Five Market Drivers to Watch

A look at how major marketing trends will affect ASCs in the coming decade.

By Bruce Maller, founder and president of BSM Consulting

The market is changing. The changes have begun subtly, but trends show there will be dramatic alterations in the patient population, available surgical options and the business environment for ambulatory surgery centers (ASCs) in the next decade.

I've developed a list of five key market trends and drivers to follow. How will these affect ophthalmic ASCs? What should you do to prepare and adapt? Here, I'll look at these important questions with a focus on cataract surgery — the most common procedure performed in ophthalmic ASCs — but the information is relevant for all ophthalmic ASCs, regardless of the procedure mix.

1.The Aging Population

America's changing demographics will result in a dramatic increase in the number of cataract procedures performed in the future. In the next 10 years, most population growth will take place in two segments: people ages 55 to 64 and those age 65 and older.¹ The number of Americans age 65 and older will be nearly 55 million in 2020 — that's nearly 15 million more seniors than there were in 2010.

According to Medicare claims data, cataracts occur in about 61 out of 1,000 people age 65 and older. This compares to a utilization rate of less than 4 per 1,000 for people under age 65. Based on these utilization rates, it is estimated that more than 4 million cataract surgery procedures will be performed in 2020.² Compared to 2010 numbers, we're looking at over 1 million additional cataract surgeries over the same timeframe, an increase of more than one third.

2. Changes in Technology

Over the next 10 years, cataract surgeons are likely to have an expanding array of lens options and equipment, such as the femtosecond laser. Technological advances are designed to help you provide better outcomes for your patients.

In the case of premium lenses, the approval cycle has slowed, and according to industry trade journals, there are at least nine new lenses in development.²

For many practitioners, the professional “up charge” for premium lens technology has provided a nice boost in practice income. For the ASC owner, there isn't much incremental margin on the facility side, since the patient is generally charged a small premium over and above the cost of the lens.

It's too early to tell whether the adoption of femtosecond laser technology will offer a similar return on the facility or practice side. Based on my observations, most ophthalmologists are cautious but intrigued by this new technology. The majority of physicians are adopting a wait-and-see approach. At present, there are two manufacturers with approval to market the laser platform. A competitive environment may help make the technology more economically feasible.

Regardless of the available femtosecond laser technology platforms, surgeons and facilities will need to assess whether they can formulate a business/pricing model that will work for their business and their patients (Figure 1).

3. Hospital Acquisitions of ASCs

Over the past few decades, ophthalmologists have been slowly migrating away from the hospital setting and transitioning their caseloads to ASCs. Today, about 80% of all cataract surgeries in the United States are performed in ASCs.² So, why would hospitals be interested in buying ASCs? There are several possible reasons worthy of exploration.

First, some hospital CEOs see eye care as a discipline that is highly valued by consumers. A hospital or health system CEO may believe that an eyecare center of excellence could offer strategic value for the institution.

In addition, availability of eyecare services could offer a hospital a key point of differentiation when negotiating third-party contracts. Moreover, an ASC's additional operating room capacity would give a hospital added flexibility and options to help maximize overall efficiency. Most ASC owners recognize that a well-run facility provides a reasonable return on investment. The hospital executive who recognizes the strategic significance of the ASC will also appreciate that an ASC will offer the potential for a reasonable return when compared to other investment vehicles.

Although it may not seem obvious or intuitive that a hospital would have an interest in owning and operating an ophthalmic ASC, I believe there are many markets where these opportunities may emerge. In fact, a few transactions have already taken place.

4. The Emergence of ACOs

The Patient Protection and Affordable Care Act (PPACA) includes embedded provisions for creation of Accountable Care Organizations (ACOs). ACOs are legal “contracting” entities, designed to provide a full spectrum of healthcare services to Medicare and Medicaid beneficiaries. ACOs reimburse doctors based on the quality of their outcomes, as well as their ability to reduce overall healthcare costs.

Although there's some speculation that the PPACA may be repealed, the market has already moved toward the continued formation of ACOs. While this development may not be a big issue for ASCs, I don't think it's a good idea to ignore ACO development. It's advisable to stay close to ACO development activity in your local market so you can have a voice in the process and ensure that you're not excluded from contracting opportunities in the future.

5. Investment Considerations

Over the past several years, investors have found it increasingly difficult to find suitable investments that offer a potentially attractive return with a modest amount of risk. This is true for private, individual and institutional investors, including private equity and venture capitalists.

Most ophthalmology ASCs have a long history of consistent revenue growth and profitability. It's reasonable for one to assume that in a world where good investment vehicles are hard to find, a solid-performing ASC is likely to attract investor interest.

To ensure that your ASC is an attractive investment option, consider what you can do to enhance the value of your center. Even if you have no plans to sell your ASC or take on new investors, it's important to assess your center from the standpoint of a potential buyer.

The main thing buyers and investors seek is stable and predictable cash flow. This can be accomplished with a diverse mix of payers, cases and surgeons. Although Medicare will likely account for more than half of all cases, your ASC should have a strategy to optimize contracting relations with commercial payers while also being responsive to surgeons who are interested in promoting cash or elective procedures.

The center should also minimize its dependency on a small number of surgeons. One or two busy and efficient surgeons can help build operating efficiency, but a center that is dependent on the efforts of one or two surgeons is less attractive to potential buyers and investors.

Buyers also want to see a business plan that demonstrates sensible growth. Growth is extremely important for institutional investors. They want a reasonable plan that can achieve consistent growth in revenue and profitability. For example, the ASC may have the capacity to add another operating room and/or enhance the capacity of its existing rooms.

You should be able to show that your center is able to attract and maintain a stable and experienced management team. This goes a long way toward demonstrating operating stability. It also places a burden on the owners to ensure they maintain a positive and supportive work environment.

Finally, the facility should have a succession plan for key surgeons while also minimizing surgeon “flight risk.” Investors don't want a high-volume surgeon to leave (and neither do you). This type of risk can have a dramatic effect on the value, or implied multiple of earnings, that an investor or surgeon might be willing to pay for the center's shares.

Your ASC also needs a succession plan. This is true for key surgeons as well as the members of the management team. Plan early to keep surgeons. Some ASC owners are reluctant to give shares to younger surgeons, but that may lead those surgeons to become impatient and seek opportunities elsewhere. Selling shares may dilute your interest, but the benefit to your future may be greater if you retain good surgeons who boost the value of your ASC. If and when you decide to sell, be prepared to invest time to carefully review your current operating agreement to ensure that the buy-and-sell agreements protect the integrity of the company. I recommend seeking professional advice from a lawyer who has experience in this arena.

A New Day

I think the best days of the ophthalmology ASC are in front of us. Market trends point to busier facilities with improved technology. The proven history of success for the ophthalmic ASC will continue to attract investor and surgeon interest in the coming years.◊

References

1. US Census Bureau, Population Division, Interim State Projections of Population.
2. Market Scope, Ophthalmic Market Perspectives.