Since Medicare approved payments to ASCs in 1982, the number of ASCs has grown substantially. Further, as the number of procedures that can be performed in an outpatient setting has grown, the utilization of outpatient surgery centers has increased in recent years from 50.5 percent of total surgeries in 1990 to 65.9 percent of total surgeries in 2014, according to VMG Health’s “Multispecialty ASC Study Intellimarker 2017.”

Once the sustainable level of future cash flow has been determined, the cash flow is discounted to a present value utilizing a risk-adjusted discount rate. The risk factors considered when formulating a discount rate include potential regulatory changes, lack of physician diversification, financial leverage or debt, competition and case mix. To the extent an ASC can lessen the effect of these risk factors, the value of the ASC will increase.

Market Approach

The two primary methods under the market approach are the guideline public company (GPC) method and the mergers and acquisition (M&A) method. The GPC method employs the use of ratios developed from the market price of traded shares of publicly traded companies. The M&A method is based on transactions involving both public and private companies. Comparability is typically an issue when using the market approach, and it is important that adjustments are made for any differences between the subject ASC and the guideline companies. Under both methods, valuation multiples are determined from the market data and applied to the subject ASC. Multiples of EBITDA are most common, although in some cases multiples of revenue may be used as well. While current market data might provide good insight into how buyers and sellers are valuing interests in ASCs, the transaction data found in many of the available databases might be incomplete so it might be difficult to find companies that are sufficiently comparable to the subject ASC. As a result, the market approach is generally used as a supplementary method for valuing ASCs rather than as the sole or primary method.

Common Errors in ASC Valuations

There are many pitfalls to be aware of in ASC valuations. Some of the more common pitfalls are:

• Failure to understand key health care regulations
• Failure to understand ASC reimbursement
• Failure to understand local market conditions
• Unsupported growth assumptions
• Ignoring capacity constraints
• Failure to adjust for non-operating/non-recurring income and expenses.

Having a valuation professional who understands the nuances of valuing ASCs and has a good grasp of the regulatory environment is essential for avoiding these common pitfalls.

Conclusion

Any ASC considering a transaction will benefit from obtaining a fair market value appraisal. As ASCs continue to grow in popularity, there will be a continued interest in investments by both strategic and financial buyers. A valuation prepared by a credentialed valuation specialist will help buyers and sellers of ASCs withstand regulatory scrutiny.

Tami M. Bolder leads the Valuation & Litigation Advisory practice for the Northeast Ohio region of CBIZ MHM, LLC. Write her at tmbolder@cbiz.com.

The advice and opinions expressed in this column are those of the author and do not represent official Ambulatory Surgery Center Association policy or opinion.