the 2014 Review of Physician and Advanced Practitioner Recruiting Incen- tives, which examines over 3,000 permanent physician recruiting assignments that Mer- ritt Hawkins/AMN Healthcare had ongoing or were engaged to conduct between April 1, 2013 and March 31, 2014, 64 percent of newly hired physicians are employed by hos- pitals, up from 11 percent in 2004. Though lagging behind, most specialists are on the same path towards employment. Accord- ing to MGMA, over 51 percent of orthopedic surgery respondents are hospital owned, up from 31 percent in 2009. As, health systems continue to acquire physician practices in part in preparation for risk-based contracting arising from healthcare reform, the impact to independent surgeons and ASCs is poten- tially significant," notes Mr. Mello. 1. Primary care physicians who are employed by a hospital or health system are strongly encouraged to refer to specialists who are also em- ployed, thus possibly reducing refer- rals to unaffiliated surgeons. 2. Surgeons who become employed are oftentimes precluded from do- ing cases in a free-standing ASC to the extent the ASC is not affiliated with the hospital. Accordingly, free- standing ASCs are finding it harder and harder to attract new surgeons to maintain the long-term viability of their ASCs. 3. Free-standing ASCs are oftentimes acquired and cease to operate on a free-standing basis, either through outright closure or conversion to hospital outpatient departments. Other Notable Findings Management Fees ASC company management fees have ranged from 5 percent to 7 percent of ASC net revenue for the past several years, and that trend continued in the most recent survey, where 69 percent of respondents in this year's survey reported that their typical management fees range from 5 percent to 6 percent. However, contrary to expectation, the proportion of respondents charging management fees of 7 percent increased year-over-year, while that pro- portion charging 4 percent also increased. "If you are competing against other manag- ers/buyers and charge a higher percentage of net revenue in management fees, you may be disadvantaged," says Mr. Mello. "Ad- ditionally, ASC owners often want to lower the percentage over time. The hardest work is generally in the first couple of years — that's when the company spends the most resources to make sure the ASC performs well. Then the ASC companies' profit mar- gins typically go up. But once the ASC runs smoothly they typically don't need as much support from the management company." Many contracts have minimum manage- ment fees, with 72 percent of respondents reporting minimum fees between $100,000 and $300,000 per year. Similarly, for the reasons mentioned above, 40 percent of the respondents reported having arrange- ments where the management fee rate var- ies based on the level of revenue generat- ed by the ASC. Thirty-eight percent of those reporting such variation provisions in their management agreements report ASC rev- enue thresholds for decreasing manage- ment fees ranging between $10 million and $14 million (i.e., at these revenue levels, the ASC manager would consider reducing its standard management fee). "At risk" Management Fees The trend within the inpatient setting to tie compensation, in part, to the achievement of pre-established performance and qual- ity metrics, which is consistent with the di- rection of healthcare reform, is still lagging within the ASC industry. Only 15 percent of respondents reported that some portion of their management fee is "at risk." "While there is still much uncertainty sur- rounding the future of healthcare delivery and reimbursement, I think within the next several years we will see more pressure to introduce quality and performance- based metrics into ASC management fees," noted Mr. Mello. "As ASC industry participants continue to evaluate ways to align with hospitals for the delivery of cost- effective, coordinated inpatient and outpa- tient care in the wake of healthcare reform, I believe its only inevitable." n 1 http://www.mrchouston.com/ambulatory-surgery- centers-ripe-for-consolidation/ HealthCare Appraisers, a nationally recognized valuation and consulting firm, provides services exclusively to the healthcare industry, includ- ing: business valuation (e.g., ASCs, hospitals, physician practices, dialysis centers, home health, diagnostic/treatment facilities, and intangible assets); fixed asset appraisals for furnishings, machinery and equipment; fair market value opinions for compensation and service agree- ments (e.g., employment, ED call coverage, medical directorships, collection guarantees, equipment lease/use arrangements, and service/ co-management arrangements); consulting and advisory services (including valuation for financial reporting); and litigation support. www.HealthCareAppraisers.com | info@hcfmv.com | (561) 330-3488 DELRAY BEACH | DENVER | DALLAS | CHICAGO | PHILADELPHIA Not all things are created equally. We are not your average Healthcare Valuation Firm. With over 12 years in the business and thousands of fair market value opinions rendered, HealthCare Appraisers has assembled a diverse, highly experienced team to help you navigate through a myriad of valuation needs and dilemmas. HealthCare Appraisers - Redeening Healthcare Valuation Since 2000

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