The fragmented ambulatory surgery center sector is ripe for consolidation and likely will see more such activity soon, thanks to Tenet Healthcare Corp.'s recent deal to buy United Surgical Partners International.
Dallas-based Tenet has been ahead of the game in building its outpatient business portfolio, but other providers could soon follow, experts said. USPI competitors AmSurg and Surgical Care Affiliates in particular could be potential targets.
“It's not a question—they have to,” said Blayne Rush, president of Ambulatory Alliances, an investment banking and mergers and acquisitions firm. “We're going to see more and more of these types of deals.”
“Everything I'm seeing is pointing to that direction,” agreed Joan Dentler, CEO of Avanza Healthcare Strategies, a consulting firm on outpatient and population health strategies. “The hospitals taking aggressive stances and aggressive acquisition strategies are going to continue to do that.”
The pressure on hospitals is coming primarily from insurance companies that want to move patients into lower cost-care settings, Dentler said. But consumers themselves “don't want to go into the maze of the hospital for non-acute surgeries,” she added.
A total of 65% of hospital revenue is now coming from outpatient services. Providers are seeing 10 outpatients for every inpatient, according to data from Avanza.
A number of parties are interested in buying ambulatory surgery centers, including major players looking to expand their market share, physician practice groups that want to capture referrals and hospitals seeking to create outpatient centers within a 30- to 40-mile radius of their acute-care campuses, Rush said.
Outpatient care is a central part of the “Triple Aim”—or better health, better patient experience and lower cost—that health systems are trying to achieve under healthcare reform, Rush added.
Still, “Some of the bigger health systems are sometimes late to game,” he noted.
Independent ambulatory surgery centers comprise the largest share of the $24 billion ASC market at 63%, according to an investor presentation from Tenet. The two largest standalone companies, USPI and AmSurg, each have 4%, while hospitals operate 13% of facilities. HCA's ambulatory surgery center division has 2% of the market while Tenet currently controls 1% of centers.
Tenet began moving rapidly into outpatient care about five years ago, Rush said, as it realized that ambulatory surgery centers offered more attractive rates and lower overhead.
The company, which operated 67 outpatient centers in 2009, had as many as 200 centers as of the third quarter of 2014.
Yet the most unusual part of the deal is that Tenet chose a company that operates its surgery centers in partnership with health systems and physician groups, observers said. “Are they now in bed with a hospital (chain) that they see as a competitor in some way?” Dentler said.
USPI CEO William Wilcox emphasized in an interview that its hospital partners have been supportive of the transaction. “Nothing changes for them at the partnership level,” he said.
In addition to moving into the outpatient market, Tenet has been pursuing more deals that are structured as joint ventures with larger not-for-profit systems, rather than traditional takeovers. This strategy allows it to expand its geographic reach and partner with systems in a position of strength—as opposed to financially distressed hospitals, executives said on the company's most recent earnings call.
Tenet also can trade on its partner's market clout, brand awareness, physician relationships and higher margin potential, Darren Lehrich, an analyst at Deutsche Bank, said in a note to clients. Those factors compensate for the fact that Tenet might have only a minority stake in the transaction and isn't getting the full financial benefit that would be seen in a takeover.
A key part of the strategy for Tenet and USPI also will be to purchase other ambulatory surgery centers in the fragmented market.
But they're likely to face competition. “I know that there are hospital systems thinking of buying small surgery centers,” Dentler said.
Tenet said Monday that it planned to merge its ambulatory surgery assets into a joint venture with USPI. The chain will pay $425 million to own 50.1% of the combined assets, while USPI's owner, private equity firm Welsh, Carson, Anderson & Stowe, will hold the remaining 49.9% stake. Tenet plans to assume full ownership of USPI over the next five years.