Surgery to Go

When you live in Florida, you wrestle not only with the periodic hurricane or hungry gator but also with the growing population battling it out to schedule hospital surgical procedures. That may explain why more than a million procedures were performed last year in the state's 360 ambulatory surgery centers ("ASCs") -- facilities that can perform surgeries not requiring hospital admission.

Florida ranks second only to California in its number of ASCs. According to the Federated Ambulatory Surgery Association, the first ASC opened in 1970, and today more than 4,200 centers operate in the U.S., performing more than 8,000 surgeries a year. Disciplines encompassed include ophthalmology, gastroenterology, orthopedics, ENT, gynecology, and plastic surgery. Patient satisfaction tends to be quite favorable, and affluent consumers are finding ASCs an attractive alternative to a hospital stay.

The FASA cites a 1977 study by Blue Cross/Blue Shield of North Carolina showing that surgeries performed at ASCs cost 47% less than those done at hospitals because of lower overhead and increased efficiency. ASCs are subject to any state-required regulation, as well as to federal inspection for those approved for Medicare reimbursement.

So the question, of course, is: If ASCs can benefit patients and contain health costs, can they benefit investors, too? A few players in the market do, in fact, show potential:

AmSurg (NASDAQ:AMSG), the eldest of our prospects, was founded in 1992 and owned a majority interest in 149 centers at the end of 2005. Headquartered in Nashville, the company develops, acquires, and operates practice-based ASCs, focusing on high-volume gastrointestinal and ophthalmologic procedures. By eschewing the multispecialty approach, the company believes that it can capture efficiencies most effectively.

Symbion (NASDAQ:SMBI), also based in Nashville, was originally founded in 1996 as UniPhy Health Care, changing its name in 1999. The company owns and operates 52 multispecialty centers in joint ownership arrangements with physicians, hospitals, and hospital networks. It also manages nine additional centers, one diagnostic center, and three physician networks. Symbion also provides contractual management and administrative services to ASCs.

United Surgical Partners (NASDAQ:USPI), headquartered in Texas, was formed in 1998 and went public just five years ago. Through a strategic relationship with Baylor Health Care System, the company owned a network of 22 centers in Dallas. At the end of last year, the company operated 96 multispecialty centers in the U.S. and three in the U.K. through joint ownership with physicians and nonprofit hospitals.

Each of these companies recently reported increasing same-store sales (an odd-sounding term, given the business!). They diverge, however, in their business models and in their financial characteristics. Of the three, AmSurg probably represents the most cautious play, with its longer operating history and consistently high operating margins. Symbion boasts strong cash flow but has a much shorter history, while United Surgical carries a debt-laden balance sheet.

While these companies each approach this field in their own unique way, they share the benefits of an upward trend in outpatient surgery. They also share such risks as the possible threat that Congress could bar joint ventures between physician owners and ASCs or make future cuts in Medicare reimbursements. ASCs currently face a freeze on such rates through 2008.

We'll continue to monitor the health of this interesting business and put results under the scalpel.

For related Foolishness:

• Can United Surgical Cut It?
• AmSurg Under The Knife
• Making Short Work Of Surgery

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Fool contributor S.J. Caplan does not own shares of the companies mentioned. The Fool has a disclosure policy.