Amsurg (AMSG)

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Thomas Shyr

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AmSurg Corporation (NASDAQ:AMSG) is a hospital operator that owns surgical centers throughout the U.S. As of December 31, 2009 AMSG had 202 ambulatory surgical centers in 32 states, and one center under development.^[1] 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. 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.

Ambulatory surgical centers (ASCs) are healthcare facilities that specialize in providing surgical, pain management and diagnostic procedures in an outpatient setting.^[2]AmSurg is the largest US operator of ASCs, holding 3.6% of the market by volume.^[3] AmSurg is the only operator of ASCs to focus on gastroenterology and opthamology. 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.

Lower costs allow ASCs to charge patients lower prices than hospitals for identical procedures, leading insurers to encourage their policyholders to choose its facilities.^[4] 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.^[5]

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.

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.^[6] The firm grows primarily through acquisitions, though it also develops new ASCs.

Business and Financial Metrics

In 2009, AMSG earned a total of $669 million in total revenues. This was a significant increase from its 2008 total revenues of $601 million. Unsurprisingly, this had a positive effect on AMSG's net income. Between 2008 and 2009, AMSG's net income increased from $47 million in 2008 to $171 million in 2009.^[7]

Business Segments

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

These centers perform colonoscopies and other endoscopy procedures.

Ophthalmology

Ophthalmology centers perform cataract procedures and retinal laser surgery.

Orthopedics

These centers perform 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. To stem this growth, the federal government is taking steps to decrease the rates at which it compensates healthcare providers such as AmSurg.^[8] Because AmSurg receives 34% of its revenues from government sources, any changes in the Medicare program will impact the firm. More recent changes to the Medicare reimbursement system decrease payments for gastroenterology procedures, which comprise approximately 75% of AmSurg's total revenues, threatening to have an even larger negative impact on the firm.^[6] A rapid increase in the number of elderly Americans provides an opportunity for growth for healthcare providers like AmSurg, since people older than 65 generally need more medical care.^[9] 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.^[10] 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.^[11]

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.^[12] 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.^[3] 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.^[13] 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.^[6]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.^[14] 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;^[15] 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.^[16]

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.

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. The industry is highly fragmented - no firm holds more than 4% of the market.

Market Share of Major ASC Operators, 2007^{[17] [18][19][20][21]}

• 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.^[22] In 2007, USP was acquired by private equity firm Welsh Carson. ^[23]

• 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.^[24]

• Symbion (SMBI) is headquartered in Nashville like AmSurg, and has a similar business model, though on a smaller scale - the firm owns 70 ambulatory surgery centers.^[25] In 2007, the firm was bought out by private equity company Crestview Partners.^[26]

References

1. ↑ AMSG 10-K 2009 Item 1 Pg. 1
2. ↑ Ambulatory Health Care
3. ↑ ^{3.0 3.1}
4. ↑ Ambulatory Health Care
5. ↑ Ambulatory Surgery Centers - A Positive Trend in Healthcare
6. ↑ ^{6.0 6.1 6.2} AMSG 2007 10-K Section 7 - MD&A p. 24
7. ↑ AMSG 10-K 2009 Item 6 Pg. 21
8. ↑ "Hospitals, Insurers Still Expected to Feel Long-Term Squeeze From Medicare Funding Deficit". AP. March 26,2008
9. ↑ "Aging Baby Boomers" Wikinvest Article
10. ↑ Healthcare Expenditure: A Future in Question
11. ↑
12. ↑ Symbion 2006 10-K. Item 1- Business. p.2
13. ↑
14. ↑ What's Virtual Colonoscopy?
15. ↑ X-Ray Colonoscopy May be More Available Soon
16. ↑ The Colon Cancer Prevention Network: FAQ
17. ↑ USP 2007 10-K. Item 1 - Business. p.3
18. ↑ NovaMed 2007 10-K. Item 1 - Business. p.1
19. ↑ Symbion Company Profile
20. ↑ SCA Corporate Website
21. ↑ HCA Company Profile
22. ↑ USP 2007 10-K. Item 1-Business. p.1
23. ↑ US firm Welsh Carson to acquire United Surgical Partners International for $1.8bn
24. ↑ NovaMed 2007 10-K. Item 1- Business. p.1
25. ↑ Symbion 2006 10-K. Item 1- Business. p.1
26. ↑ Symbion sells to Crestview Partners for $637 million