Tom Blankenship, vice president of the healthcare group and public finance department at Citi, told Becker's ASC Review what surgery centers can expect when getting involved in transactions or partnerships.
Note: Responses were lightly edited for style and clarity.
Question: What kinds of entities are most interested in ASCs right now and why?
Tom Blankenship: Strategics and financial sponsors are aggressively pursuing ASCs. Industry and market dynamics, consumer preferences and the fragmented nature of the industry present a compelling investment thesis.
The financial profile, equity alignment through physician ownership, and opportunities for consolidation attract private equity investment. Outpatient surgeries are a high-value, high-margin service with little-to-no substitutes. Given the compensation headwinds, physicians are attracted to PE partnerships, which financially incentivize performance and productivity. Through a management services organization, the ASC owners and physician partners rely on PE to employ all of the ASC's support staff and mid-levels, be responsible for the ownership and development of all ancillary services such as imaging and lab, and perform in-depth service-line analysis and data analytics. By aligning with PE, physicians can retain a greater distribution of earnings and invest in the business for infrastructure and strategic growth.
Hospitals and health systems are focused on increasing access to care and providing services in the appropriate care setting. As new entrants disrupt the competitive landscape and governmental payers represent an ever-increasing percentage of business, hospitals and health systems must promote and grow their core services and go on the offense with in-market and adjacent competitors. ASCs are an integral part of their strategy. Their strategic plans emphasize maintaining, improving or accelerating market leadership, profitability and growth trajectory to ensure essentiality and to offer increased value to their communities.
Q: What can ASCs do to make themselves more attractive M&A targets?
TB: Scale, financial performance, and physician contribution and composition are critical elements in ASC valuation. Buyers are sensitive to over-reliance on a few key physicians and a high average age of physicians. Larger ASCs with attractive financial profiles command higher valuations. With size, physician concentration becomes less of an issue. Similarly, a culture that attracts, recruits and develops future physician leaders mitigates concerns about long-term success. Other factors that make ASCs more attractive include their progression into value-based reimbursement (i.e., bundled payments), proprietary models/methods, and best practices that provide differentiated value to partners or acquirers.
Q: How can ASCs benefit from M&A deals in the current healthcare landscape?
TB: Today's environment positions ASCs well for partnerships or sales. The opportunity to include both strategic and financial buyers in the process creates healthy competition, improving valuation levels and contractual terms and conditions. PE recognizes the mutual financial benefits to physicians and their model while hospitals and health systems must grow their ambulatory presence and align with successful physician organizations.
Before commencing a partnership or sale process, ASC owners and physicians must establish and align upon clear goals and objectives, including thresholds on critical items. Lastly, the owners need a strong understanding of the potential partners or buyers, which includes their track record, benefits and considerations as a partner, and level of interest.
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