Valuing an Out-of-Network Center in 2012: Thoughts from VMG Health’s Kevin McDonough

Published by: Becker’s ASC Review

When looking to buy a surgery center, the percentage of out-of-network cases an ASC does is one of the most important factors a buyer considers. In a recent VMG Health survey, 93 percent of buyers said heavy reliance on out-of-network payors had a “very high” impact on the ASC’s value. Seven percent said it had a “high” impact.”

A high percentage of out-of-network cases results in a lowering of the multiple a surgery center sells for, says Kevin McDonough, CFA, senior manager of VMG Health. The reduction can often be as high as 50 percent. The general trend in surgery center valuation is a widening margin in the multiples, Mr. McDonough says.

“Our observation of the ASC transaction market over the last five-10 years is that the valuation ranges we’re seeing and the relative multiples have widened significantly,” he says. “With respect to valuation, you simply cannot paint the entire industry with a single brushstroke. We’ve observed almost as many acquisitions occurring at discounted multiples as we have observed at the very top end.”

Five to seven years ago, control-interest acquisition multiples fell consistently right around a 7 times EBITDA range. Now, Mr. McDonough says, acquisition multiples are significantly more varied.

“For those ASCs that are deemed high-risk, buyers will either discount the multiple offered or utilize higher multiples however adjust or “normalize” underlying EBITDA to account for significant risk factors.”

Of the myriad of headwinds facing the industry, an out-of-network reimbursement strategy can be considered one of, if not the most significant, risk factors for a surgery center.

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