What the ACA Could Mean for ASCs

In 2013, the Affordable Care Act (ACA) saw the light of day. With new regulations being implemented, it’s inevitable that the ASC market falls into the realm of industries affected. Will the results of the ACA lead to an opportunistic climate for owners of ASCs hoping to sell in the near future?

Looking to last year for signs of what’s to come will be helpful for owners and physicians seeking to make changes throughout the course of the coming year. Furthermore, with 2014 already off to a promising start, the repercussions of the ACA along with other developing trends should be kept in mind as 2014 unfolds.

2013 and Affordable Care

Making agreement According to Carol Lucas, a shareholder at Buchalter Nemer, the effects of the ACA on M&A activity to the ASC were relatively limited as of last year. Nevertheless, some indirect effects will be seen.

“[The ACA] provides some impetus on the seller side because there are concerns about declining reimbursement,” Lucas said. “Also, because the ACA shut down physicians’ ability to invest in hospitals, it reinforced their interest in ASC ownership.”

Other factors that contributed to setting the M&A activity of 2013 apart from years past include a noted increase in patient volume for the ASC as well as a bit of recovery continuing on from the recession. In the opinion of Dr. Greg Horner of Tri-Valley Orthopedic Specialists Inc., these influences, along with the activity of the ACA, resulted in a period of time that served well for consolidating any out-of-network business.

strong hospital health system as threat to ambulatory surgical centerIn respect to M&A, Lucas noticed a trend in 2013 of health systems acquiring a majority interest in physician-owned centers.

“Health systems are partnering with specialty surgery center operators and are acquiring surgery centers while leaving physicians with a 49% interest to keep them invested in the center’s success,” she said. “As this happens, the multiples paid in these deals are increasing, although they are deceptive.”

In this scenario, the market value of the individual ASC is misleading due to the smaller stake in the center held by the physician.

According to attorney Matt Burnstein of Waller Landsen Dortch & Davis, this allows the health system to thereby acquire higher reimbursement.

“We are seeing large investor-owned hospital companies taking this approach as well as not for profit health systems,” he said.

As 2014 moves along, the increase in patient volume for ASCs can be expected to continue, according to Dr. Horner. This will be a result of insurance plans that involve higher patient responsibilities.

“People are shopping and looking for ways to save money,” said Dr. Horner. “We will see an exponential growth in patients shopping for high quality and affordable care.”

2014 is poised to be promising as a result of a drift toward high-deductible insurance plans.

“Some of the policies look like good ones if people can afford them,” Dr. Horner said. “Those people selecting high deductibles who are healthy or younger will have the opportunity to seek high quality, affordable surgery centers. These types of centers will see the increase in volume.”

Threats and Opportunities

Some of the bigger changes to be wary of will be in reference to network contracts with insurance companies.

“Out-of-network opportunities are going to vanish faster than in previous years,” according to Dr. Horner. “This will cut down on those using the out-of-network model.”

On the other hand, Lucas sees a possible prospect for ASCs to form better contracts with insurance companies.

“Payors are becoming increasingly aggressive in their dealings with out-of-network ASCs,” she said. “This may result in ASC’s ability to negotiate more favorable contracts.”

In Dr. Horner’s opinion, the biggest opportunity for ASCs will lie in that increase in patient quantity.

“The rapid up-phase in volume will be in 2014 when people are signing up for new insurance plans,” Dr. Horner said. “ASCs should take advantage and prepare for that volume. You won’t realize the volume if you don’t have some way to get the word out, and physicians have to be active in doing so.

With the development of a more competitive environment, Burnstein notes that, “Physicians have decreasing appetite for the incredible investment of money and expertise to launch a venture.” This is where ASC management companies can and will come into play.

“Where physicians may have been reluctant to involve third party management companies before, they’re increasingly seeing the value of the domain expertise and deep benches these management companies bring to the table,” he said. “I see more of all of this in 2014.”

These companies will see more opportunities for growth so long as they are able to perform efficient and effective billing and reporting, according to Lucas.

“I think it is important for them to compete on quality, by which I mean not try to lock ASCs into long-term contracts that are difficult to terminate,” Lucas said.

Signs to Sell 

With patient volume levels going up and offers coming to the table from larger health systems, 2014 could be the year to sell for many ASCs. In order to do so successfully, owners should look for the right offers while keeping in mind the condition of their practice. According to Dr. Horner, the time to sell is when things are good.

“It would be a good time to sell a center that has peaked out in its volumes, and that has great contracts in place to be a high quality care center,” he said. “The next level would be working with a larger management company.”

Mergers will also be a trend in 2014, as some ASC’s will move to combine, for example, two centers in the same market.

“[These centers] will move to the better facility, shutter the other, and achieve better economies of scale,” Burnstein said. “One consequence of PPACA is the continued push to cost-management, including efforts in episodic risk and bundling, which should present opportunities for ASCs to participate in alignment efforts such as ACOs and payment bundling.”

Dr. Horner predicts 2014 will be a good time for management companies to look to selling options as well.

“[The companies] that are small may consider this the best time to get bought or to merge,” he said. “That’s because at this time debt remains cheap and the future is very bright for this industry.”

With many unknowns still to come as a result of the ACA, preparation will be the main key to success in 2014. Nevertheless, public opinion of the ASC market holds strong, a promising element that should be cultivated.

“The ASC IPO is viewed very positively, as have been recent results of the public ASC operators,” Burnstein said. “A couple of deals in the space that confirm the market’s view of the health and prognosis of the sector would boost the sentiment higher.”

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