Three experts in ASC transactions and valuations gathered at the Becker's ASC 24th Annual Meeting: The Business and Operations of ASCs in Chicago Oct. 26 to discuss rising multiples, private equity and healthcare consolidation, among other mergers and acquisitions trends to watch in 2018.
Participants in the discussion included:
- Paul Shade, managing director at Principle Valuation
- Jon Vick, partner at ASCs Inc.
- Kevin McDonough, managing director at VMG Health
Valuation multiples for ASCs are 'creeping up'
"Over the past 10 years we've seen [earnings before interest, taxes and amortization] multiples creeping up. Five or 10 years ago a six or six-and-a-half multiple was pretty good and was pretty average for a majority interest purchase. Today, we're seeing seven-and-a-half or eight multiples being offered," Mr. Vick said, adding a range of factors might influence an ASC's valuation multiple. "The past success of the center, the growth opportunity that the center represents, the age of the physicians, the speciality mix, the contracting ability of the center … If you can show a growth picture where you're going to add new specialities, add new joints, spine, a good solid growth story will get you a much higher multiple than if you're at full capacity."
Why consolidation might result in lower multiples
"As opposed to 10 years ago, you've just got more competition. You've got more players out there for control-level transactions in ASCs. It's not just management companies and it's not just health systems … you've got private equity involved, you've got larger physician groups that have come together," Mr. McDonough said. "The expected return for these buyers is no different, in my opinion, than what it was five years ago, 10 years ago. If anything their expected return is higher. But all the buyers out there, they bring certain synergistic qualities that allow them to take an eight multiple and make it into a four multiple … It's because of all the consolidation that's happened on the buyer front."
Private equity is a growing trend — but other partnerships may prove more valuable
"In order to continue the success you've had in the past you need to add new expertise to the center, and that comes through either partnerships with a management company or a hospital, or both," Mr. Vick said. "[Private equity] will take a more prominent role in acquiring companies, but not individual [surgery] centers … I don't see the benefit of an individual center selling to a private equity company because the private equity company doesn't bring strategic value, it just brings money. And money's nice, but it's not going to help the center grow. The benefit to physician-owners is a company that can help the business quota become better and more profitable."
Multispecialty versus single-specialty valuation
"We typically see slightly higher valuation multiples for multispecialty centers, but [it depends] really on what that specialty is. We typically see the greatest amount of activity in multiples for orthopedics and GI, which continues to have a premium investment. It can operate at higher [earnings before interest, taxes and amortization] margins, which usually see a higher multiple in that service line," Mr. Shade said.
Surgical volumes are transitioning to outpatient procedures, changing the payer mix
"On the financial side, we'll have both positives and negatives," Mr. McDonough said. "You've got a trend of surgical volume moving from inpatient to outpatient, we're seeing a tremendous amount of that. That comes with some negative, because a lot of that inpatient to outpatient is also changing the payer mix, and exacerbating a trend we're seeing with a greater level of government pay within healthcare, but you've also got greater patient transparency on the reimbursement front, that's excellent when you're talking about ASCs being a low-cost provider overall. Patients having greater transparency on what they're paying is a great positive for the ASC industry."