Surgery Outmigration Driving Elevated Valuation Multiples in the ASC Segment

Recent Transactions Signal Significant Future Transfer of Inpatient Cases

In 2021, the bellwether transaction in the ambulatory surgery centers (ASC) segment was the purchase by United Surgical Partners International (USPI) of nearly all of the SurgCenter Development (SCD) ambulatory surgery centers, adding 86 mature and de novo centers primarily focused on musculoskeletal surgical cases. Tenet Healthcare management estimates the purchase will add $275 million in fully ramped adjusted EBITDA by years three and four.

According to Scope Research, the SCD transaction was priced at 10.8x of year one EBITDA less non-controlling interest. USPI’s willingness to apply this multiple to future EBITDA reflects confidence in their ability to execute on growth initiatives given their differential management capability and negotiating strength with payers. More importantly, the valuation multiple implicitly expresses their confidence in the industry’s outlook regarding the outmigration of surgical cases.

By the Numbers

As illustrated in the chart below, estimates of future outpatient surgery migration suggest that ASC industry revenue and profits could significantly increase in the future.

Source: Surgery Partners Inc. Investor Presentation – January 2022

• As of 2018, Surgery Partners Inc. (SGRY) estimated that $58 billion (or 25%) of the $230 billion payments for surgical inpatient procedures have the potential or likely ability to shift to the outpatient setting. These payments are associated with 3.6 million (or 40%) of 2018 inpatient procedures.
• Of the $58 billion inpatient payments that could potentially migrate to the outpatient setting, SGRY estimates 75% as likely to move and 25% as having potential to move in the near future.

Yes, But…

With the significant potential for future surgical migration to the outpatient setting, the high valuation multiples observed in bellwether transactions may be justified. However, not all independent ASCs will benefit from these headwinds to the degree of the larger operators.

• Available and independent surgeons required to take advantage of the outmigration trends are scarce. Their training and skillsets will be in high demand for all existing and future ASC partnerships. Securing and collaborating with the right specialties in the right locations to take advantage of the outmigration trends may be operationally challenging for ASC operators.
• Staunch competition will exist for these cases from health systems. Because outmigration is inevitable, health systems will continue to move quickly to employ or affiliate with physicians and staff with the unique training and skillset to perform these cases. These cases will then be directed to ASCs where health systems have an ownership stake.
• Due to the finite nature of surgeries in general, large ASC operators may face cannibalization (and political) issues of growing within market at the expense of other alignments. 

Health Care Valuation Takeaways

• The outmigration trend is an extraordinary future growth opportunity for the ASC industry. This trend will lead to higher volume, revenue, and profits for the industry and helps justify elevated transaction multiples in the space.
• Individual ASCs may not have the ability or the specialized knowledge and training to take advantage of these opportunities. Their valuations will likely be based on historical status quo performance, with resulting EBITDA multiple implications.
• Regardless of the favorable outmigration trends, significant headwinds continue to exist in the industry related to ASC partnership succession, given the lower availability of independent physicians.

Dig Deeper

• ASC Partnerships Face Succession Challenges

For information about ASC partnerships, contact us. We are here to help.

© 2022

This is one in a series of related health care valuation posts:

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• Expanding Supply of Urgent Care Centers Create FMV Considerations
• Behavioral Telehealth Growth May Mean Opportunities for Inpatient Operators
• The Future of US Health Care Profits
• Hospital Expense Statistics Illustrate Significant Labor Pressures
• Hospital Earnings Supported by Fewer Uninsured Patients
• Health Care Services Transaction Volume Declines Below Pre-Pandemic Levels