2010 saw a significant increase over 2009 in surgery center transactions. During 2010, the pricing of transactions tended to increase from 2009. This article provides examples of pricing seen in various transactions.
1. ASC mergers and acquisitions. McGuireWoods and myself helped surgery centers complete approximately eight different transactions in the last quarter of 2010. In the ASC sector, the pricing generally ranged from six to eight times earnings for majority interest transactions with a few outliers. An interesting trend is that half of these transactions involved hospitals acquiring surgery centers, and half were national companies acquiring surgery centers. Some of the specifics on pricing were as follows:
• Orthopedic-focused surgery center that was mostly in-network, national chain purchaser for approximately 7.3 times EBITDA.
• Multi-specialty center, heavily in-network, hospital purchaser, with no co-management agreement, approximately 8 times EBITDA.
• GI center heavily in-network, hospital purchaser, no co-management agreement, approximately 6 times EBITDA.
• Multi-specialty center, entered into co-management agreement as part of the transaction, some out-of-network, hospital purchaser 5.75 times EBITDA.
• Multi-specialty center, in-network, hospital purchaser, some co-management arrangement, approximately 7 times EBITDA.
• Multi-specialty orthopedic-focused center, mostly in-network, national chain buyer approximately 7 times EBITDA.
• Multi-specialty surgery center, some orthopedic and spine focus, in and out-of-network, national chain purchaser, for 5.65 times EBITDA
• Hospital purchaser, a very high multiple, mostly due to the fact that there was a significant drop in income in 2010 and 2010, was not indicative of continued income, approximately 9 times EBITDA.
Where the hospital is also entering into a co-management agreement with the physicians, there will often be a lower price due to the reduction of the expected earnings in connection with the payments for co-management services.
Pricing is higher where there is a strong probability of continued earnings, a strong physician base and the center is heavily in-network.
2. Hospital interest in ASCs. We continue to see a great deal of physician-alignment activity, and almost everybody is looking at new and emerging physician alignment models. While here has been a slowdown in the development of de novo joint venture ASCs, 2010 experienced an increase in hospitals acquiring a 100 percent interest in ASCs. We also saw an increase in national ASC companies trying to buy into hospital-physician joint venture ASCs.
3. Co-management. On the co-management side, we are seeing a lot of activity. For co-management arrangements around a hospital-owned surgery center, keep in mind the following:
• We see some of the co-management deals done as part of an acquisition of a surgery center. Co-management agreements need to be based on fair market value and they need to be truly needed. A high quality valuation firm needs to be able to support the fair-market-value nature of the agreement and the actual need for the agreement should be documented very closely internally. There is some skepticism that certain of the agreements are entered into to help tighten relationships or lock in referrals and not that they are truly needed for management purposes.
• These relationships are often fixed, in part, with a variable component as well. It is critical that the variable component not be based on or tied to volume or value of referrals. Finally, there are significant questions as to how to split up the dollars within the groups that are providing co-management services. Much of the dollars are often allocated to actual specific services provided by individuals that are part of the co-management group. Other dollars are often paid and split by the co-management entity as a whole for the overall services being provided. In each situation, the total dollars must not be based on the volume or value of referrals and the dollars allocated to any specific person may not be based on the volume or value of referrals.
4. Healthcare economics. Over the last few years, the healthcare economy has not seen significant dollars taken out of the economy. For example, 30-40 percent of the dollars, (i.e., the Medicare dollars) have been relatively stable. Further, the shift in unemployment — which has led to an approximately 2-3 percent increase in unemployment over the last five years — has not meant a complete a shift of 2 to 3 percent from commercial patients to Medicaid or no pay patients. Rather, a smaller fraction of that that has shifted payors and moved to a lower payment situations. The greatest reduction in reimbursement has come from the commercial sector, but it is less the day-to-day reimbursement and more the bigger ticket reimbursement that people are finding in certain situations that is no longer readily available. Thus, the overall amount of dollars being spent in the healthcare sector remains fairly stable. Within that, there are changes in practice patterns and changes in reimbursement that are shifting dollars between sectors. In terms of prognosis, we anticipate that the total number of dollars within healthcare will stay relatively steady over the next 3 to 5 years. There will be, however, continued shifting between sectors.
1. ASC mergers and acquisitions. McGuireWoods and myself helped surgery centers complete approximately eight different transactions in the last quarter of 2010. In the ASC sector, the pricing generally ranged from six to eight times earnings for majority interest transactions with a few outliers. An interesting trend is that half of these transactions involved hospitals acquiring surgery centers, and half were national companies acquiring surgery centers. Some of the specifics on pricing were as follows:
• Orthopedic-focused surgery center that was mostly in-network, national chain purchaser for approximately 7.3 times EBITDA.
• Multi-specialty center, heavily in-network, hospital purchaser, with no co-management agreement, approximately 8 times EBITDA.
• GI center heavily in-network, hospital purchaser, no co-management agreement, approximately 6 times EBITDA.
• Multi-specialty center, entered into co-management agreement as part of the transaction, some out-of-network, hospital purchaser 5.75 times EBITDA.
• Multi-specialty center, in-network, hospital purchaser, some co-management arrangement, approximately 7 times EBITDA.
• Multi-specialty orthopedic-focused center, mostly in-network, national chain buyer approximately 7 times EBITDA.
• Multi-specialty surgery center, some orthopedic and spine focus, in and out-of-network, national chain purchaser, for 5.65 times EBITDA
• Hospital purchaser, a very high multiple, mostly due to the fact that there was a significant drop in income in 2010 and 2010, was not indicative of continued income, approximately 9 times EBITDA.
Where the hospital is also entering into a co-management agreement with the physicians, there will often be a lower price due to the reduction of the expected earnings in connection with the payments for co-management services.
Pricing is higher where there is a strong probability of continued earnings, a strong physician base and the center is heavily in-network.
2. Hospital interest in ASCs. We continue to see a great deal of physician-alignment activity, and almost everybody is looking at new and emerging physician alignment models. While here has been a slowdown in the development of de novo joint venture ASCs, 2010 experienced an increase in hospitals acquiring a 100 percent interest in ASCs. We also saw an increase in national ASC companies trying to buy into hospital-physician joint venture ASCs.
3. Co-management. On the co-management side, we are seeing a lot of activity. For co-management arrangements around a hospital-owned surgery center, keep in mind the following:
• We see some of the co-management deals done as part of an acquisition of a surgery center. Co-management agreements need to be based on fair market value and they need to be truly needed. A high quality valuation firm needs to be able to support the fair-market-value nature of the agreement and the actual need for the agreement should be documented very closely internally. There is some skepticism that certain of the agreements are entered into to help tighten relationships or lock in referrals and not that they are truly needed for management purposes.
• These relationships are often fixed, in part, with a variable component as well. It is critical that the variable component not be based on or tied to volume or value of referrals. Finally, there are significant questions as to how to split up the dollars within the groups that are providing co-management services. Much of the dollars are often allocated to actual specific services provided by individuals that are part of the co-management group. Other dollars are often paid and split by the co-management entity as a whole for the overall services being provided. In each situation, the total dollars must not be based on the volume or value of referrals and the dollars allocated to any specific person may not be based on the volume or value of referrals.
4. Healthcare economics. Over the last few years, the healthcare economy has not seen significant dollars taken out of the economy. For example, 30-40 percent of the dollars, (i.e., the Medicare dollars) have been relatively stable. Further, the shift in unemployment — which has led to an approximately 2-3 percent increase in unemployment over the last five years — has not meant a complete a shift of 2 to 3 percent from commercial patients to Medicaid or no pay patients. Rather, a smaller fraction of that that has shifted payors and moved to a lower payment situations. The greatest reduction in reimbursement has come from the commercial sector, but it is less the day-to-day reimbursement and more the bigger ticket reimbursement that people are finding in certain situations that is no longer readily available. Thus, the overall amount of dollars being spent in the healthcare sector remains fairly stable. Within that, there are changes in practice patterns and changes in reimbursement that are shifting dollars between sectors. In terms of prognosis, we anticipate that the total number of dollars within healthcare will stay relatively steady over the next 3 to 5 years. There will be, however, continued shifting between sectors.