The health care sector is continually clouded by uncertainty from government regulation, reimbursement pressures and other outside forces. These uncertainties can place downward pressure on the valuation of a given entity. While ASCs are not immune from these pressures, positive tailwinds in recent years have resulted in an expanded interest in ASCs. Accordingly, investors have been purchasing ASCs at increased valuation multiples.
Care Migration a Growing Trend
As payers seek to shift the place of care from inpatient to less costly outpatient settings, ASCs are a natural beneficiary. While the cost advantage of an ASC setting has been touted by the ASC industry for years, we are now seeing widespread acceptance of this value proposition. Payers are increasingly indicating that for procedures that can be performed in an ASC, prior authorization would be required to have the same procedure performed in a hospital outpatient department. This trend is affecting other segments of the health care industry, with certain payers outright refusing to reimburse for specific imaging services provided at a hospital and denying out-of-network reimbursements for emergency department care that payers determine should have been handled in an urgent care setting. This cross-industry trend indicates that a structural shift is taking place, which should be a boon for lower-cost settings, such as ASCs.
As an example, this shift from inpatient to outpatient settings is highlighted by the increasing amount of total joint replacements being performed at ASCs throughout the country. The Centers for Medicare & Medicaid Services has furthered this shift by removing knee replacements from its inpatient-only list in 2017. At HealthCare Appraisers, we have seen an increased demand for appraisals of orthopedic-focused ASCs, as both physician and corporate investors alike seek to buy in or increase their ownership interest in these ASCs.
Integration Spurs Investment
Integration of the health care delivery model, both vertical and horizontal, also appears to be a trend that will affect many areas of the health care sector (including ASCs) into the foreseeable future. UnitedHealth Group’s Optum acquired Surgical Care Affiliates in 2017, as it continues to vertically integrate its national health care delivery operations. Tenet Healthcare increased its ownership interest in United Surgical Partners International from 80 percent to 95 percent in the second quarter of 2018. As the health care market continues its trend towards integration, the new entry of entities, such as insurance companies, competing against health systems and ASC management companies for ownership in ASCs only heightens the demand and appeal of ASCs in the marketplace.
Private Equity Ramps Up Pursuit
Like insurance companies, private equity investors have re-emerged as a source of capital in the health care arena, adding yet another potential bidder for ASCs. At the close of the third quarter of 2017, Bain Capital purchased a roughly 54 percent ownership interest in Surgery Partners. In June 2018, KKP executed a definitive agreement to acquire Envision Healthcare, which contains a sizeable ASC portfolio given its previous merger with AmSurg.
On a smaller scale, private equity firms across the nation continue to purchase physician practices and their affiliated ASCs through management service organization/arrangements and friendly professional corporation arrangements. Demand is strong for ophthalmology, dermatology, gastroenterology, dental, plastics and other specialties with the ability to generate revenue through multiple streams, such as in-office ancillaries, cosmetic procedures and ASCs.
ASC Multiples on the Rise
With a larger number of entities competing to invest in ASCs, a shift in the focus of payers in moving care from an inpatient to outpatient setting and the emergence of a trend of vertical integration in the health care delivery model, a favorable environment has emerged for ASC owners, resulting in higher valuation multiples.
In HealthCare Appraisers’ annual ASC Valuation Survey, we noted a trend of not only increasing valuation multiples, but a tightening of the range of multiples paid for an ASC. As an example, our 2017 survey indicated that 25 percent of respondents paid less than a 6.0x EBITDA multiple for a controlling interest in a multi-specialty ASC. Conversely, in 2018, no respondents reported paying a multiple below 6.0x, with most paying a multiple about 7.0x.
While the value of an ASC is always based on its individual performance, as well as local economic and demographic drivers, the macro environment should continue to bode well for ASC investors for the foreseeable future.