National Surgery Centers touts itself as the nation's only pure-play, publicly traded operator of ambulatory surgery centers.
With 40 surgery centers in 14 states, the firm may be put into another form of play-one made by a larger healthcare company through merger or acquisition, according to Wall Street speculation.
The only other companies operating more surgery centers are hospital giant Columbia/HCA Healthcare Corp. and the Goliath of the rehabilitation provider business, HealthSouth Corp. of Birmingham, Ala.
But by being the only public company focusing solely on operating surgery centers, 8-year-old NSC has outdistanced potential competitors and maintained booming growth rather than worrying about being acquired. When the Chicago-based company releases its earnings this month, it will report net income of $12.5 million for 1997, an 80% increase over 1996, analysts say. The company's net revenues for 1997 were $102.7 million, a 32% increase from 1996.
"It's in our company's, our physician partners' and our shareholders' interest to keep doing what we are doing," says Timothy Geary, NSC's chairman, president and chief executive officer.
NSC's goals are to acquire surgery centers through equity joint venture partnerships with physicians. NSC manages the centers, providing capital for medical equipment and other infrastructure.
Other surgery center firms that have equaled or surpassed NSC's size have been gobbled by larger companies.
Two years ago, HealthSouth acquired Surgical Care Affiliates, which owned 67 surgery centers, for $1.2 billion in stock. In 1994, Columbia acquired Medical Care America, which had 96 surgery centers, in an $858 million stock swap.
Wall Street analysts have speculated that NSC might be acquired but believe its lack of competition from well-capitalized firms other than Columbia and HealthSouth offers ample growth opportunities. Not-for-profit hospitals provide competition, but NSC is partnering with them in a half-dozen markets across the country.
"It's a great business and has a really strong future," Geary says.
Surgery center business has become more attractive in recent years as Medicare reimbursement expanded to cover 2,200 procedures today from 1,200 in 1991. More than 60% of all surgical procedures are performed on an outpatient basis.
Nationwide, the ambulatory surgery center industry produces about $5 billion in annual revenues.
With the federal government's emphasis on lower costs, HCFA is considering expanding the list of outpatient surgical procedures covered by Medicare. Most HMOs and Blues plans already cover more procedures than Medicare does. Since the reimbursement climate is so promising, Geary expects other companies to enter the field.
But analysts thought NSC would see some competition seven years ago when Medicare began expanding the list of ambulatory surgery procedures. It was then that NSC got its start with an infusion of $20 million in venture capital from New York investment bank Welsh, Carson, Anderson & Stowe.
By fall 1991 NSC acquired its first center, Olympic Ambulatory Surgery Center in Bremerton, Wash., and never looked back.
Other start-ups weren't as successful, because the healthcare reform years of 1993 and 1994 caused venture capital investors to pull away from backing new companies, industry analysts say.
"There were about a dozen start-ups back then, but NSC was the only one to make it to the public market," says Peter Emch, a healthcare analyst with BT Alex. Brown in Baltimore.
In addition, other companies weren't able to follow through on operational successes although they acquired surgery centers and partnered with physicians.
"A number of folks have tried to emulate NSC, but they haven't been as successful working with surgeons," Emch says.
To maintain annual revenue growth of 25%, NSC targets six to eight centers for acquisition each year. Annual revenues for each center are typically $3 million to $4 million.
In 1996, NSC scored its first acquisition of a surgery center chain. Purchased for an undisclosed amount, Thousand Oaks, Calif.-based Endoscopy Centers of America hadn't been making its physicians happy.
"ECA had been in the development of surgery centers and was a good partner from a design, development and state licensure standpoint, but it was in the business in sort of a turnkey manner," says Thomas Deas, M.D., a gastroenterologist at Fort Worth (Texas) Endoscopy Center, one of eight centers that was owned by ECA. "It was not really managing facilities well."
Deas says Fort Worth's group of 10 surgeons was looking for more than just an investment partner.
When NSC came on the scene, it offered employees profit-sharing, 401(k) programs and continuing education seminars. "They take a nurse administrator to a couple of meetings a year and provide employees financial incentives," Deas says. "They provide a lot of good business principles. There was no corporate management before."
Financial partnerships with physicians could be a problem for a company like NSC because of federal probes into financial arrangements between physicians and healthcare providers.
Physician partnerships aren't pro-tected from government investigation. Federal law prohibits any form of remuneration in return for the referral of Medicare of Medicaid patients.
But legal observers often cite physician-surgery center partnerships as among the most secure for healthcare companies.
"It's one of the safest ventures," says Scott Becker, a healthcare attorney with Chicago-based Ross & Hardies.
The "Stark II" physician self-referral law, which took effect in January 1995, bars physicians from ownership interest in 11 types of healthcare facilities or services to which they refer Medicare or Medicaid patients. The law was sponsored by Rep. Fortney "Pete" Stark (D-Calif.).
"Surgery centers aren't a (prohibited) service according to Stark," Becker says.