This article was originally published by ASC Focus.

Key Learnings

  • Major operators will continue to consolidate
  • Expert more higher-acuity procedures to migrate to ASCs
  • Private equity investors keep investing more intentionally in the ASC market

Between 2011 and Q2 2024, the total number of Medicare-certified ASCs in the US steadily climbed, reflecting the nationwide shift toward outpatient care. This growth did not occur as an explosion in a given year but as a sustained increase of a compound annual growth rate of 1.62 percent, translating to a jump from 5,217 to 6,377 Medicare-certified ASCs. Despite the industry’s upward trajectory, the ASC market remains highly fragmented, with approximately 68 percent of freestanding ASCs being independently owned and operated. Large companies own the remaining 32 percent of the ASC industry. Those companies include Amsurg (now part of Envision Healthcare), United Surgical Partners International (USPI, owned by Tenet Healthcare), SCA Health (owned by Optum/UnitedHealth), HCA Healthcare (outpatient surgery operator through Surgery Ventures), Surgery Partners (partly owned by Bain Capital), and others that run multiple locations.

Industry Trends

In recent years, higher-acuity procedures, once exclusive to an inpatient or hospital outpatient department (HOPD) setting, have increasingly migrated to the freestanding ASC setting. This shift redefines ASC capabilities, establishing them as safe and efficient hubs for complex procedures and setting a new standard for the level of acuity that an ASC setting could handle safely and efficiently. The ASC industry continues to focus on higher-acuity specialties when considering both organic growth and mergers and acquisitions (M&A) opportunities. In their second quarter 2024 investor presentation, Tenet reported that USPI’s same-facility ASC total joints volume had grown 22.6 percent year-to-date as of June 30, 2024.

In the company’s Q2 2024 earnings call, Saum Sutaria, president of Tenet Healthcare, reported that Tenet is committed to scaling its ASC portfolio and continued focus on higher-acuity service lines: “During the quarter, we expanded our reach by adding 11 new centers, including a new partnership with the Florida Orthopedic Institute in three surgery centers that perform over 15,000 cases annually.”

According to CMS, Tenet Healthcare, parent company of USPI, is the largest outpatient surgery operator in the US, controlling about 8.5 percent of the ASC market. These additions highlight the ASC industry’s emphasis on higher-acuity service lines, suggesting a sustained trend toward using ASCs for such procedures in the future.

In addition to the major, multisite operators, private equity (PE) investors have continued investing more intentionally in the ASC market. Historically, PE interest in ASCs has often been tied to related physician practice portfolio companies. More recently, PE interest in an ASC strategy has been seen outside of that capacity. Driven by favorable tailwinds, this type of investment in ASCs allows PE investors to capture additional revenue streams related to their physician practice investments.

With approximately $2.62 trillion in global PE dry powder as of July 10, 2024, there is plenty of opportunity for ASCs to finance continued growth if they can attract investors, but with more and more regulations being implemented around PE’s involvement in the healthcare industry, this could remain difficult. Because of this risk factor, PE investments in the healthcare industry fell to a three-year low in 2023, according to S&P Global Market Intelligence.

The ASC industry is experiencing ongoing, reliable growth, establishing itself as a highly profitable segment of the healthcare market. Investors are drawn to this field, intrigued by its potential for high returns. The ASC industry’s success is fueled by several critical factors, including rising demand for outpatient services, enhanced operational efficiency, technological innovations, a supportive regulatory environment, high patient satisfaction, and for some ASCs, beneficial relationships with commercial payers. While there are many encouraging factors, the industry faces a range of significant threats: maintaining cost-effective anesthesia coverage, rising staffing and supply costs, difficulties in physician recruitment and retention, the potential impact of some unfavorable upcoming regulatory changes, and others.

Transaction Activity

Between 2015 and 2018, the ASC industry went through a period of consolidation culminating in several megamergers, which are transactions that unite two large corporations valued at billions or more. Megamergers reshape the industry through market consolidation, increased bargaining power and regulatory impact.

In 2015, Tenet and USPI merged, while in 2016, Envision Healthcare Holdings and Amsurg Corporation merged. In 2017, Optum, a subsidiary of UnitedHealth Group, acquired SCA; Surgery Partners acquired National Surgical Healthcare; and Bain Capital acquired a large interest in Surgery Partners.

Private equity firm KKR & Co. made two large acquisitions of ASC operators during this period and acquired Nashville-based Covenant Physician Partners, an operator of ASCs and physician practices across 17 states. In October 2018, KKR finalized its acquisition of Envision and its subsidiary Amsurg. The history of mega-transactions has left only one publicly traded, pure-play ASC company remaining: Surgery Partners. In 2020, Tenet finalized a deal for $1.1 billion to acquire 45 ASCs from SurgCenter Development. Additionally, in Q4 2021, USPI entered into a $1.2 billion deal to acquire SurgCenter Development’s remaining centers and established a long-term development deal.  The transaction included acquiring ownership interest in an additional 92 ASCs, expanding support services in 21 states and ensuring continuity for future de novo development projects.

In 2024, USPI made a significant move by quietly acquiring Covenant Physician Partners that focuses on key areas such as gastroenterology, ophthalmology and optometry. This acquisition, along with the 45 other centers purchased by USPI in 2024’s first quarter, reiterates their broader strategy of growing their business through high-acuity surgery center investments.

Outside of the larger M&A activity, the industry maintained a steady pace of transaction activity at the multisite operator level and through local and regional health systems.

Covenant Physician Partners expanded its ASC footprint with the merger of its St. Vincent Eye Surgery Medical Center and Wilshire Center for Ambulatory Surgery, adding an additional facility for surgeries.

On September 18, 2023, Unifeye Vision Partners (UVP), a management and support services company with an ophthalmology and optometry practice network—including 13 ASCs—announced the acquisition of InSight Vision Group, a comprehensive eyecare platform in California. Insight Vision Group is made up of 10 clinics and two multispecialty ASCs. UVP was active in the M&A space earlier in the year, acquiring Premier Surgery Center of Santa Maria through a leveraged buyout for an undisclosed amount.

Surgery Partners further expanded its reach in September 2023, with the announcement of its acquisition and partnership with NorCal Orthopedic Surgery Center in San Ramon, California.  Merrit Healthcare Advisors helped merge nine separate entities and 25 physician partners from an out-of-network ASC into one center, which was then sold to Surgery Partners.

TriasMD, the parent company of DISC Surgery Center and another musculoskeletal management company, declared its acquisition of Pinnacle Surgery Center in October 2023. This strategic move extends DISC’s evidence-driven ASC model into Northern California, marking its second acquisition within the past six months. TriasMD previously acquired Gateway Surgery Center in Santa Clarita in February. In 2024, TriasMD announced the acquisition of Thousand Oaks Surgery Center, further establishing its ASC position in the California region.

In November 2023, Regent Surgical Health acquired majority ownership in Oregon Surgical Institute (OSI), expanding a joint venture partnership that started in 2016.

Reimbursement & Regulatory Environment

The Centers for Medicare & Medicaid Services (CMS) released the ASC payment final rule for calendar year (CY) 2024 on November 2, 2023, resulting in overall growth in payments equal to 3.1 percent in CY 2024. This increase is determined based on an inflation rate of 3.3 percent less the maximum fair price (MFP) reduction of 0.2 percent mandated by the Affordable Care Act (ACA). CMS has proposed a 2.6 percent increase to Hospital Outpatient Prospective Payment System (OPPS) payment rates for CY 2025 that reflects a market basket percentage increase of 3 percent reduced by a 0.4 percent productivity adjustment. The 2.6 percent growth in payments represents a continuation of elevated increases in projected payments, a direct result of the increase in labor, supplies and other cost pressures seen over the last five years. In addition to these factors, ASCA has been successful since 2019 in convincing CMS to align ASCs with HOPDs with regards to the payment factors updaters, switching from use of the consumer price index for all urban consumers (CPI-U) to the use of the hospital market basket.

Although the ASC industry recognizes the relative increase in payments over the last five years as a win, especially as other providers have experienced cuts, many major players believe the increase was insufficient given the extraordinary cost pressures hospitals and ASCs are facing and lower increases compared to 2024.

In the CY 2023 final rule, CMS considered 64 recommendations for new procedures to be added to the ASC Covered Procedure List (ASC-CPL). After reviewing the clinical characteristics of these procedures, four were chosen to be added to the ASC-CPL for the upcoming year. The addition of only four codes resulted in pushback and continued desire for more procedures that ASCs are safely and successfully performing to be added to the ASC-CPL.

CMS made major strides in ASC-CPL additions in the CY 2024 final rule, finalizing the addition of 37 surgical procedures to the ASC-CPL for CY 2024. These include 26 dental codes that were included in the proposed rule and 11 surgical codes that were not included in the proposed rule—most notably total shoulder arthroplasty. These codes correspond to procedures that have few to no inpatient admissions and are widely performed in outpatient settings.

In the CMS CY 2025 proposed rule, CMS proposed to add 20 medical and dental surgical procedures to the ASC-CPL, including two major cardiology codes involving dual-chamber, leadless pacemakers.

The addition of so many surgical procedures to the ASC-CPL in the 2023 and 2024 final rules was well received by major players in the ASC market. The further shift of higher-acuity procedures to the outpatient setting continues to drive the growth of the ASC market and strengthens trends observed over the last few years.

Future Outlook

The ASC marketplace remains an active hub for transactions as major operators consolidate their positions and pursue new opportunities in this space. As the market evolves, we anticipate a rise in strategic acquisitions of multiple ASCs, known as platform transactions, by larger entities seeking to expand geographically and achieve operation synergies. In addition to established operators, more diverse investors are expressing interest in this marketplace. The ASC sector’s stable cash flow and potential for growth is particularly attractive to private equity firms, though these investors might to navigate potential regulatory changes in the coming years. Overall, the trend of ASC transactions is expected to carry forward the positive momentum seen in 2024, with transaction levels likely to rise into 2025.