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ASC ownership trends in 2017: More complex joint venture deals

Ambulatory surgery centers make compelling value propositions as care delivery shifts to lower-cost, higher-margin outpatient settings. Recent deals between some of the biggest ambulatory surgery centers, hospitals, management companies, and insurers signal a new period of M&A activity for ASCs. Valuation experts expect the ongoing drive to explore managed care opportunities among increasingly interconnected parties to produce more complex joint ventures in the ASC market in 2017. 

This content is sponsored by HealthCare Appraisers

For many ASCs and interested investors, joint ventures provide ample opportunity for market growth with more diversified ownership risk compared to traditional transaction structures. This article examines overall ASC market conditions, common ownership models in ASC transactions and trends in joint venture deals between various healthcare entities. It specifically examines health systems' strategic motivations for contributing to joint-ventured ASCs moving forward, rather than just simply executing acquisitions. Finally, the article differentiates fair market value from synergist value in valuating business contributions to joint ventures. 

ASC market overview

"Overall, there continues to be tremendous interest in outpatient surgical centers, on pace with previous years," said David Walline, ASA, director at HealthCare Appraisers, a specialized valuation firm focused on healthcare and life sciences transactions. For years, provider groups looking to expand their service lines through vertical integration have seen value in affiliating with freestanding ASCs. Healthcare investors interested in ASCs primarily include providers looking to expand market share, hospitals and health systems seeking to better position themselves in their market, and ASC management companies leveraging their core competencies to increase operational value.

The ASC industry has also undergone a period of rapid consolidation in response to a variety of factors. Rapid regulatory changes and reduced government reimbursement have challenged independent ASCs to stay competitive with more dominant ASC peers and outpatient surgical departments of local hospitals. Seventy-one percent of physicians reported changes in healthcare regulatory, compliance and government policy significantly affected their ability to remain independent, according to a 2016 ProCare Systems survey.

"We are still seeing mergers and acquisitions throughout the industry as ASC management companies and health systems look to strategically reposition themselves in the market” says Hunter Outcalt, CPA, director at HealthCare Appraisers. According to the HealthCare Appraisers 2017 ASC Valuation Survey, approximately 50 percent of survey respondents reported acquiring between one and 10 surgical centers in 2016, and 69 percent expect to purchase between one and 10 ASCs in 2017.

Health systems, ASC management companies, and health plans are also opting for less-traditional transaction models. Joint ventures and strategic partnerships have become a common alternative to traditional M&A because they allow participants to retain their independence while expanding a particular service line. These ownership arrangements also allow for more nuance in contracts and terms of the affiliation. This trend toward more complex, multi-entity ownership structures reflects the drive for enhanced collaboration between healthcare providers in care management. 

Common joint venture participants and structures

Mr. Walline and Mr. Outcalt expect multi-entity joint ventures to proliferate in 2017. The valuation experts outlined a variety of joint venture scenarios that they expect to see most often in the 2017 ASC market.

Remaining independent of health systems, and/or ASC management companies can present long-term challenges for ASCs. Independent ASCs potentially face weaker positions in payer negotiations and decreased opportunities to become risk-sharing partners in value-based arrangements with health systems. "Freestanding 100 percent physician-owned ASCs are becoming fewer and far between," Mr. Outcalt says. Instead, many ASCs are strategically positioning themselves for future success by affiliating with more powerful allies.

ASC management companies

ASC management companies have emerged as key players in ASC transactions. These companies offer smaller ASCs the capital, economy of scale, administrative support and leverage in payer negotiations needed to remain competitive in their market. These same core competencies also allow large multi-specialty ASCs to continue-to expand and compete within their markets.  In exchange for providing these specialized services, as is common with most larger ASC partners, ASC management companies often purchase an ownership interest in the ASC.  When purchasing equity in ASCs, 57 percent of survey respondents said they preferred ownership rates between 1 percent and 50 percent, according to HealthCare Appraisers.


Physician interest in ASC ownership opportunities continues unabated. "We continue to see physician interest in both single- and multispecialty ASCs," Mr. Walline says. Physicians have partial ownership in approximately 90 percent of ASCs nationwide, according to the ASC Association.

Health systems / hospitals

Hospitals and health systems continue to expand their ambulatory footprints as the industry moves toward value-based care. In 2016, 50 percent of survey respondents reported selling a controlling interest of a surgery center to a hospital or health system, up from 46 percent in 2013, according to HealthCare Appraisers. Fitch Ratings estimated hospitals and health systems own between 25 percent and 30 percent of existing ASCs in 2017, up from 20 percent in 2011.

"Hospitals want to make sure they have lower cost alternative [settings] both for private payers and government-based payers," Mr. Walline says. "Hospitals are also looking to diversify their revenue streams and leverage [payment] rates.  ASCs offer that opportunity."

Several recent deals illustrate the growing preference of the largest ASC providers to create joint ventures with larger provider networks or health insurers. Dallas-based Tenet Healthcare acquired a majority ownership stake in United Surgical Partners International for $425 million in 2015. OptumCare, the healthcare arm of UnitedHealth Group, agreed to pay $2.3 billion to merge Surgical Care Affiliates with its own ASC management firm. SCA has a partial stake in about 190 ASCs in the U.S.

Five strategic advantages to hospital joint ventures

Hospital systems appear to increasingly prefer joint ventured ASCs to acquiring 100 percent ownership. Mr. Walline and Mr. Outcalt identified five strategic advantages hospitals see in contributing to a joint venture.

1. Payment neutrality. The move to site-neutral payments, effective Jan. 1, has decreased the value of 100 percent ownership in off-campus ASCs. The Bipartisan Budget Act of 2015 disallows off-campus surgical centers acquired or established by hospitals after Nov. 2, 2015, from billing Medicare at a higher rate than freestanding ASCs for the same services. Hospital-owned outpatient surgery departments established prior to November 2015 may continue billing at higher rates. Freestanding ASCs typically receive 25 to 50 percent of what hospital outpatient departments receive for identical services and procedures, although this rate is highly dependent upon the subject ASCs percentage of government payors and their respective commercial payor contracts. 

Hospitals are less inclined to buy 100 percent ownership in an ASC today because rates between HOPDs and freestanding ASCs are neutralized. Joint ventured ownership still allows the hospital to reap some benefit from outpatient procedures, however. Some hospitals are even beginning to divest full ownership of their surgery centers for partial ownership with strategic partners.

"We have seen a number of joint ventures which contemplate the contribution of a current freestanding ASC and the contribution of a freestanding HOPD surgery center once it goes through the process of converting to a freestanding ASC," Mr. Outcalt says.

2. Physician alignment. Joint ventured ASCs support hospitals' ongoing recruitment and retention of top-tier physicians. "[A joint venture] can be a more cost effective way to achieve physician alignment compared to going out into the community, buying a [surgical] practice and employing the physicians," Mr. Outcalt says. Major draws for surgeons include the potential economic upside of an ownership interest in the ASC, enhanced productivity in the ASC environment and the patient experience in the ASC. Hospital-physician alignment strategies that foster cooperation and shared goals between providers in the same community offer significant opportunities for efficiency and quality improvements.

3. Strategic market position. Hospitals can maximize patient access and capture increased market share by aligning with an ASC. Joint ventured ASCs in different geographic locations expand a hospital's presence and patient base in the community. The organization then has the opportunity to extend its brand to new markets.

4. Management and operational expertise. Many hospitals benefit from the administrative support and resources ASC management companies bring to the table. In some instances, Hospital leaders are not as familiar with overseeing operations in an outpatient space. ASC management companies can provide additional capital, operational expertise and experience mediating previous joint ventures.

5. Increased surgical specialization. "We are seeing hospitals targeting larger multi-specialty ASCs when they are looking for a partnership," Mr. Walline says. Often expanding the number of surgical specialties offered can help improve both efficiency and coordination of patient care, producing a more seamless patient experience.

Key factors in determining fair market value of contributions

Structuring and negotiating a joint venture between multiple partners requires diligence, good faith and a clear understanding of each entity's fair market value. When valuating an entity's contribution to a potential joint venture, participants must consider the value of each contribution as-is rather than the anticipated value it may produce post affiliation, known as synergistic value, Mr. Outcalt says.

"It's important to consider what each party is bringing to the table when looking at a business that is expected to be contributed to a newly formed joint venture," Mr. Outcalt says. "This means taking into consideration current patient volume and reimbursement, not the expected volume and reimbursement resulting from the joint venture."


Interest in joint ventured ASCs remains steady among hospitals, health systems and management companies. Hospitals buying or joint venturing with physicians in ASCs has been common practice for several years, but there are now a greater variety of ownership models available.

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