Private Equity and Ambulatory Surgery Centers

Surgeons discussing their surgery

As you may have read in our Private Equity 101 article, as the financial landscape of medicine continues to change, Private Equity purchases are expected to increase in prevalence as evidenced by several transactions of well-known private equity firms across the country. Specifically, there are certain specialties within medicine that are being targeted because of their significant potential for financial growth due to their ownership of Ambulatory Surgery Centers (ASCs) — namely, Orthopedic Surgery, Ophthalmology, and Pain Management.

This article dives into the intersection of Ambulatory Surgery Centers and Private Equity purchases in medicine, and dissects the relationship through 3 main questions: What, Why, and How?

What is Private Equity? What are ASCs?

If you haven’t read Private Equity 101 already, take a quick read and come back. That article gives an introduction into the PE world and its involvement in medicine. Learn about the vocabulary commonly used (e.g. EBITDA) as well as the mechanics of a PE transaction in healthcare.

Ambulatory Surgery Centers, or ASCs, may go by several other names that are more familiar, outpatient surgery center, same-day surgery center, or surgicenters. These entities specialize in treatment of patients who need surgical procedures that do not require overnight stays.

The Centers for Medicare and Medicaid Services (CMS) defines ASCs as any “distinct entity that operates exclusively for the purpose of providing surgical services to patients not requiring hospitalization and in which the expected duration of services would not exceed 24 hours following an admission.”

While some hospitals may also have a connected area for outpatient surgery or own a separate outpatient surgery center, these are actually categorized by CMS as a completely different entity that does not fall under the definition of an ASC. Instead they are categorized as hospital outpatient departments (HOPD). This is an important distinction to make as reimbursement rates are significantly different.

HOPDs are entitled to receive on average 81 percent higher reimbursement compared to ASCs.

While this difference in payment has generated some interest for hospitals to purchase and convert ASCs to HOPDs, it is not a straightforward decision. In fact, strategic alliances with physician-owned ASCs may actually be a better long-term partnership, especially since this keeps physicians incentivized to use their ASCs while also satisfying payers that demand lower-cost settings.

ASCs play a significant role in healthcare expenditures.

In 2016, Medicare spending on ASC services totaled $4.3 billion across 5,532 facilities.

The number of ASCs continue to grow each year at annual rate of 1.4%, with nearly 150 new facilities built in 2016. In the month of January 2019 alone, 21 new ASCs were opened or announced in the US.

Based on a 2018 survey of over 700 surgery centers throughout the US, when a controlling interest in a multi-specialty ASC is being considered for purchase, the majority of respondents report valuation multiples for ASCs average 7.0-7.9 times EBITDA, which might be increased by another 0.26-1.0 multiple if the ASC has a certificate of need (CON).

Why are ASCs such a valuable commodity?

ASC surgical volume is expected to increase as major market forces drive a trend for more outpatient surgery. Specifically, bundled payments and an emphasis on value-based care are pushing surgical procedures from hospitals to the ambulatory setting.

For example, total hip arthroplasty which has traditionally been an inpatient procedure is now being done on an outpatient basis. This transition has happened for multiple reasons.

Newer surgical techniques, more reliable post-operative pain control with anesthetic regional blocks and improved intra-operative technology have made recovery from this type of surgery possible on an outpatient basis.

Surgical costs are often lower in ASCs compared to hospitals because of their higher efficiency, leaving a greater part of the bundled payment for profit. Both physician and patient experiences can also be better at ASCs. For instance, physicians often enjoy faster turnovers, better assistance from staff who are more familiar with their preferences, and an easier environment for using equipment and technology that is not limited by hospital regulation and bureaucracy.

Furthermore, for physician-owned ASCs, surgeons may also be financially incentivized to bring cases to their own ASCs, further contributing to patient volume. If you read that and are concerned that this a possible financial conflict of interest, surgeons who own or invest in ASCs can be exempt from both the Anti-kickback Statute and the Stark Act as long as certain requirements are met.

For example, one requirement to be protected under the ASC safe harbor for the Stark Act is the “one-third rule”, which specifies that at least one-third of each physician’s medical practice income come from performance of ASC procedures.

Finally, reimbursements for medicare payments are changing to take advantage of the lower overall costs of healthcare that ASCs can provide. CMS implemented the Outpatient Prospective Payment System (OPPS) for HOPDs in 2000 and later for ASCs in 2004. As we mentioned before, the reimbursement for the same surgery can be very different. In 2017, HOPD rates were nearly twice as expensive to provide the same care. As a result CMS has started to increase rates of certain surgeries, incentivizing a shift toward more care delivered to ASCs. For instance, 2016 Medicare Elbow arthroplasty rates were $7,887 compared to 2017 Medicare ASC rate of $12,107, representing a 54% increase.

A surgeon passing a surgical tool

How will things change moving forward?

Depending on your perspective the recent surge in interest in ASCs may affect you differently. For example, if you are a physician practicing in a specialty with ownership in ASCs, you may be considering changes to make the ASC more appealing to buyers. This could include efforts to lower costs, increase efficiency, and changes to increase case volume. In fact, ASC valuations are typically driven by a variety of factors that include scope of services, capacity, revenue stream, payor mix, and operating expenses. In general, ASC valuations are improved if they are part of a large organization, which gives them better resources and economies of scale. For instance, better payor contracts, supply purchasing power, operational infrastructure, and accounting services. Purchasers also look for criteria of ASCs that demonstrate potential for future growth. This includes, being in-network with major insurance companies, having multiple younger physician-partners, and being located in a desirable geographic location.

On the other hand, if you are young member of a group, you may also be offered the opportunity to buy-in to an ASC. Although this may be an especially opportune investment given the current landscape, there are many factors to consider. For instance, non-compete clauses, voting rights, policies regarding distributions and liquidation, etc. There are also different types of partnerships to consider, for example joint ventures with hospitals or management companies.


  1. ASCs are being targeted by PE firms in healthcare because of their potential for significant growth
  2. A multitude of factors are driving growth of ASCs, including changes in reimbursement rates, better physician and patient experience, and a focus on value-based care
  3. Not all ASCs are created equal — whether you are a current or potential physician-investor, do your due diligence — it may pay off in the long run
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