In the first quarter of 2024, 53 ASCs achieved Medicare certification, and this number grew throughout the year. Continuous advancements in minimally invasive technology, anesthesia, and perioperative protocols have broadened the outpatient mix along with the number of surgeries able to be performed. The most popular surgeries performed at ASCs are cataract, gallbladder, tonsillectomy, endoscopic, and orthopedic procedures. The most notable increases in case volume include a 50% increase in joint surgeries and an 11% increase in orthopedic surgeries, signaling a shift in ASCs to higher acuity and margin-specialized surgeries. This migration is enhancing profitability across all ownership models. Large public operators, like Surgery Partners, United Surgical Partners International, HCA Healthcare, and Medical Facilities Corporation, have achieved EBITDA margins ranging around 18-19%. These operators have benefitted significantly from continued ASC expansion. HCA Healthcare reported a 5% revenue increase in 2024 despite a 2% volume decrease in patients, highlighting the benefits of ASC diversification.
According to a study by RAND, procedures that take place at Hospital Outpatient Departments (HOPDs) charge private insurers 200%–250% of their Medicare prices, but only 170% at ASCs. While corporations receive significant benefits from ASCs, consumers also benefit. The average cost of surgery at an ASC is $3,157, while HOPD procedures average $7,716. Having a procedure at an ASC saves a typical insured patient $684. CMS has also benefited from procedures taking place at ASCs, saving over $2.3 billion in 2024. This has caused a significant increase in surgeries that CMS agrees to cover for the aging U.S. population.
The popularity of ASCs among patients and insurers has propelled the value of the ASC market in the United States. Currently, the market is valued at $46 billion and is expected to reach $66 billion by 2033 (a compound annual growth rate of 4.1%). The international market has also grown significantly, but the United States remains the primary target of Private Equity M&A activity.
HCA Healthcare (NYSE: HCA) owns and operates hospitals and related healthcare entities in the United States. It operates general and acute care hospitals that offer medical and surgical services. Recently, HCA has expanded its ASC construction to keep pace with competitors.
Medical Facilities Corporation (TSX: DR) owns and operates specialty surgical hospitals and ambulatory surgery centers in the United States. Its specialty surgical hospitals offer non-emergency surgical, imaging, diagnostic, and pain management procedures.
Surgery Partners Inc (NasdaqGS: SGRY) owns and operates a network of surgical facilities and ancillary services in the United States. Surgery Partners provides ambulatory surgery centers and surgical hospitals that offer non-emergency surgical procedures in various specialties.
Tenet Healthcare (NYSE: THC) operates as a diversified healthcare services company in the United States. The company operates its ambulatory surgery centers through a subsidiary called United Surgery Partners International (USPI). USPI was acquired by Tenet in 2015.
Private Equity Involvement
Out of the 1,049 Private Equity healthcare deals that occurred in 2024, 139 were to acquire outpatient practices. The average acquisition price for the ASCs was approximately 8x EBITDA. Typically, PE firms buy Physician Practice Management (PPM) companies to roll up their ASCs into one system. The firms control the surgery clinics and suites, meaning the physician who refers patients for surgery will send them to the ASC that is owned by their PPM. This effectively limits competition from other ASCs. Insurance companies also offer specialized deals, allowing the PE shops to bundle their doctors’ consultation services and surgeries. Although outpatient acquisitions declined 28.7% YOY, there is an expectation that the new administration will be more relaxed with healthcare M&A regulations, leading to a positive outlook for ASC acquisitions in 2025.
HOPD vs. ASCs
Procedures at ASCs cost significantly less to perform and can have a variety of positive mental impacts on patients. Since a majority of ASCs are physician or platform owned, revenues that large healthcare providers have historically relied on are dwindling. In response, healthcare facilities are making a push to upgrade their HOPDs and transfer their classifications to be the same as ASCs. At the end of 2024, the base dollar-per-unit for HOPDs was 64% higher than ASCs. This means that if Medicare pays $1.00 to an ASC, they will pay $1.64 to a HOPD. This increased cost can be attributed to 24/7 “stand by requirements,” regulatory overhead, and drug/supply inflation. Even though HOPDs cost more than ASCs to maintain, legislation is being pushed to have these two facilities reimbursed at the same site-neutral payment schedule. To combat this, the big systems are experimenting with several solutions. In 2024, Tenet (THC) was aggressive in its acquisition of ASCs, bringing its total to 545 centers. On the other hand, HCA Healthcare created its own ASCs, totaling 124 freestanding centers. 2 Acquisition of ASCs can save construction costs and integrate ASCs into the system to prevent competing ASCs from receiving referrals. Another strategy providers have implemented has been the creation of hybrid operating rooms on-site. These rooms can toggle between inpatient and outpatient facilities depending on the surgery, allowing hospitals to decide which procedures to perform on-site based on cost reimbursements.
While it is possible to mitigate the cost burden of HOPDs compared to ASCs, hospitals face possible regulatory risks. The large providers are lobbying to increase the reimbursement for HOPDs, but Congress has yet to act. ASCs are sequestering some patients from hospitals but other ongoing issues like rate changes, labor shortages, and wage inflation are harming healthcare providers, too. Hospitals will likely continue to acquire ASCs with the expectation that HOPD margins will remain constrained, making ASCs a crucial component of the healthcare system.
Originally appeared in Mercer Capital's Healthcare Facilities newsletter: Q4 2024.