20 Buxton Hills Boulevard
Company Perspectives:
Our strategy focuses on providing high volume, lower-risk ambulatory surgery services in single specialty settings, which we believe results in lower costs, improved operating efficiencies and greater convenience and appeal to patients, physicians, private and governmental payers, and managed care organizations. In addition, our center operations are designed to enhance physician productivity and maximize efficient use of the centers. We intend to continue to grow through the acquisition of surgery centers, the development of new surgery centers, and through same-center revenue growth.
AmSurg Corporation is the nation's leader of practice-based, single-specialty ambulatory surgery centers and the second-largest ASC owner-operator company in the United States. Through its subsidiaries, AmSurg develops, acquires, and operates practice-based ASCs and specialty physician networks in partnership with surgical and other group practices. The company's licensed outpatient ASCs are usually equipped and staffed for a single medical specialty and are typically located in, or adjacent to, a physician group practice. AmSurg targets ownership in centers that perform gastroenterology, ophthalmology, orthopedics, otolaryngology (ear, nose, and throat) and urology procedures. These medical specialties usually require a high volume of lower-risk procedures that can be performed in an outpatient setting on a safe and cost-effective basis. The company, owner of a majority interest in 95 ASCs in 27 states and the District of Columbia, also has five additional centers scheduled for development during 2002. In 2001, AmSurg ranked fourth on the June Investor's Business Daily's list of "Top Medical Companies" and seventh in the accompanying "Profit Diagnosis" list of medical companies with relative price strengths ratings of 90 or higher. In the July-August 2001 issue of FSB: Fortune Small Business, AmSurg was cited for a second year and ranked 12th on the FSB 100 list of "America's Fastest Growing Small Companies." AmSurg was also included in the October issue of Forbes list of the "200 Best Small Companies in America." AmSurg ranked 139th on the Forbes list in 2000 but improved its ranking to 79th in 2001.
1970-97: Evolution of Cost-Contained Patient Care
In 1970, according to The Federated Ambulatory Surgery Association (FASA), several Phoenix, Arizona-based anesthesiologists opened the first ASC and pioneered a way of providing high-quality, cost-effective health care for surgeries that did not require hospital admission. Some surgeons opened surgical facilities in their offices. For many years, private insurance companies, managed-care organizations, and self-insured employers implemented various cost-containment measures to limit the growth of health-care expenditures. However, as changes in technologies and techniques enabled doctors to perform an increasing number of surgeries in hospitals, physicians treated more patients and received less income from patient visits. In a February 4, 2002 interview for the Wall Street Transcript, AmSurg president and CEO Ken P. McDonald told newswriter Michael Smith that "in the beginning doctors built ASCs to tap the facility-fee side of the income in the surgical process." By law, surgeons who performed a surgery in a hospital did not receive any of the hospital's facility fee. Hence, physicians looked to ASCs as "an opportunity ... to recoup their lost income," McDonald explained.
FASA was formed as a non-profit association to represent the interests of the entire ASC industry, including physicians, nurses, administrative staff, and owners. The Association advocated for ASCs before the media, Congress, state legislatures, and regulatory bodies. FASA emphasized the need for insurance coverage by Medicare and private payers, quality standards, and reasonable conditions of coverage. The association also played a significant role for the formation of the ASC accrediting body known as the Accreditation Association for Ambulatory Health Care (AAAHC), which required that all facility members be accredited, licensed, or certified by Medicare.
In 1978, another organization--the Society for Office Based Surgery (SOBS)--was formed to represent the regulatory and legislative interests of ASC surgeons and anesthesiologists. SOBS provided them with a forum for sharing information about developing their own facilities. Initially, only board-certified surgeons and anesthesiologists were admitted in the Society. These professionals realized that ASCs were a cost-effective alternative that offered them maximum efficiency for patient care and an environment that was more convenient and less stressful than could be found in hospitals.
The success of office-based surgical suites triggered the development of single and multi-specialty centers. As an advocate for ASC development, in the mid-1980s, SOBS changed its name to the American Association of Ambulatory Surgery Centers (AAASC), and defined itself as a physician-led organization dedicated to advocacy for the ambulatory surgery industry. Among the association's early lobbying successes was the part it played in 1982 for the creation of the Medicare ASC facility-fee benefit. This achievement contributed substantially to the growth of Medicare-certified ASCs.
Meanwhile, in 1981, five former executives from Hospital Affiliates International founded American Healthcorp Inc. in order to own and manage hospitals. Nashville, Tennessee-based Healthcorp diversified by providing hospital-based treatment centers for diabetics and by offering medical-management services to managed-care organizations and third-party administrators. Healthcorp's physicians frequently spoke about their desire for a company that would be a business partner, a risk partner, and a financial partner for setting up ASCs. These discussions led to Healthcorp's November 1992 acquisition of AmSurg, a private company formed in April 1992 to develop, own, and manage practice-based surgery centers in partnership with surgical and other group practices. Healthcorp and a group of private Nashville investors funded the purchase of AmSurg, which became a 59 percent-owned Healthcorp subsidiary and consistently produced substantial revenues and profits. By the end of fiscal 1995, the subsidiary had 18 centers in operation and was developing or negotiating for 11 more.
1997-99: Establishing Market Leadership
On March 11, 1997, Healthcorp spun off AmSurg and distributed its common stock to Healthcorp shareholders. Healthcorp chairman and chief executive officer Thomas G. Cigarran believed that if both companies functioned independently as public companies they could more effectively finance the expansion of their businesses and provide greater value to stockholders. AmSurg filed plans with the Securities and Exchange Commission, went public December 3, 1997, and was traded on the NASDAQ Stock Exchange.
AmSurg senior vice-president Rodney Lunn, during a March 24, 1997, interview for Crain Communications, Inc., told newswriter Raquel Santiago that the company was already developing surgery centers in three Ohio cities--Cleveland, Lorain, and Willoughby. He pointed out that AmSurg helped physicians to "develop a lower-cost alternative to other outpatient settings by having smaller, focused, and efficient centers" that specialized in certain procedures. The Willoughby ASC, opened in June, housed three gastroenterologists; in late 1997, the Lorain ASC also offered gastroenterology procedures while the Cleveland venue provided ophthalmology care.
By year end 1997, AmSurg managed 39 ASCs and had an additional eight centers under development. Revenues increased 65 percent to $57.4 million from $34.9 million for 1996; net income grew 70 percent to $2.5 million from $1.5 million. The company attributed its growth to the value it created for its three constituencies: the patient, the physician, and the payer. As reported in the company's 1997 Annual Report, through surveys conducted among its patients, AmSurg found that over and above high-quality care and lower costs, patients thought that the company's ASCs were "less intimidating than either hospitals or traditional stand-alone surgery centers." Patients were also complimentary about ease of scheduling, access to the facility, uncomplicated admissions and discharge, the convenience of venue location, and the patient-friendly atmosphere at an AmSurg Center.
Physicians working with AmSurg reported multiple benefits that allowed them to dominate the market for their specialties. Patients expressed great satisfaction for the high-quality care they received from physicians focused on one specialty only. The ASCs, usually adjacent to, or within walking distance of the physicians' offices, gave doctors greater flexibility for scheduling appointments and allowed them to create partnerships within their specialties.
AmSurg contributed the expertise needed for dealing with constant changes in delivering and marketing health-care, namely, the design, building, staffing, equipment, and general operation of the facilities as well as risk management, quality accreditation, and business development. In comparison to the operation of other free-standing ambulatory surgery centers, AmSurg's emphasis on the specific needs of a single-specialty practice group of physicians allowed the company to significantly decrease the size of its ASCs, the number of personnel, and the amount of equipment. Thus, AmSurg created value by meeting payers' criteria for high-quality care in the lowest cost venue for a given surgical procedure. ASCs administered by AmSurg were not the same as rural health clinics, urgent care centers, or any other ambulatory-care centers that provided diagnostic or primary health care. The only patients admitted to AmSurg ASCs were those who had seen a health-care provider who recommended surgery as an appropriate treatment.
After six years of developing and managing the daily operations of practice-based surgery centers, by year end 1998 AmSurg was a leader in its industry segment. Centers in operation increased to 52, compared to 39 in the previous year; the development of three new specialty networks brought the total number of ASC networks to seven; and the Joint Commission on Accreditation of Health-care Organizations (JCAHO) enhanced the company's leadership position by granting initial or renewed three-year accreditation for 22 centers. According to the AmSurg 1998 Annual Report, several structural strengths supported the company's consistent growth: newly established ASCs usually reached break-even point within 90 days of opening and typically met their goals for annualized performance within a year. Furthermore, because surgeons sharpened their skills by performing a large number of specific procedures, the increased volume of procedures resulted in rapid revenue growth while providing high-quality care and patient satisfaction at lower costs.
For both 1998 and 1999, AmSurg posted double-digit increases in same-center revenues; by year-end 1999 the company had 63 ASCs in operation, 12 others under development, and eight newly-established partnerships. The company, with 208,000 surgical procedures performed in its ASCs during 1999 (a growth of 33 percent), emerged as a clear leader of the rapidly expanding practice-based surgery center segment. Health-care analysts estimated that on an annual basis, approximately six million surgeries were performed in ASCs, that is, more than half of all the surgical procedures performed each year in the United States. AmSurg was a significant player in an industry expected to grow annually at approximately 8 percent because of continuing health-care trends, including steadily improving technology that enabled an increasing variety of surgical procedures to be conducted outside the high-sensitivity surgical facilities of hospitals.
2000 and Beyond
In January 2000, AmSurg signed an agreement with Physicians Resource Group, Inc. to purchase PRG's ownership position in a number of its single-specialty ophthalmology surgery centers. This acquisition, combined with AmSurg's own ophthalmology centers, gave the company the largest industry presence in practice-based ophthalmology ASCs, thereby joining the company's dominant market position in gastroenterology surgery centers. Continuing substantial cash flow from operations--which was more than double diluted earnings per share--enabled the company to fund internally the major portion of its center acquisitions and developments.
In May 2001, AmSurg completed a stock offering that netted the company $66.3 million. According to Cheryl Jackson's article in the May issue of American Medical News, Charles Lynch, analyst at CIBC World Markets, commented that AmSurg was "in great shape operationally. They're kind of peeling out this low-end surgery from the hospital industry ... The physicians are happier. The patients are happier. The HMO's are happier." As Jackson stated in her article, "AmSurg usually focused on markets where it would not be in head-to-head competition with hospitals."
By mid-2001, the typical surgeries performed at AmSurg centers within each specialty included gastroenterology (colonoscopy and other endoscopy procedures), ophthalmology (cataracts and retinal laser surgery), orthopedics (knee arthroscopy and carpal tunnel repair), otolaryngology (ear, nose, and throat procedures), and urology (cystoscopy and biopsy). AmSurg marketed directly to third-party payers, including health maintenance organizations (HMOs), preferred provider organizations (PPOs), and other managed-care organizations and employers. The company worked consistently at having its ASCs obtain and maintain three-year certification from JCAHO or AAAHC.
Because of its strategy for the design of ASCs, AmSurg could charge facility fees lower than those of hospitals and free-standing, multi-specialty outpatient surgery centers. Furthermore, more efficient staffing, better utilization of space, and a specialized operating environment focused on cost containment contributed a cost-effective alternative to other surgery venues. Each ASC had two or three operating or procedure rooms as well as areas for reception, preparation, recovery, and administration and could provide for 2,500 or more procedures annually.
In September 2001, AmSurg opened a new ASC that offered two different types of surgical treatments in the same building, according to freelance writer Trent D. McNeeley's story in the July 11, 2001 issue of the Nashville Business Journal. The first suite, the Louisville Endoscopy Center, offered treatments from the physicians of Louisville Gastroenterology Associates; the other suite, tentatively named the Bluegrass Surgery and Laser Center, offered surgical eye treatments by Dr. Donald W. Bennett of Bennett & Bloom Eye Centers. The doctors formed a partnership for the funds needed to buy the land, build the center, and acquire the equipment needed for each suite. AmSurg managed the entire facility.
Despite the destruction of New York City's World Trade Center on September 11, 2001, as well as a turbulent economy, the health-care industry continued to enjoy high growth and robust profit margins, Molly Cate wrote in the December 3, 2001 issue of the Nashville Business Journal. She pointed out several reasons for what she called a rush "to enter the [ASC] business: the baby-boomer bubble, advances in technology, and the push from all sides toward outpatient treatment. About 70 to 80 percent of surgical procedures are now performed on an outpatient basis. That compares to only 15 percent in 1980." Cate quoted industry analyst Darren Lehrich's statement about the possibility of continuing growth of the ASC business: "There are about 3,200 ambulatory surgery centers in the country. Two-thirds of those facilities are still controlled by physicians or independent partnerships. And there's still a lot of growth yet to come." Lehrich, who rated AmSurg at "outperform," estimated that AmSurg had a 3 percent market share of the ASC sector.
Revenues for 2001 increased 41 percent to $202.31 million from $143.26 million for 2000. Net earnings were $14.9 million, up 64 percent from $9.1 million; earnings per diluted share rose 30 percent to 78 cents for 2001, compared to 60 cents for 2000. AmSurg set new records in revenues, net earnings, and same-center revenues for each of the four years since it became a public company.
Thus, in a relatively short time, AmSurg proved the strength of its business model, established itself as the nation's leading practice-based, single-specialty surgery center company, and was in a sound financial position to penetrate a larger portion of the potential market for its services.
Principal Competitors: HCA, Inc.; HealthSouth Corporation; Laser Vision Centers, Inc.; Opticare Health Systems, Inc.; United Surgical Partners International, Inc.
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