The healthcare market characterized by mega-mergers and disruptive transactions in 2017 will be shaped an uncertain regulatory environment in 2018, according to VMG's Healthcare M&A Report.
Here are the trends VMG observed in the ASC space in 2017, and what to expect in 2018.
2017 trends
1. Steady growth. The number of Medicare-certified ASCs in the U.S. grew at a compound annual growth rate of 1.3 percent between 2010 and 2016. The total increased from 5,105 in 2010 to 5,532 in 2016.
2. High fragmentation. About 72 percent of freestanding ASCs are independently owned and operated. The remaining 28 percent is controlled by large players including AmSurg Corp., United Surgical Partners International, Surgical Care Affiliates, HCA Holdings, Surgery Partners and other multi-site operators.
3. Increased valuation multiples. In 2017, VMG observed an increase in valuation multiples. Median total invested capital to trailing 12-month earnings before interest, taxes, depreciation and amortization multiples increased from about 6.6x in 2016 to about 6.8x in 2017.
4. Policy changes. CMS' site-neutral policy, which took effect Jan. 1, 2017, was intended to end payments to hospital off-campus facilities at the same reimbursement rates as hospital outpatient departments. The move could slash reimbursement rates by up to 50 percent for ASCs billed as HOPDs. Later in the year, CMS published a final rule to increase the ASC conversion factor by approximately 1.2 percent in 2018.
5. Consolidation and mega-transactions. After Tenet Healthcare and United Surgical Partners merged in 2015 and Envision combined with AmSurg in 2016, major transactions continued playing out in 2017. UnitedHealth subsidiary OptumHealth acquired Surgical Care Affiliates for approximately $2.3 billion in March of 2017, which resulted in SCA going private. Surgery Partners acquired National Surgical Healthcare for about $760 million in August 2017.
6. Private equity activity. There was also a flurry of activity by private equity firms in the ASC space. Bain Capital Private Equity partially funded Surgery Partners' acquisition of NSH in exchange for preferred equity and picked up a 54 percent stake in Surgery Partners for about $503 million. Private equity firm KKR & Co. acquired Covenant Surgical Partners, which operates ASCs and physician practices in 17 states, for an undisclosed amount in October 2017.
2018 expectations
1. Continuing consolidation. The healthcare industry's transition to providing services in lower cost outpatient settings will drive continued consolidation of ASCs. Expect to see health systems and insurers diversify operations as a result of the industry's shift.
2. Direct and indirect hospital participation. Hospitals and health systems will seek to gain footing in the ASC space through acquisitions or joint venture arrangements with ASC management companies and/or local physicians.
3. Payer interest. Payers will continue showing interest in ventures and partnerships that lower healthcare costs by shifting surgical volume to outpatient settings.
4. Neutral to favorable multiples. VMG predicts ASC multiples will "trend neutral to favorable in 2018" as a result of various factors, including high demand, regulations driving volume to outpatient settings and encouraging economic variables for surgery centers.