TOP CONTRIBUTORS

Katerina Semida

Chris Kallos

www.zacks.com

AmSurg Corporation (AMSG) is a hospital operator that owns surgical centers throughout the U.S. It has 164 single-specialty and 12 multi-specialty ambulatory surgical centers in partnership with physician practice groups; these centers focus almost exclusively on gastroenterology (studies of intestines) and ophthalmology (studies of eyes), which have higher proportions of senior patients than other specialties.^[1] Because of this, AmSurg is positioned to benefit from the aging of the US population - the number of US residents over 65 years old is growing so swiftly that it is on pace to double in the next 32 years, ^[2] and revenues have grown 16%-20% annually over the past three years as the firm acquires and develops more centers across the country to meet this rising demand.^[3]

Ambulatory surgical centers (ASCs) are healthcare facilities that specialize in providing surgical, pain management and diagnostic procedures in an outpatient setting.^[4]AmSurg is the largest US operator of ASCs, holding 3.6% of the market by volume.^[1] AmSurg is the only operator of ASCs to focus on gastroenterology and opthamology.^[5] Its primary competitors are hospitals located close to its facilities; like other operators of ambulatory surgical centers, the firm benefits from lower overhead because its centers do not provide services such as emergency care and intensive care units, which account for much of the overhead in traditional hospitals.^[6] Lower costs allow ASCs to charge patients lower prices than hospitals for identical procedures, leading insurers to encourage their policyholders to choose its facilities.^[7] For instance, the Medicare program saves approximately $464 million each year due to the utilization of ASCs by its beneficiaries; patients benefit as well - a procedure in an ASC can save as much as 61% in patient copayments.^[8]

Company Overview

AmSurg acquires and develops ambulatory surgical centers in partnership with physicians, typically retaining a 51% or higher majority ownership stake in the facilities. Most of the firm's ASCs are single-specialty sites located inside or adjacent to a physician group practice and performing a limited array of high-volume, low-risk, outpatient surgical procedures, such as colonoscopies and cataract surgeries. Of AmSurg's 176 centers, 123 perform gastrointestinal procedures, 36 perform ophthalmology surgery procedures, 12 perform procedures in multiple specialties and 5 perform orthopedic procedures.^[9]AmSurg receives all of its revenues from the fees it charges patients for the procedures; these, in turn, are largely funded by third-party reimbursement programs such as government and private insurance.^[10] The firm grows primarily through acquisitions, though it also develops new ASCs; in 2007, for instance, AmSurg acquired 21 centers and developed 3.^[9]

Business and Financial Metrics

AMSG Revenues and Net Income^[11]

In 2007, revenues rose 16% to $531.1 million from $455.9 million in the prior year. This increase stems both from organic growth (existing centers increased revenues by 4% on higher numbers of procedures) and acquisitions and development of new centers (centers opened in 2007 generated $40.8 million in revenues).^[9] Overall, procedures performed during the year rose by 17%.^[10]

AmSurg's 2007 net income rose 17%, in tandem with revenues.^[11] Due to the low overhead characteristic in the industry, most of the firm's expenses (salaries/benefits, supplies) are directly tied to the number of procedures performed,^[12] explaining why profit margins remained essentially the same from 2006 to 2007 (8.3%).^[13]

Business Segments

AMSG Revenues by Specialty

AmSurg operates as one business segment, since its centers all carry out similar functions and are administered on a centralized basis. However, it is possible to distinguish among the firm's facilities based on each center's surgical sub-specialty. The majority fall into one of three areas: gastroenterology, ophthalmology, and orthopedics.

• Gastroenterology (57% of revenues) - centers performing colonoscopies and other endoscopy procedures

• Ophthalmology (35% of revenues) - centers performing cataract procedures and retinal laser surgery

• Orthopedics (8% of revenues) - centers performing knee arthroscopy and carpal tunnel repair

Key Trends, Risks, and Forces

Caps on Medicare and Medicaid Reimbursements Limit Revenue Growth

Medicare expenditures have grown swiftly in the past several years, reaching 5.3% of U.S. GDP in 2006.^[14] To stem this growth, the federal government is taking steps to decrease the rates at which it compensates healthcare providers such as AmSurg.^[15] Because AmSurg receives 34% of its revenues from government sources, any changes in the Medicare program will impact the firm; in 2007, it already recorded a $3 million decrease in revenue as a result of cuts in Medicare reimbursement rates for cataract laser surgery procedures, passed as part of the Deficit Reduction Act of 2005.^[10] A rapid increase in the number of elderly Americans provides an opportunity for healthcare providers like AmSurg, since people older than 65 generally need more medical care.^[16] People 65 and over account for 40-50% of total spending on healthcare; the per capita healthcare spending in this age group is 3-5 times higher than for people under 65.^[17] As a result, healthcare expenditures are already growing swiftly, rising 6.7% in 2006 to reach $2.1 trillion.^[18] Because about 90% of AmSurg's centers specialize in gastroenterology or ophthalmology procedures, which have higher proportions of older patients than other specialties, the firm stands to benefit from this trend even more than its competitors.^[5]

Technological Developments Allow More Procedures to be Performed in an Outpatient Setting

New advances in medical technologies have played a large role in the growing popularity of ambulatory surgical centers by increasing the types of procedures that can be performed in such centers.^[19] For instance, new pharmaceuticals, lasers, enhanced endoscopic techniques and fiber optics have reduced the time necessary to undergo and recover from the gastroenterology and ophthalmology procedures that most of AmSurg's centers specialize in. Furthermore, developments in anesthesia have decreased side effects and post-operative recovery time for many procedures, making overnight hospital stays unnecessary.^[1] In fact, 60-70% of all surgeries performed in the US in 2007 occurred on an outpatient basis.^[6]2,500 different procedures can legally be performed in ASCs; those still not approved include muscle and skin grafts, reconstructive cleft palate surgery, excision of the parotid gland, draining ovarian abscesses, repair of facial nerves and eardrum revision.^[6] Further technological developments will allow such procedures to be performed at ASCs, increasing potential revenue streams.

Virtual Colonoscopy Decreases Demand for Conventional Colonoscopy Procedures

While new medical technologies have generally proved beneficial for AmSurg's business, advances in virtual colonoscopy screening actually threaten the firm's revenues by providing an alternative for conventional colonoscopies, which account for nearly three quarters of the firm's revenues.^[10]Virtual colonoscopy is a non-invasive method of examining the colon that lasts no longer than 10-20 minutes and requires no sedation, allowing patients to leave immediately after the procedure is completed.^[20] In addition to being more convenient for patients, this procedure is also less expensive than conventional colonoscopies. So far, the technology is at an early stage of development, and available at a limited number of facilities;^[21] however, as it becomes more widespread, demand for traditional procedures will fall, hurting AmSurg. To respond to this risk, the firm has partnered with the Cleveland Clinic and General Electric Corp to test virtual colonoscopy in some of its centers, hoping to become one of the first providers to offer the procedure to its patients.^[22]

Competition

AmSurg is the largest operator of ambulatory surgical centers in the United States, and the only one focusing primarily on single-specialty centers in the areas of gastroenterology and ophthalmology. As such, its primary competitors are hospitals, where patients can get the same procedures that AmSurg's centers provide. AmSurg has two primary advantages over the hospitals it competes with. First, a much smaller and simpler infrastructure leads to lower overhead and thus lower costs than hospitals for the same procedures.^[23] A large part of these cost savings comes from the lack of emergency rooms and intensive care units in ASCs; these are some of the most expensive services that a healthcare facility can provide, and are legally required in hospitals.^[6] Due to this lower cost structure, the popularity of ambulatory surgical centers has been rising swiftly over the past several years as both public and private insurers encourage their customers to choose these outpatient procedures whenever possible in order to cut costs.^[24] The Medicare program alone saves approximately $464 million annually through the utilization of ASCs by its beneficiaries. Patients benefit as well, since a procedure in an ASC can save as much as 61% in copayments; for instance, the copayment for a cataract extraction at a hospital reaches nearly $500, while ASC copays are only about $200.^[8]

ASC vs. Hospital Copayments^[8]

AmSurg also avoids one of the most pressing problems that hospitals face - rising bad debt expense. Ambulatory surgical centers do not have emergency rooms, which must provide care to uninsured patients and thus account for much of the bad debt expense at hospitals.^[25] Furthermore, because all of AmSurg's facilities are partly owned by the physicians who are in charge of directing patients there, these physicians have a financial incentive to refer patients with adequate insurance coverage, while sending uninsured patients to hospital outpatient departments. As a result, the vast majority of patients seen by ASCs are insured.^[26]

.

Market Share

At the end of 2007, 4900 ambulatory surgical centers were registered in the United States.^[1], accounting for 31% of the 50 million surgeries performed each year.^[28] Approximately 65% of the 4900 total ambulatory surgery centers are single specialty; among these, approximately 2,000 operate in one of the same specialties as AmSurg's centers.^[1] The industry is highly fragmented - no firm holds more than 4% of the market.

Market Share of Major ASC Operators, 2007^{[29] [30][31][32][33]}

• United Surgical Partners owns and operates 155 ambulatory surgery centers and surgical hospitals in two primary markets - the US and the United Kingdom. The firm has pursued partnerships with physicians for some of its centers.^[34] In 2007, USP was acquired by private equity firm Welsh Carson. ^[35]

• NovaMed (NOVA) has historically focused on operating single-specialty ophthalmic ASC performing primarily cataract surgeries. Over the past four years, however, the firm has taken steps to diversify its 34 centers into other specialties, ranging from plastic surgery to gynecology to orthopedics. Like AmSurg, NovaMed owns a majority interest in most of its centers, with physicians owning the rest. NovaMed also operates several smaller segments - manufacturing surgical equipment and operating optical laboratories, an optical products purchasing organization and a marketing products and services business.^[36]

• Symbion (SMBI) is headquartered in Nashville like AmSurg, and has a similar business model, though on a smaller scale - the firm owns 70 ambulatory surgical centers.^[37] In 2007, the firm was bought out by private equity company Crestview Partners.^[38]

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4} AMSG 2007 10-K Section 1 - Business p.1
2. ↑ The Aging US Population
3. ↑ AMSG 2007 10-K Section 7 - MD&A p. 27/29
4. ↑ Ambulatory Health Care
5. ↑ ^{5.0 5.1} AMSG 2007 10-K Section 1 - Business p.2
6. ↑ ^{6.0 6.1 6.2 6.3} Ambulatory surgery centers proliferate
7. ↑ Ambulatory Health Care
8. ↑ ^{8.0 8.1 8.2} Ambulatory Surgery Centers - A Positive Trend in Healthcare
9. ↑ ^{9.0 9.1 9.2} AMSG 2007 10-K Section 7 - MD&A p. 23
10. ↑ ^{10.0 10.1 10.2 10.3} AMSG 2007 10-K Section 7 - MD&A p. 24
11. ↑ ^{11.0 11.1 11.2} AMSG 2007 10-K Section 6 - Selected Financial Data p. 22
12. ↑ AMSG 2007 10-K Section 7 - MD&A p. 26
13. ↑ AMSG 2007 10-K Section 7 - MD&A p. 27
14. ↑ National Health Expenditure Accounts 2006 Highlights
15. ↑ "Hospitals, Insurers Still Expected to Feel Long-Term Squeeze From Medicare Funding Deficit". AP. March 26,2008
16. ↑ "Aging Baby Boomers" Wikinvest Article
17. ↑ Healthcare Expenditure: A Future in Question
18. ↑ Statistics, Trends and Reports.
19. ↑ Symbion 2006 10-K. Item 1- Business. p.2
20. ↑ What's Virtual Colonoscopy?
21. ↑ X-Ray Colonoscopy May be More Available Soon
22. ↑ The Colon Cancer Prevention Network: FAQ
23. ↑ Sutter Health Forms New Joint Venture to Operate and Develop Surgery Centers. June 8, 2007
24. ↑ Ambulatory Health Care
25. ↑ Brophy Marcus, Mary. "The spotlight grows on outpatient surgery." USA Today. July 29, 2007.
26. ↑ Physician-Owners Of Ambulatory Surgical Centers Siphon Off High-Paying Privately Insured Patients, Say Researchers
27. ↑ All data from 2007 10-Ks; USP data for US facilities only
28. ↑ Brophy Marcus, Mary. "The spotlight grows on outpatient surgery." USA Today. July 29, 2007.
29. ↑ USP 2007 10-K. Item 1 - Business. p.3
30. ↑ NovaMed 2007 10-K. Item 1 - Business. p.1
31. ↑ Symbion Company Profile
32. ↑ SCA Corporate Website
33. ↑ HCA Company Profile
34. ↑ USP 2007 10-K. Item 1-Business. p.1
35. ↑ US firm Welsh Carson to acquire United Surgical Partners International for $1.8bn
36. ↑ NovaMed 2007 10-K. Item 1- Business. p.1
37. ↑ Symbion 2006 10-K. Item 1- Business. p.1
38. ↑ Symbion sells to Crestview Partners for $637 million