Private equity firms upping investment in hospital ASCs

Private equity firms are increasingly investing in hospital-owned ambulatory surgery centers, allowing the companies to bankroll a growing sector while limiting regulatory scrutiny.

The sector is poised to expand as providers and patients more frequently choose the lower-cost setting over a hospital. The dynamic has attracted corporate investors for years.

Related: Why private equity-linked sales of physician groups have slowed

Interest in the joint ventures is picking up amid an aging population, more state and federal oversight and hospital outpatient care expansion plans, said healthcare advisers who oversee the deals.

“Private equity is looking at how they can partner with hospitals without taking ownership and running the whole enterprise,” said Richard Zall, a healthcare lawyer at law firm King & Spalding. “A lot of hospitals have come to understand that [private equity] can be a competitor but also a collaborator. As hospitals look at areas to diversify, ASCs are high on the list and [private equity] can be a valuable source of capital.”

The joint ventures often involve management service organizations — many of which are backed by private equity — taking a 49% share of a hospital-owned surgery center. Hospitals maintain operations and branding while leveraging investors’ capital and expertise to upgrade technology, hire clinicians and delegate administrative functions such as billing and claims management.

Some of the fastest-growing specialties within the ambulatory surgery center sector include orthopedics, cardiology, gastroenterology, obstetrics and urology. Private equity is focused on higher-acuity services such as cardiology, said Matt Brubaker, chairman and CEO of consultancy FMG Leading.

“They are looking in specialties that have consistent, repeatable procedures for certain segments of the population,” he said. “Most of the investors I know are looking at the margins rather than big change-of-control capital infusions because there are not as many of those deals to be done, it is still a fragmented sector and it is a proven wealth-creation play.”

Regulators also don’t scrutinize joint ventures as closely as transactions that change ownership, advisers said. While the Federal Trade Commission, Justice Department and state attorneys general seek to clamp down on certain healthcare deals involving corporate investors, joint ventures tend to fly under regulators’ radar, said Darren Buskirk, a director at consultancy Stax who focuses on private equity transactions.

“There are a lot of negative headlines about private equity in healthcare, which could make it more cumbersome for a PE firm to build its own, or buy, an ASC from a regulatory perspective," he said. “If the ASC is still under the hospital umbrella, the regulatory risk is much less severe.”

Hospitals are looking for financial support, a recently released survey shows.

More than half of 120 hospital, physician practice, pharmaceutical, biotech and medical device executives said their organizations have accepted private equity backing, are actively seeking it or are considering it. More than a quarter of respondents who weren’t considering private equity investment at the moment said they would do so in the future, noting the increased importance of private capital in the current landscape, according to the survey conducted by law firm Barnes & Thornburg in May.

“Hospitals are interested in private equity investment when they are making some kind of expansion play, particularly in underserved markets,” said Thomas Hutchinson, a healthcare lawyer at Barnes & Thornburg.

Technology advancements, along with the promise of quicker procedures and quality improvements relative to hospital stays, are expected to fuel the growth of surgery centers. The sector is projected to grow about 7% a year to $75.2 billion in 2030, up from $46.6 billion in 2023, according to estimates from Fortune Business Insights.

Private equity is eyeing that growth trajectory, as well as health system-owned surgery centers’ steady flow of referrals and ability to collect facility fees, industry observers said.

Unlike independent clinics that combine a doctor's fee and the cost of maintaining a practice into a single bill, hospitals often include additional charges for patients who receive care at hospital-owned clinics and ambulatory surgery centers known as facility fees.

Hospital-owned ambulatory surgery center joint ventures are poised to increase healthcare costs, said Dr. Paul Berggreen, a gastroenterologist at Arizona Digestive Health and president of the American Independent Medical Practice Association, who supports site-neutral payment policy that would eliminate facility fees. The association advocates for physicians operating under management services organizations, including those owned by private equity firms, as an alternative to health system and insurer employment models.

“These ventures give more firepower to those entities, driving up the total cost of healthcare with no corresponding increase in quality,” Berggreen said.

Health systems and private equity firms involved in ambulatory surgery center joint ventures did not return requests for comment.

State and federal lawmakers continue to try to limit hospital costs by proposing bills that would eliminate facility fees. But even if policymakers move forward with site-neutral pay legislation, hospitals and corporate investors will continue to invest in ambulatory surgery centers, experts said.

"There is a lot of upside," Buskirk said.