Ambulatory surgery centers (ASCs) are a hot commodity, attracting increased interest from hospital and health systems, surgical facility operators (e.g., Surgery Partners, SCA Health), private equity firms, and commercial payers. Given this increased interest from strategic and financial buyers, it's not surprising that we are hearing from a growing number of ASC owners wondering about the value of their facilities.
Before we dive into the factors influencing ASC value and discuss surgery center valuations, it's helpful to get a lay of the ASC land. The massive changes in ASC scale and scope in recent years continue to propel growth but also bring challenges. A larger number of ASCs are performing a broader set of procedures than ever, including the likes of total joint replacements and a variety of cardiovascular treatments, but labor shortages, inflation, and reimbursement pressures are hurting their ability to increase profitability.
Outpatient care will continue shifting away from inpatient (e.g., hospital) settings toward ASCs. Evolving medical and technology advances will further accelerate the transition as patients seek safe, affordable care and payers look to reel in rising healthcare costs. The rise in the number of ASCs to the point where the number of Medicare-certified surgery centers (~6,400) has surpassed the number of hospitals (~6,100) is in part due to the significant cost savings of procedures performed in ASCs compared to onsite hospital surgeries, which allows for lower reimbursement rates and patient expenses. The migration of care into ASCs, fueled by payer pressures, is one the reasons many hospitals are seeking to develop or partner with ASCs. Consulting firm Avanza Healthcare Strategies notes that more than 7 out of 10 hospitals and health systems intend to continue investing in and affiliating with ASCs. The trend is up 8% since 2019, with the firm attributing the shift to many factors, including consumer demand and the need to decrease costs. Physicians remain interested in starting ASCs or becoming minority or majority owners to allow them to obtain distributions.
Key ASC Risk Drivers
Similar to most investable assets, the value of ASCs is a function of risks versus rewards. Key risk drivers include:
- Location: Being located in a certificate of need (CON) state and/or being located near key suppliers, solid referral sources, ample labor supply, low concentration of other ASCs, and good patient demographics are all positives.
- Payers: Having low reliance on out-of-network payers is preferable.
- Reimbursement: Having low dependence on procedures with low reimbursement rates helps reduce risk.
- Operational dependence: Having high reliance on one physician, one referral source, or one senior executive who would cause a dramatic decline in revenue if they were to leave the ASC raises risk.
- Non-competition/non-solicitation agreements: Having little concern that employees or independent contractors would leave the ASC and immediately become a competitor or would steal away key employees reduces risk.
- Multi-specialty vs. single-specialty ASCs: Multi-specialty ASCs that have a low concentration of services/procedures provided relative to total revenue are considered less risky than single-specialty ASCs.
Other issues impacting the riskiness of a particular ASC include:
- Performance: The overall performance of an ASC relative to its peers/competitors. An ASC that historically underperforms its peers will be viewed as more risky than one that at least performs as well as like facilities.
- Historical legal issues: Legal fees will impact valuations via lower profitability, while a history of numerous legal issues will increase buyers' perception of riskiness.
- Turnover: An ASC with relatively high employee, patient, and/or referral source turnover will be looked at as more risky than otherwise.
- Collections issues: An ASC with a history of billing/collections issues, high reimbursement denials, longer than normal collection periods, and higher than normal write-offs for uncollectable accounts receiable (A/R) will be deemed riskier than normal.
- Malpractice claims history: An ASC with numerous malpractice claims may lead buyers to increase their perception of riskiness.
- Patient readmissions: An ASC with an above-average hospital readmission rate will increase buyers' perception of riskiness.
- Compliance: An ASC with a history of regulatory compliance, accreditation, and/or licensure issues will be deemed more risky.
Some people might argue that the above-listed risk drivers are qualitative matters rather than quantitative. In reality, these risk drivers ultimately impact overall performance and are therefore quantitative relative to creating cash flow for the owners/investors of the ASC.
Relative size also matters regarding the market value of ASCs. There is higher demand by buyers for ASCs with higher revenue and organizations with multiple locations. Higher demand will lead to higher valuations.
Current ASC Valuations
Let's discuss ASC valuations. Below is a breakdown of the current estimated market values based on multiples of earnings before interest expense, income taxes, depreciation, and amortization (EBITDA) of ASCs by size and perceived riskiness:
Market Valuation*
Annual Revenue <$15 million $15 to $30 million >$30 million
Low-risk ASCs 4.0x to 4.5x 4.5x to 6.0x 6.0x to 8.0x
Moderate-risk ASCs 3.5x to 4.0x 4.0x to 5.5x 5.5x to 7.5x
High-hisk ASCs 2.5x to 3.5x 3.0x to 4.0x 5.0x to 5.5x
For example, a low-risk ASC with $9.0 million in annual revenue and an EBITDA of $1.8 million (20.0% EBITDA margin) will have a market value in the range of $8.1 million to $10.8 million.
*Actual market value is also a function of (1) quality of offering memorandum and reporting, (2) quality of intermediary representation, (3) historical performance of the company, (4) future growth prospects of the company, (5) quality, type, and number of potential buyers, (6) current and projected macroeconomy, (7) current and projected industry stability and growth, (8) and numerous other factors.
Note that acquisitions of ASCs are typically stock purchases, as opposed to asset purchases, and are done on a cash-free/debt-free basis. The seller(s) normally distribute their cash balances before closing the sale/purchase and after paying off all indebtedness.
Buyers typically undertake a Quality of Earnings (QoE) analysis. A QoE is a comprehensive examination of a company's financial performance, detailed revenue analysis, review of accounting policies, assessment of company management, examination of company operations, and reliability of financial reporting. We often recommend that ASC owners undertake a seller's QoE before going to market. By doing so, owners can take steps to mitigate issues uncovered during the QoE process, thereby reducing perceived riskiness.
Moreover, the QoE process helps sellers and their mergers and acquisitions (M&A) advisor to better identify discretionary and non-recurring expenses that are add-backs to EBITDA to best reflect the cash flows generated by the ASC to potential buyers.
What Is Your ASC Worth? Receive a Market Valuation From VERTESS. Whether or not you're considering selling your ASC, knowing the current market valuation can provide you insight into deciding where to go. You might be trying to determine where you want your ASC to be five years from now. A good roadmap begins by knowing where you stand today. A market valuation of your ASC is a great start to knowing where you are now.
As a healthcare-focused M&A firm, we at VERTESS help owners understand the expected value of their business if they are to bring their company to market. We'd be more than happy to provide you with a current market valuation of your ASC.