TRENDS
BY DANIEL I. LEVIN
HealthCare Appraisers released its 2020 ASC Valuation and Bench- marking Survey in spring. ASCA collaborated with
HealthCare Appraisers on conduct- ing the survey, which includes insights from owners and managers of more than 1,200 ASCs throughout the US. We have published our annual sur- vey for more than a decade, providing valuable insights into trends in valua- tion as well as the financial and oper- ating performance of surgery centers. We conducted and published our
2020 survey prior to the profound effects of COVID-19 in the US. Since that time, many states issued orders limiting elec- tive surgical procedures, which caused sharp declines in ASC case volumes in the second half of March and April. A few of the largest publicly traded oper- ators of surgery centers indicated case volumes were down as much as 85 per- cent in April. As of mid-August, most ASCs have experienced a rebound in vol- umes but are still below pre-COVID-19 or budgeted levels and some orders ban- ning non-emergency procedures in hos- pitals due to local outbreaks have been reinstated in recent weeks. The long- term outlook for ASCs, however, is as positive as ever.
In the 2020 survey, the consensus among respondents was that transac- tion activity remained robust and com- petitive, with the trend expected to continue going forward. The majority of respondents indicated that transac- tion activity and competition for acqui- sitions increased in 2019. As a result of this competition, valuation multi- ples for controlling interest purchases
increased as well. Many factors drove increased activity in the ASC space including increased interest from pri- vate equity sponsors in surgical spe- cialty physician practices, hospital outpatient departments (HOPD) con- verting to freestanding ASCs and health systems attempting to recap- ture procedure volume as it migrates to lower cost settings. We anticipate these trends will continue given more proce- dures are being approved for the out- patient setting—i.e., the inpatient-only procedure list continuing to shrink— including total joint replacements and cardiovascular procedures. Valuation multiples in the ASC sector continued their upward trend in our 2020 valuation survey. Details surrounding the increase in valuation multiples, including comparisons of valuation multiples as compared to previous years, are discussed and ref- erenced in greater detail in the survey. From our perspective, the primary
buyers at the high end of the valuation multiple range are private equity spon- sors consolidating physician practices and affiliated ASCs. A wealth of data as well as commentary from public com- panies and other market participants support the fact that private equity firms
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are driving up valuation multiples across a range of medical specialties and entity types. Some of the earliest specialties to see strong interest from private equity were dermatology and ophthalmology, however, the last few years have seen a surge in consolidation activity within the specialties of orthopedics, radiol- ogy, gastroenterology, urology, cardi- ology and podiatry. With private equity firms sitting on more than $1.5 trillion in cash, we believe these trends could continue for the foreseeable future. Companies with a historical focus
on ASCs, such as private equity-backed Covenant Surgical Partners, which recently rebranded as Covenant Physi- cian Partners, have broadened their strat- egy to include physician practices. Cov- enant Physician Partners now operates more as a physician services organiza- tion akin to many of the private equity physician practice management plat- forms that have formed in recent years. This suggests that companies that have focused primarily on ASCs in the past see growth opportunities in managing physi- cian practices and recognize the impor- tance of aligning physician groups with their ASCs. The strategy could also be defensive in some cases to retain vol- ume at existing ASCs and avoid having high-volume physician groups acquired by a competitor platform. In our 2020 survey, we also observed an increase in HOPD conversions to freestanding ASCs. Approximately three quarters of respondents indicated that HOPD to freestanding ASC conversions increased in the last year. Hospitals often view the conversion of HOPDs to free- standing ASCs as part of a physician alignment strategy, and the conversion is frequently conducted simultaneously with a transaction in order to syndicate
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