As ASCs across the U.S. consider whether to bring on new investors or sell outright, owners face new challenges in determining valuation and expected earnings before interest, taxes, depreciation, and amortization.
At the Becker's Healthcare Orthopedic, Spine + ASC Virtual Event, a panel of experts gathered to discuss ASC transactions. The panel included:
Wael Barsoum, MD, chief transformation officer of Healthcare Outcomes Performance Company, a musculoskeletal outcomes, service line and practice management company
Thomas K. Miller, MD, vice chairman of orthopedic surgery and chief of sports medicine at Carilion Clinic in Roanoke, Va.
Mihir Patel, MD, an orthopedic surgeon with OrthoIndy in Indianapolis
Below is an excerpt from their conversation. Click here to view the full panel on demand.
Note: Responses are lightly edited for clarity and style.
Question: How did the pandemic affect ASC valuation and EBITDA?
Dr. Patel: The country was shut down during the pandemic for six weeks, and elective surgery was shut down as well. When we start to compare performance going forward, we will compare to '21 or '22 versus '20, and all of a sudden those numbers start looking even better. During the pandemic, outpatient surgeries moved out of the hospital, and now it's our horse race to run as fast as we can and go as far as we can.
I think patients are demanding to be taken care of in the outpatient setting. You can perform surgery clearly more efficiently in the outpatient setting than in the inpatient setting. That's where the advantage lies. Looking back at transactions, as we've done internally, we throw out 2020. We don't even look at that number. We look to projections going forward, as opposed to what happened over the past 12 to 16 months.
Dr. Barsoum: I think Dr. Patel hit all the salient points on the money. One thing to be cognizant of, as an orthopedic surgeon or as a healthcare system, if you are interested in investing in an ASC, or building an ASC, is understanding the importance of quality of earnings. Everybody looks at things like what was the EBITDA for an ASC? And then they might say, well, you know, reasonable market valuations might be 6x, 7x, 8x, 9x, whatever that number is, but savvier investors look at the quality of earnings. Is this an ASC that's actually growing? Are the volumes growing? Is there room to expand the ASC? Have other large groups moved into the community that are building their own ASC? If so, you might start seeing volumes diminished.
So as you are thinking about making that investment, which for many orthopedic surgeons may be the biggest and most valuable investments that they make in a lifetime, you really have to understand the intricacies of valuations and whether a year like last year hurt the valuation, helped the valuation, or made no difference. Every ASC is a little bit different.
Dr. Miller: I would agree that at this point, traditional modeling probably doesn't work. You can go back and use previous trends, understanding that there may be a subset of trends may be gone forever, but they are being replaced by different patient volumes and subsets. Part of valuation has to look at the future trends, changes in 2022, and what's moving out of hospital systems.
How well did an ASC fair during the pandemic? ASCs that have done well and have room for expansion are going to be the ones that are quite valuable. They don't have a lot of dead fiscal weight, and they have the potential for future earnings and expanded earnings. I think the makeup of the provider group and locale are going to dictate the true fair market value down the line.
Register today for the 18th Annual Spine, Orthopedic and Pain Management-Driven ASC + the Future of Spine Conference virtual event June 7-17, 2021.