High-Growth Specialties and the Impact on ASC Valuation

The fair market value of ambulatory surgery centers (ASCs) is significantly influenced by high-demand specialties. Today, ASCs aligned with certain specialties that demonstrate high outpatient surgical case growth combined with premium reimbursement levels are leading to top-of-market valuations, a characteristic particularly attractive to investors.

A closer look at the ASC industry reveals that specialty diversification is a common strategy for large-scale operators. However, there is a particular emphasis on future investing in ASCs with a high-growth surgical case offerings. This strategic focus is setting a new standard for valuation premiums in the ASC market.

By the Numbers

For example, Surgery Partners, Inc, (SGRY), the largest pure-play publicly traded ASC operator in the county, has focused on high-growth outpatient surgical specialties such as cardiology and orthopedics. Its approach to other traditional specialties like gastroenterology and ophthalmology remains inclusive with a steady exposure. Growth trends observed by Surgery Partners are largely indicative of the direction of the broader ASC industry.

Source: Surgery Partners 42nd Annual J.P. Morgan Healthcare Conference Presentation

• For Surgery Partners, cardiology is growing the fastest at a 13.6% annual increase since 2019. This is likely due to a low base from which to calculate the Compound Annual Growth Rate (CAGR) since interventional cardiology is relatively new and expanding. Cardiology-related cases are driven by both organic growth in clinical demand as well as a shift toward outpatient and out-of-hospital care setting.
• Ophthalmology and gastroenterology, more traditional ASC specialties, are still growing at an accelerated rate. Common procedures within these specialties, such as cataracts and colonoscopies, represent highly reliable growth as most older Americans will have multiple colonoscopies and at least one cataract procedure.
• Surgery Partners’ orthopedic volume growth appears modest at 5.1% per year. However, reimbursement for these cases is high (e.g., total joint replacement) and the number of eligible orthopedic cases in the ASC setting continues to expand.

Top Trends in ASC

Surgery Partners management recently identified the following trends in the ASC setting:

• Musculoskeletal remains the highest growth, most financially attractive specialty.
  • Total joint replacement procedures saw a 95% CAGR from YTD Sept 2019 to YTD Sept 2023.
  • 80% of Surgery Partners facilities conduct orthopedic procedures.
• Cardiology is in the early stages of transitioning to ASCs.
• Ophthalmology and GI are experiencing consistent annual growth.

Industry Voices Speak to High-Growth Specialties

During Surgery Partners’ Q3 2023 earnings call, CEO Eric Evans reiterated, “You should see that mix continue to change. Now that doesn’t take away from the fact – we love our GI business; we love our Ophthalmology business. They are great businesses. But when you think about our ASCs, think about denovos for example, almost all of them are ortho or cardio based.”

Other leading voices in the industry echo similar sentiments, with Kristen Richards, regional vice president of Cardiovascular Operations, recently saying, “It is estimated that by 2030, more than 80% of all hospital outpatient department cardiovascular procedures will be added to Medicare’s CPL [Covered Procedures List] and shifted to ASCs.”

Health Care Valuation Takeaways

• ASCs that focus on GI and ophthalmology will continue to command good valuations, based on evidence of stability and reliability in the revenue stream. To the extent the ASCs are located in areas with an increasing 65+ population and have a healthy physician partnership, these centers can expect to expand faster than the broader local population due to higher service demand in the aging population (a cohort growing faster than the general population).
• ASCs that focus on cardiology and orthopedics are benefiting from case volume exiting the hospital setting. Since growth is a significant component that drives valuation, ASCs with strong physician alignment in cardiology and orthopedics can expect a premium valuation multiple.

Weaver’s Valuation team is here to support businesses as they navigate the evolving landscape of ASC valuations. Contact us to learn more about working with Weaver’s team of valuation professionals. We are here to help.

Authored by Connor Campbell and Luke Peron

©2024