After a half-decade of uncertainty, clear trends are beginning to emerge in the U.S. healthcare system: the number of insured Americans continues to rise, patients are paying out-of-pocket more often for services and many doctors are giving up traditional private practice in favor of a variety of alternatives. For healthcare businesses, these new realities mean the strategies of the past are often obsolete. In a recent news report, Barclay’s analyst Joshua Raskin said 2014 marked “the biggest shift in healthcare since the creation of Medicare and Medicaid in 1965.” His rationale? “We’re seeing a clear movement to outpatient services,” said Raskin, echoing a dynamic that’s familiar to all of us in the ASC industry. Evidence of the changing landscape is everywhere. Last summer, AmSurg Corp., which operates more than 235 ASCs across the nation, completed its $2.35 billion acquisition of physician-services provider Sheridan Healthcare, creating a highly complementary, combined company that’s well positioned to capitalize on the national shift towards outpatient care. Meanwhile, Wyoming lawmakers in January debated whether ASCs should be allowed to provide extended convalescent care after joint replacements. The measure failed in committee — but only by one vote. 2015 is expected to bring even more exciting ASC industry developments. Here are the three main areas to watch: 1. The Stock Market Overall, publically traded companies in the United States performed at historic levels in 2014, as a recovering economy, healthy cash reserves and other factors pushed stock prices up across many industries. Healthcare firms have performed particularly well over the past year, outpacing the S&P 500 by more than double. According to Fidelity, healthcare sector stock prices rose an average of 27.1 percent during the past year, compared with 13.4 percent for the index, considered the broadest measure of stock market performance. Publically traded ambulatory surgery center management companies also performed well in 2014. AmSurg’s stock reached an all-time high by the close of 2014, while Surgical Care Affiliates, which operates 185 ASCs and hospital-based surgical facilities, finished 2014 only 10 percent off its all-time high share price. With more than 150 hospitals and 100 ASCs, HCA Holdings, Inc., also reached an all-time high in 2014. How well will ASC-related healthcare stocks perform in 2015? That remains an open question. What is certain, however, is that a well-performing stock market will mean higher earnings multiples, more attractive mergers and acquisition targets, and more consolidation in the ASC space. 2. M&A activity Overall, consolidation in the healthcare industry is expected to remain brisk in 2015. According to Moody’s research, small hospitals this year will continue to be attractive targets for large hospital systems, as “the larger, for-profit operators HCA, Tenet and Community are likely to continue looking for targets that fill out existing markets or provide opportunities to enter new ones.” “Hospitals in general will continue to benefit from a reduction in the number of patients without health insurance as the Affordable Care Act continues to gain traction,” Moody’s stated in January. Among the nation’s 5,000 community hospitals, however, consolidation in 2015 is expected to be uneven across broad segments of the industry. Rural community hospitals, in particular, face unique challenges in the post-ACA landscape that often leaves them with only two options: change business models or merge with other facilities. Here’s why: According to American Hospital Association data, the nation’s roughly 72 million rural residents are older, sicker and poorer than Americans who live in urban and suburban areas. Hospitals in rural areas – which make up half of all inpatient facilities in the United States — also are considerably smaller than their urban counterparts: Almost half of all rural inpatient facilities have 25 or fewer beds and only 4 percent of rural hospitals in the United States have 200 beds or more. Taken together, these dynamics are forcing rural facilities to chart a different course in order to keep their doors open. According to the AHA, “with fewer patients over which to spread fixed expenses, costs per case tend to be higher” in rural facilities, which only adds to the difficultly in an era of shrinking reimbursements. “Smaller size also translates into a financial position that is much less predictable, complicating long-range financial forecasting and contingency planning,” the AHA stated. Among publically traded ASC management companies, low same-store growth is expected to increase M&A activity in 2015. For example, in its most recent quarterly statement, SCA reported that “same site system-wide case volume increased 2.1%,” while AmSurg reported a “same-center revenue increase of 1% for ambulatory services” in its most recent quarterly report. With same-store growth flat, ASC companies with healthy balance sheets are expected to be on the lookout for well-located, independent, multispecialty ASCs that can increase their caseload. Two large publically traded companies that manage ASCs, AmSurg and HCA, both have P/E ratios – 26.78 and 16.94, respectively — that would allow them to create significant value by acquiring independent ASCs that fit into their existing portfolios. 3. Innovative recovery and contracting strategies As many companies realized in 2014, there are limits to conventional cost-cutting methods when attempting to trim healthcare costs. Some employers are turning to wellness programs, high deductible plans and leaner benefits, while others are dropping coverage altogether and encouraging their employees to fend for themselves on the state-based exchanges. Many are trying different approaches, including direct employer contracting with ASCs. By negotiating prices directly with leading ASCs across the country for common surgical procedures, employers are able to better manage – and even reduce — their healthcare costs, while employees are able visit out-of-network specialists with no out-of-pocket expenses. According to a 2014 Fitch Ratings report, “direct contracting arrangements between employers and healthcare providers are likely to gain popularity and acceptance in the near term as providers gain experience in population health management and as employers seek to manage employee healthcare costs.” New patient recovery strategies also will continue to come online in 2015, particularly in rural areas. For some providers, the aforementioned post-ACA realities are forcing them to migrate increasingly complex cases to ASCs. Of course, this migration has been in the works for some time: According to the AHA, 29 percent of gross revenue at rural hospitals in 1990 came from outpatient procedures; by 2009, 56 percent of gross revenue at rural hospitals came from outpatient procedures. In the United States, patients are now recovering in a variety of non-traditional settings, including hotels, skilled nursing facilities and at home. Regent is leading the way in developing these new strategies. For example, our Loveland Surgery Center (Colorado) is planning to introduce total-knee replacement surgery in 2015 that includes overnight stays at our convalescence center. Regent also works closely with payers on reimbursement issues during the implementation of programs. We have a variety of innovative recovery and direct contracting initiatives that we are planning to roll-out during 2015. If you have any questions about these or any other programs, please contact Nap Gary at ngary@regentsh.com.
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