ASC Transactions:
Analysis & Valuation Trends
Chance Sherer, CVA
Senior Manager
Clinton Flume, CVA
Senior Manager
Presentation Overview
I.
Observation & Trends – Healthcare Market
II.
Observation & Trends – ASC Industry
III.
ASC Transaction Market
IV.
Valuation Trends
V.
What Does the Future Hold?
I.
Observation & Trends –
Healthcare Market
Current Market Observations

Current Macro Healthcare Trends

US healthcare spending is out of control
2012 Health Expenditures Per Capita
Norway
$9,055
Switzerland
$8,980
United States
$8,895
Luxembourg
$7,452
Denmark
$6,304
Australia
$6,140
Canada
$5,741
Netherlands
$5,737
Austria
$5,407
Sweden
$5,319
Belgium
$4,711
France
$4,690
Germany
$4,683
Iceland
$3,872
United Kingdom
$3,647
Italy
$3,032
Spain
Singapore
Greece
Portugal
$2,808
$2,426
$2,044
$1,905
World Health Organization National Health Account database (see http://apps.who.int/nha/database/DataExplorerRegime.aspx)
Page 4
Current Market Observations
Current Macro Healthcare Trends

Healthcare is currently 17.2% of GDP

Healthcare spending in the United States grew 3.7% in 2012, which is slightly greater than the increase in 2010

By 2020, national health spending is expected to reach $4.5 trillion and comprise 19.2% of GDP

Contrary to popular belief, healthcare spending appears to be slowing
National Healthcare Spending as a % of GDP
20.0%
18.0%
16.0%
14.0%
12.0%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2012
Page 5
Current Market Observations
Current Macro Healthcare Trends

In the chart below, year over year growth in healthcare expenditures is shown from 2000 to 2012.

Contrary to projections of out of control growth, healthcare expenditures are shown to be decelerating.
Percent Change in National Healthcare Expenditures
12.0%
9.7%
10.0%
8.5%
8.4%
8.0%
7.2%
7.0%
6.8%
6.5%
6.3%
6.0%
4.7%
4.0%
3.8% 3.8%
3.6%
3.7%
2009
2011
2012
2.0%
0.0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2010
Page 6
Current Market Observations

Healthcare is Headed in a New Direction
Fee-for-Service
Shared Savings / Value
Based Reimb. / Bundled
Payments
Physicians/Hospitals
Acting Independently
Physicians & Hospitals
Collaborating
ASC’s Operating
Independently
ASC’s Becoming Part of
the Continuum of Care
Strong Revenue Growth
Cost Containment &
Operating Efficiencies
More Facilities/Capacity
More Efficient
Facilities/Consolidation
Page 7
II.
Observation & Trends –
ASC Industry
ASC Industry

State of Industry – Two Observations:
1)
Trends consistent with a mature industry
2)
Possible revival of de novo development

Recovery in volume post-recession was short-lived – signs of
weakness in same center volume trends

Continued managed care and Medicare reimbursement
pressure

Uncertainty regarding healthcare reform’s long-term impact on
ASCs
Page 9
ASC Industry

All Signs Point to a Mature ASC Industry
Growth in ASC
Development has
Leveled Off
Same Center Growth
has
Flat-Lined
ASC Supply Exceeds
Physician Demand in
Most Markets
Significant Capacity at
Many ASCs
Growth in Observed
ASC Mergers &
Consolidation
Initial Stages of
Consolidation among
ASC Management
Companies
Page 10
ASC Industry

Slowdown in government ASC payments and new ASC
construction point to a mature market
Medicare ASC Payments and Certified ASCs, 2000-2011
6,000
$4,000
$3,500
5,000
$3,000
4,000
$2,500
3,000
$2,000
$1,500
2,000
$1,000
1,000
$500
0
$0
2000
2001
2002
2003
2004
2005
2006
2007
Medicare ASC Payments (in millions)
2008
2009
2010
2011
2012
Certified ASCs
Page 11
ASC Industry

Rebounding of OR Utilization From Dip in 2009
From 2007 to 2009, OR
utilization declined by 16%
before rebounding 15% from
2009 to 2011. Utilization
appears to be leveling off.
Median Cases per OR per Day
3.2
3.1
3.0
2.9
2.8
2.7
2.6
2.5
2.4
2.3
2007
2008
2009
Source: VMG Health Intellimarker ASC Benchmarking Study
2010
2011
2012
In many markets, we are seeing
a revival of ASC de novo
development – perhaps leading
to decline in capacity utilization
Page 12
ASC Industry

Current Focus – Implementing Operational Efficiency
Staff Hours Per Case
De-Leveraging: Debt/Total Assets
60.0%
16.0
14.0
14.9
12.0
50.0%
14.0
10.0
10.4
11.0
8.0
10.0
11.0
40.0%
44.8%
49.0%
35.0%
30.0%
6.0
31.8%
31.8%
27.4%
20.0%
4.0
10.0%
2.0
0.0%
0.0
2007
2008
2009
2010
2011
2012
2007
2008
2009
2010
2011
2012
Source: VMG Health Intellimarker ASC Survey
Observed a slight decrease in staffing efficiency in 2012, largely a result of decrease in
same center volume trends.
Page 13
ASC Industry

Current Macro Healthcare Trends

Supply of new physicians will likely not meet demand
Page 14
ASC Industry

Current Macro Healthcare Trends

Aging physician demographic will further limit recruitment & volume
Age 45 and over
Age under 45
Number of Physicians (Thousands)
Demographics of the Physician Workforce
650
600
550
500
450
400
350
300
250
200
150
100
50
0
50
100
150
200
250
300
350
400
Age Group
1980 – Approx 20%
over Age 55
65 & Over
55-64
45-54
1990 – Approx 30%
over Age 55
35-44
Under 35
1980
1990
2000
2012 – Approx. 43%
over Age 55
2012
Source: “Physician Characteristics and Distribution in the US” by American Medical Association
(2011 Edition)
Page 15
ASC Industry

Hospitals have ramped up physician employment to build integrated networks
2000
2012
Hospital Based,
25.3%
Hospital
Based,
18.7%
Office
Based,
81.3%
Office Based,
74.7%
Source: American Medical Association
Page 16
ASC Industry

ASCs and Physician Owned Hospitals (“POHs”) rely on the same
physician investor pool

Growth in ASCs and POHs has far exceeded growth in the physician pool
2-3% Annual
Growth in
Eligible Drs
Number of Eligible Physicians per ASC
40
35
30
25
20
36
32
31
29
26
23
21
20
19
19
19
19
18
>40% Decline
In Eligible Drs
Per ASC/POH
15
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Page 17
ASC Industry

What to Expect in a Mature Industry Environment?
Attracting Physician Investment & Volume will
be the
Greatest Challenge
Increase in ASC
Mergers & Limited ASC
Failure
Increased Involvement
of Hospitals in
ASC Industry
Expected Return for ASC
Investors will be
Moderated
Existing ASCs will need to
Focus Efforts on
Implementing Efficiencies
Page 18
III. ASC Transaction Market
ASC Transaction Market

In a Mature ASC Market, Who are the Buyers?
Acute Care
Hospitals
ASC
Management
Companies
Competing
ASCs
- Broader
consolidation trend
- Interested in
expanding existing
market presence
- Merger Scenarios
-Easy reimbursement
arbitrage
- JVs w/ Hospitals
- Successful ASCs
absorbing struggling
ASCs
Physician
Owned
Hospitals
- Limited, Niche
expansion play
- Limited by Capacity
/ Ownership
Restrictions
- Goals of Cost
Reduction
Page 20
ASC Transaction Market

The ASC Market Continues to Evolve…
De Novo
Development
Management /
Development
Company JVs
Hospital
Acquisition /
JVs
New Wave of
De Novo
Development?
Page 21
ASC Transaction Market
 ASC Acquisition History
Merger&
& Acquisition
Acquisition Trends
Merger
Trends
30
30
25
25
20
20
15
15
10
10
5
5
0
0
2007
2007
2008
2008
2009
2009
NOVAMED
SCA
USPI
2010
2010
USPI
AMSURG
2011
2011
AMSURG
2012
SCA
2012
2013
2013
NOVAMED
Page 22
ASC Transaction Market

Consolidating ASC Market:
Graymark acquisition of Foundation Healthcare – 21 Centers
USPI acquisition of Titan Health Corporation – 14 Centers
Amsurg Corp. announces acquisition of National Surgical Care – 18 Centers
Surgery Center Holdings, Inc. (Surgery Partners) acquisition of NOVA – 37 Centers
Sunlink Health merger with Foundation HealthCare – 15 Centers
USPI acquisition of HealthMark Partners – 14 ASCs
SCA acquisition of Health Inventures – 20 Centers
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Hospital Transaction Market
 Hospital M&A activity has been driven market consolidation, healthcare reform
initiatives and cheap capital
 Activity has steadily risen over the last 5 years and was exceptionally high in 2012
 The number of large, multi-site “chain” transactions has risen
 While the number of deals seems to have decreased in 2013, the number of
hospitals and beds involved in transactions hit a 5-year high, mainly driven by two
very large mergers
Hospital Merger and Acquisition Trends
120
107
109
103
100
91
81
85
85
89
92
84
80
68
60
60
40
20
0
2002
2003
2004
2005
2006
2007
2008
Number of Deals
2009
2010
2011
2012
2013
Page 24
ASC Transaction Market

Buyers are Keenly Aware of Their Own Company Valuations

Both publicly traded and private companies are keenly aware of their Wall Street value
Page 25
ASC Transaction Market

Hospital Share Prices Reflected the Good News from the Passage of the Healthcare Law

ASCs continue to have strong performance against the S&P regardless of Healthcare Reform
Page 26
ASC Transaction Market

Demand for Acquisitions is High

Frothy stock market – particularly for healthcare

Need for ASC management companies to exhibit growth

Diminished ability to pursue growth through de novo development

Same center performance does not provide growth investors expect

Market consolidation strategies are being pursued aggressively

Hospitals are joining management companies in the buyers market

ASC attracts significant interest from private equity due to their high cash flow
generating ability
Page 27
IV. What is the Current Value of ASCs
How is Valued Measured
Valuation Methodologies
 Cost Approach
 Provides a Floor for Value – Tangible Assets +
Identifiable Intangibles
Valuation Impact – Last 12 Months
Stable
 Income Approach
 Discounted Cash Flow Value – Measure Future
Benefits of Ownership
 Market Approach
 What are Transaction Values of Comparable
Companies
Up
Fair Market Value Opinion should Consider these Three Approaches to Value – the forces
driving these approaches are dynamic
Page 29
Income Approach

Keys to Value

Future Cash Flow – The ability of the ASC to generate cash flow to the investor
after all operating expenses, capital requirements, and debt service

Risk – The likelihood of projected levels of cash flows realized given the operating
and strategic environment under which the ASC operates
Valuation is not a one-size fits all – each ASC has unique growth and risk
characteristics
Page 30
Income Approach
 Primary Factors Affecting Future Cash Flow
Market
Patient
Demographics
Historical
Performance Trends
Case Mix /
Service Line
Mix
Ownership
Flexibility
Facility
Capacity
Historical
Recruitment
Efforts/Ability
Payor Mix –
Mgd Care
Strength
Growth
Potential
Page 31
Income Approach
 Primary Factors Affecting Risk
Out-of-Network
Reliance on
Exposure
Non-Owner Physicians
Financial
Leverage
(Debt
Load)
Legal /
Partnership
(Non-Compete)
Facility & Equipment
Age /
Condition
Physician
Diversification
Barriers
to Entry
(CON)
Service
Line
Diversification
Market
Competition
Healthcare
Reform
Stable Past
Performance
(Longevity)
Page 32
Observed ASC Valuation Trends
ASC Valuation Trends as Multiple of EBITDA
8.0
Acquisition
Multiples have
widened and
trended up slightly
in last 1-2 years
Control Multiples
Control Multiples
7.0
6.0
5.0
Minority Multiples
4.0
Minority multiples
have Declined and
Widened
3.0
2.0
1.0
0.0
2005
Present
Page 33
ASC Market Transaction
Minority Level ASC EBITDA Multiples
Out-of-network minority
4.0x
3.0x
valuation multiples have
2.0x
declined until recently.
1.0x
(2012, little misleading)
0.0x
2007
2008
2009
Minority Out-of-Network
2010
2011
2012
Minority In-Network
Control ASC Transactions
6.5x
Out-of-network control level
6.0x
transactions and their valuation
5.0x
multiples have declined over the
last six years.
5.5x
4.5x
4.0x
3.5x
3.0x
2007
2008
2009
Control Out-of-Network
2010
2011
2012
Control In-Network
Page 34
IV. What Does the Future Hold
Reform and The Affordable Care Act
HOPD / ASC Payment
Equalization
The Affordable Care Act
- Individual Mandate
- Health Insurance Exchanges
Page 36
Reform and The Affordable Care Act
 In June 2013, MedPAC called for payment equalization between HOPDs
and physician offices and ASCs for certain procedures
 In April 2014, the OIG recommended that CMS reduce OPPS payment rates
for ASC-approved procedures on beneficiaries with no-risk or low-risk
clinical needs in outpatient departments
 Under this recommendation, OP departments would continue to
receive the standard OPPS payment rate for ASC-approved procedures
that must be provided in an OP department because of a beneficiary’s
individual clinical needs
Assuming that total outpatient volumes continue to grow, payment equalization may push
utilization to low cost facilities, such as ASCs and physician offices
Page 37
Reform and The Affordable Care Act
Rising premiums and deductibles may decrease utilization for procedures however push
volume to lower cost settings like ASCs

Insurers have vowed to raise premiums for small businesses and selfinsured individuals
•
UnitedHealth, Aetna, and the Blues have all cited premium increases of 25%-116% for
20141

Because of higher costs, small employers may drop coverage and pay
mandate penalties

This may cause consumers to adopt higher deductible, lower premium
plans
Page 38
Reform and The Affordable Care Act
Consumers may already be changing behavior
“So as you look at the trends over the past few years, you do see more of a shift towards the latter half of the year on
the commercial book of business in the outpatient segment. So can you attribute all that to deductibles and co-pay?
Possibly.”

- Samuel N. Hazen, President of Operations, HCA, on sluggish first quarter outpatient volumes
Private insurance rates continue to climb:
Page 39
Conclusion – Uncertainty is Certain

What Do We Know…Short Term
Volume Retention will be Difficult: Recruiting and retaining physician investment
will be single greatest challenge
Competitive Share Price
Succession Planning
No dead weight in partnership
Enforce Non-competes
Poach from competition
Form relationships with hospitals
Reimbursement Challenges: Despite ASCs status as low-cost provider for
outpatient surgery, material growth in reimbursement should not be counted on
Evaluate Contracts
Seek Affiliation with Hospitals
Pursue Higher Acuity volume
Know Profitability of Procedures
Need to for ASCs to educate themselves on shared-risk (semi
capitated) reimbursement models
Page 40
Conclusion – Uncertainty is Certain

What We Think We Know…Long Term
Market Consolidation: Dominant health systems and payors will likely be in the
driver’s seat…need to assess your specific market
Changing Healthcare Delivery Models: Network Affiliations between Health
Systems and Payors will narrow – ASCs will need to find a way to “fit in”
The ASC industry was founded by entrepreneurial and fiercely independent
physicians…..pursuit of stubborn independence moving forward could leave those
ASCs on the outside looking in.
ASC management must be proactive in assisting their individual physicians and
physician groups navigate and find their role in the healthcare delivery network
There may be an eventual need to look at your ASC as a provider in a broader
network, not as a primary surgical site for a handful of specific surgeons.
Page 41
Questions?
Chance Sherer, CVA
Senior Manager
ChanceS@vmghealth.com
214.369.4888
Clinton Flume, CVA
Senior Manager
ClintonF@vmghealth.com
214.369.4888
Page 42