The valuation of an ASC is dependent on factors ranging from supply and demand determinants to considering market trends and avoiding common mishaps that spur inaccurate estimates.
If a valuator does not have much experience in the healthcare industry or does not understand the nuances associated with ASC valuation, inaccurate or misleading projections occur, Nicholas Janiga, partner at consulting and valuation firm HealthCare Appraisers headquartered in Delray Beach, Fla., said during a presentation at the Becker's ASC 23rd Annual Meeting: The Business and Operations of ASCs.
Here are 4 thoughts about ASC valuations for surgery center administrators to consider.
1. Supply and demand factors. Mr. Janiga said surgery centers are entering more of a mature phase as growth has started to slow in recent years.
"What we're seeing is as freestanding centers are taken out of the market through various sorts of acquisitions and joint ventures and consolidation, that's offsetting new surgery centers that are being developed," he said.
Mr. Janiga said several macro and micro supply and demand factors should be considered during an ASC's valuation process. Some examples of macro factors include Medicare reimbursement rates and the supply for independent physicians in the marketplace versus employed physicians.
In 2005, 8 percent of orthopedic surgeons were employed by integrated delivery systems, Mr. Janiga said. In 2015, that number jumped to 55 percent. Mr. Janiga said this trend, which is also found in groups other than orthopedic surgeons, will certainly affect a surgery center's case volume and prospects for future growth, as less independent physicians will have ownership in freestanding surgery centers.
On the micro level, supply and demand factors affecting valuation can be influenced by the size of the primary service area, the number of patients in that area, the number of physicians across various specialties and the number of surgeons, among other factors. If these micro level factors are misunderstood, he said valuators could project unrealistic estimates.
2. Forms and structures of recent M&A activity. Mr. Janiga listed several trends in recent ASC M&A activity, including but not limited to the following:
- De novo surgery centers, many of which are joint ventures
- Conversion of free standing ASCs to bring in additional cases
- Existing ASCs becoming part of a larger joint operating agreement
"Sometimes health systems are engaging in joint venture activities because they see it as a less costly physician alignment opportunity, to align with an orthopedic group instead of acquiring an orthopedic group," Mr. Janiga said. He added ASCs may go this route to avoid "possibly losing money on their professional practice."
However, capital and payer contract constraints can hinder M&A activity, as more payers are clamping down on out-of-network strategies, Mr. Janiga said.
3. Approaches to valuation. There are three ways to go about valuing an ASC, according to Mr. Janiga — an income approach, a market approach and an asset approach.
Under an income approach, ASCs rely on a performa that looks at market driven finances over a single period or many periods. A market approach takes into consideration other ASC companies and comparable transactions when valuing an ASC. An asset approach may be used to determine the contribution of capital to a de novo surgery center or a failing ASC.
4. Common errors and pitfalls in valuation analyses. Forgetting to adjust the income statement to normalize revenue, miscounting appropriate expenses, misuse of valuation approaches and an inaccurate assessment of risk are among common errors that deter correct ASC valuations, Mr. Janiga said.
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