i. observation & trends – healthcare market · i. observation & trends –healthcare...

ASC Transactions:Analysis & Valuation Trends

Chance Sherer, CVA

Senior Manager

Clinton Flume, CVA

Senior Manager

Presentation Overview

I. Observation & Trends – Healthcare Market

II. Observation & Trends – ASC Industry

III. ASC Transaction Market

IV. Valuation Trends

V. What Does the Future Hold?

I. Observation & Trends –

Healthcare Market

$1,905

$2,044

$2,426

$2,808

$3,032

$3,647

$3,872

$4,683

$4,690

$4,711

$5,319

$5,407

$5,737

$5,741

$6,140

$6,304

$7,452

$8,895

$8,980

$9,055

Portugal

Greece

Singapore

Spain

Italy

United Kingdom

Iceland

Germany

France

Belgium

Sweden

Austria

Netherlands

Canada

Australia

Denmark

Luxembourg

United States

Switzerland

Norway

2012 Health Expenditures Per Capita

� Current Macro Healthcare Trends

� US healthcare spending is out of control

World Health Organization National Health Account database (see http://apps.who.int/nha/database/DataExplorerRegime.aspx)

Current Market Observations

Page 4

Current Macro Healthcare Trends

� Healthcare is currently 17.2% of GDP

� Healthcare spending in the United States grew 3.7% in 2012, which is slightly greater than the increase in 2010

� By 2020, national health spending is expected to reach $4.5 trillion and comprise 19.2% of GDP

� Contrary to popular belief, healthcare spending appears to be slowing

2012


Page 5

Current Macro Healthcare Trends

� In the chart below, year over year growth in healthcare expenditures is shown from 2000 to 2012.

� Contrary to projections of out of control growth, healthcare expenditures are shown to be decelerating.


Page 6

7.0%

8.4%

9.7%

8.5%

7.2%6.8%

6.5% 6.3%

4.7%

3.8% 3.8% 3.6% 3.7%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Percent Change in National Healthcare Expenditures

� Healthcare is Headed in a New Direction

Fee-for-Service

Shared Savings / Value

Based Reimb. / Bundled

Payments

Physicians/Hospitals

Acting Independently

Physicians & Hospitals

Collaborating

ASC’s Operating

Independently

ASC’s Becoming Part of

the Continuum of Care

Strong Revenue GrowthCost Containment &

Operating Efficiencies


Page 7

More Facilities/CapacityMore Efficient

Facilities/Consolidation

II. Observation & Trends –ASC Industry

� State of Industry – Two Observations:

1) Trends consistent with a mature industry

2) Possible revival of de novo development

� Recovery in volume post-recession was short-lived – signs of

weakness in same center volume trends

� Continued managed care and Medicare reimbursement

pressure

� Uncertainty regarding healthcare reform’s long-term impact on

ASCs

ASC Industry

Page 9

� All Signs Point to a Mature ASC Industry

ASC Industry

Page 10

� Slowdown in government ASC payments and new ASC

construction point to a mature market

ASC Industry

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

0

1,000

2,000

3,000

4,000

5,000

6,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Medicare ASC Payments (in millions) Certified ASCs

Medicare ASC Payments and Certified ASCs, 2000-2011

Page 11

� Rebounding of OR Utilization From Dip in 2009

From 2007 to 2009, OR

utilization declined by 16%

before rebounding 15% from

2009 to 2011. Utilization

appears to be leveling off.

Source: VMG Health Intellimarker ASC Benchmarking Study

ASC Industry

In many markets, we are seeing

a revival of ASC de novo

development – perhaps leading

to decline in capacity utilization

Page 12

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

2007 2008 2009 2010 2011 2012

Median Cases per OR per DayMedian Cases per OR per DayMedian Cases per OR per DayMedian Cases per OR per Day

� Current Focus – Implementing Operational Efficiency

Source: VMG Health Intellimarker ASC Survey

ASC Industry

Observed a slight decrease in staffing efficiency in 2012, largely a result of decrease in

same center volume trends.

Page 13

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

2007 2008 2009 2010 2011 2012

Staff Hours Per CaseStaff Hours Per CaseStaff Hours Per CaseStaff Hours Per Case

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2007 2008 2009 2010 2011 2012

DeDeDeDe----Leveraging: Debt/Total AssetsLeveraging: Debt/Total AssetsLeveraging: Debt/Total AssetsLeveraging: Debt/Total Assets

44.8%49.0%

35.0%31.8% 31.8%

27.4%

14.914.0

10.411.0

10.011.0


� Supply of new physicians will likely not meet demand

ASC Industry

Page 14


� Aging physician demographic will further limit recruitment & volume

1980 – Approx 20% over Age 55

1990 – Approx 30% over Age 55

2012 – Approx. 43% over Age 55

Source: “Physician Characteristics and Distribution in the US” by American Medical Association

(2011 Edition)

35030025020015010050050100150200250300350400450500

1980 1990 2012

Under 35

35-44

45-54

55-64

65 & Over

Age 45 and over

Age under 45

Number of Physicians (Thousands)

Age Group

400

550600

2000

650

Demographics of the Physician Workforce

ASC Industry

Page 15

� Hospitals have ramped up physician employment to build integrated

networks

ASC Industry

Page 16

Source: American Medical Association

20122000

� ASCs and Physician Owned Hospitals (“POHs”) rely on the same

physician investor pool

� Growth in ASCs and POHs has far exceeded growth in the physician pool

2-3% AnnualGrowth inEligible Drs

>40% DeclineIn Eligible DrsPer ASC/POH

ASC Industry

Page 17

36

3231

29

26

2321

2019 19 19 19

18

0

5

10

15

20

25

30

35

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Number of Eligible Physicians per ASC

� What to Expect in a Mature Industry Environment?

ASC Industry

Page 18

III. ASC Transaction Market

ASC Transaction Market

Acute Care Hospitals

- Limited, Niche

expansion play

- Limited by Capacity

/ Ownership

Restrictions

- Broader

consolidation trend

-Easy reimbursement

arbitrage

- Goals of Cost

Reduction

- Interested in

expanding existing

market presence

- JVs w/ Hospitals

- Merger Scenarios

- Successful ASCs

absorbing struggling

ASCs

� In a Mature ASC Market, Who are the Buyers?

Page 20

� The ASC Market Continues to Evolve…


Page 21

� ASC Acquisition History


Page 22

0

5

10

15

20

25

30

2007 2008 2009 2010 2011 2012 2013

Merger & Acquisition Trends

NOVAMED USPI AMSURG SCA

� Consolidating ASC Market:


Page 23

Amsurg Corp. announces acquisition of National Surgical Care – 18 Centers

Surgery Center Holdings, Inc. (Surgery Partners) acquisition of NOVA – 37 Centers

Sunlink Health merger with Foundation HealthCare – 15 Centers

USPI acquisition of HealthMark Partners – 14 ASCs

SCA acquisition of Health Inventures – 20 Centers

� Hospital M&A activity has been driven market consolidation, healthcare reform

initiatives and cheap capital

� Activity has steadily risen over the last 5 years and was exceptionally high in 2012

� The number of large, multi-site “chain” transactions has risen

� While the number of deals seems to have decreased in 2013, the number of

hospitals and beds involved in transactions hit a 5-year high, mainly driven by two

very large mergers

Hospital Transaction Market

Page 24

� Buyers are Keenly Aware of Their Own Company Valuations� Both publicly traded and private companies are keenly aware of their Wall Street value


Page 25

� Hospital Share Prices Reflected the Good News from the Passage of the Healthcare Law

� ASCs continue to have strong performance against the S&P regardless of Healthcare Reform


Page 26

� Demand for Acquisitions is High� Frothy stock market – particularly for healthcare

� Need for ASC management companies to exhibit growth

� Diminished ability to pursue growth through de novo development

� Same center performance does not provide growth investors expect

� Market consolidation strategies are being pursued aggressively

� Hospitals are joining management companies in the buyers market

� ASC attracts significant interest from private equity due to their high cash flow

generating ability


Page 27

IV. What is the Current Value of ASCs

� Cost Approach� Provides a Floor for Value – Tangible Assets +

Identifiable Intangibles

� Income Approach� Discounted Cash Flow Value – Measure Future

Benefits of Ownership

� Market Approach� What are Transaction Values of Comparable

Companies

Fair Market Value Opinion should Consider these Three Approaches to Value – the forces

driving these approaches are dynamic

Valuation Methodologies

How is Valued Measured

Page 29

Valuation Impact – Last 12 Months

Stable

Stable/Down

Up

� Keys to Value

� Future Cash Flow – The ability of the ASC to generate cash flow to the investor

after all operating expenses, capital requirements, and debt service

� Risk – The likelihood of projected levels of cash flows realized given the operating

and strategic environment under which the ASC operates

Income Approach

Page 30

Valuation is not a one-size fits all – each ASC has unique growth and risk

characteristics

Historical

Performance Trends

Payor Mix –

Mgd Care

Strength

Market

Patient

Demographics

Historical

Recruitment

Efforts/Ability

Case Mix /

Service Line

Mix

Facility

Capacity

Growth

Potential

Ownership

Flexibility

� Primary Factors Affecting Future Cash Flow

Income Approach

Page 31

Out-of-Network

Exposure

Market

Competition

Reliance on

Non-Owner Physicians

Service

Line

Diversification

Physician

Diversification

Barriers

to Entry

(CON)

Financial

Leverage

(Debt

Load)

Healthcare

Reform

Legal /

Partnership

(Non-Compete)

Facility & Equipment

Age /

ConditionStable Past

Performance

(Longevity)

� Primary Factors Affecting Risk

Income Approach

Page 32

Control Multiples

Minority Multiples

Observed ASC Valuation Trends

8.0

7.0

6.0

5.0

4.0

3.0

2.0

1.0

0.0

ASC Valuation Trends as Multiple of EBITDAAcquisition

Multiples have

widened and

trended up slightly

in last 1-2 years

Minority multiples

have Declined and

Widened

Control Multiples

Minority Multiples

2005 Present

Page 33

ASC Market Transaction

Out-of-network minority

valuation multiples have

declined until recently.

(2012, little misleading)

Out-of-network control level

transactions and their valuation

multiples have declined over the

last six years.

Page 34

IV. What Does the Future Hold

Reform and The Affordable Care Act

Page 36

� In June 2013, MedPAC called for payment equalization between HOPDs

and physician offices and ASCs for certain procedures

� In April 2014, the OIG recommended that CMS reduce OPPS payment

rates for ASC-approved procedures on beneficiaries with no-risk or low-

risk clinical needs in outpatient departments

� Under this recommendation, OP departments would continue to

receive the standard OPPS payment rate for ASC-approved

procedures that must be provided in an OP department because of a

beneficiary’s individual clinical needs


Assuming that total outpatient volumes continue to grow, payment equalization may push

utilization to low cost facilities, such as ASCs and physician offices

Page 37

� Insurers have vowed to raise premiums for small businesses and self-insured individuals

• UnitedHealth, Aetna, and the Blues have all cited premium increases of 25%-116% for

20141

� Because of higher costs, small employers may drop coverage and pay mandate penalties

� This may cause consumers to adopt higher deductible, lower premium plans

Rising premiums and deductibles may decrease utilization for procedures however push

volume to lower cost settings like ASCs


Page 38


“So as you look at the trends over the past few years, you do see more of a shift towards the latter half of the year on

the commercial book of business in the outpatient segment. So can you attribute all that to deductibles and co-

pay? Possibly.”

� - Samuel N. Hazen, President of Operations, HCA, on sluggish first quarter outpatient volumes

Consumers may already be changing behavior

Private insurance rates continue to climb:

Page 39

� What Do We Know…Short Term

Conclusion – Uncertainty is Certain

Page 40

Volume Retention will be Difficult: Recruiting and retaining physician investment will be single greatest challenge

Reimbursement Challenges: Despite ASCs status as low-cost provider for outpatient surgery, material growth in reimbursement should not be counted on

� What We Think We Know…Long Term

Conclusion – Uncertainty is Certain

Page 41

Changing Healthcare Delivery Models: Network Affiliations between Health Systems and Payors will narrow – ASCs will need to find a way to “fit in”

Market Consolidation: Dominant health systems and payors will likely be in the driver’s seat…need to assess your specific market

The ASC industry was founded by entrepreneurial and fiercely independent physicians…..pursuit of stubborn independence moving forward could leave those ASCs on the outside looking in.

ASC management must be proactive in assisting their individual physicians and physician groups navigate and find their role in the healthcare delivery network

There may be an eventual need to look at your ASC as a provider in a broader network, not as a primary surgical site for a handful of specific surgeons.

Questions?

Chance Sherer, CVA

Senior Manager

[email protected]

214.369.4888

Clinton Flume, CVA

Senior Manager

[email protected]

214.369.4888

Page 42

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