Tenet Health got its start as a major hospital operator in the U.S. and can trace its hospital business roots as far back as 1969. But it may be time to think of the Dallas-based company as an ambulatory surgery center operator, first, and a hospital chain, second.

Following its latest acquisition, Tenet's ASC footprint will be nearly five times larger by the number of facilities than its hospital portfolio, and its ambulatory earnings will account for nearly half of the company's overall earnings next year, executives recently said. That's a significant leap from about six years ago when ambulatory represented just 4% of the company's earnings.

"From a stock perspective, I think they're going to get more credit now for that ownership of the surgery center business than ever just because of the size contribution," Brian Tanquilut, an analyst with Jefferies, said.

Still he noted they will likely retain their image as a hospital provider first given that half its business (and earnings) are subject to the dynamics of the hospital space.

Tenet will now operate up to 310 ASCs in 33 states following its $1.1 billion cash deal to buy up to 45 centers from SurgCenter Development.

Tenet has billed its purchase from SurgCenter Development as a transformative deal, crowning itself the leading musculoskeletal surgical platform.

SurgCenter Development is one of the larger ASC operators in the country. The Towson, Maryland-based firm has developed more than 200 centers since the company was officially established in 2002. SCD's business model calls for its physician partners to maintain majority ownership while SCD provides consulting and capital.

In fact, Tenet will pull ahead of the pack and will operate the most ASCs compared to its competitors, according to various public data.

Amsurg, an ASC operator under private equity-owned Envision, controls more than 250 surgery centers, according to its website, followed by Optum's 230 centers under its Surgical Care Affiliates brand.

Still, those large players only control a sliver of the overall market. There are more than 5,700 Medicare-certified ASCs operating in the U.S., according to MedPac's latest March report.

The market is so fragmented because, historically, a handful of doctors could come together and open up a small surgery center with a few operating rooms, Todd Johnson, a partner at Bain and Company, said. Johnson noted there are not that many deals like this out there, which is why it's significant that Tenet was able to gobble up 45 centers in one swoop.

"We're a long way from this being a market where any individual operator's got 30% of market share. There's just so many of these out there," Johnson said.

What's so attractive?

Regulatory and reimbursement changes and patient preference continues to fuel certain procedure migration away from hospitals.

"For payers, typically, the surgery rates are 30 to 40% less than the same procedure that's done in a hospital outpatient department. So, payers certainly value the economic value proposition of ASCs," Johnson said.

Just recently, regulators cleared the way for more procedures to be done in ASCs. CMS is eliminating the list of procedures that must be performed in a hospital, drawing ire from the hospital lobby. The inpatient-only list will be completely phased out by 2024, creating even more growth potential for surgery centers. Come Jan. 1, total hip replacements will be covered if performed in an ASC, a huge win for ASC operators.

It's why hospital operators like Tenet have been keen to expand their surgery center footprint. The centers attract relatively healthy patients for quick procedures — eating into hospitals' revenue and margin.

"This further move only solidifies the fact that they are trying to diversify their revenue streams, and, frankly move into a more attractive economic profile of procedure types — not trauma and COVID but rather scheduled surgeries they can run in and out like a factory but with really good clinical outcomes," Johnson said.

To this point, Tenet leaders said the new SurgCenter Development centers generate higher margins and have minimal debt.

Patients also tend to prefer ASCs, Johnson said. Plus, as a lower cost option it can be persuasive for patients, especially those with high-deductible health plans.

A shift in focus to outpatient settings is also occurring among medical device companies. Both Stryker and Zimmer Biomet have made ASCs more of a priority over the last several years as private payers and CMS have expanded their coverage to these facilities. Experts believe that CMS' embrace of outpatient care will fuel further coverage decisions going forward and lead to an uptick in ASC procedure volumes, which was seen when the agency added total knee replacement to the ASC covered procedures list.

Long-term strategy

Tenet has continued to bet on the shift from inpatient to outpatient services following its purchase of USPI in 2015.

The purchase set Tenet up to be a serious competitor in the space, establishing a portfolio of 244 surgery centers when the deal was announced. It illustrated Tenet's intent to build a broader portfolio.

At the same time, it has whittled down its hospital portfolio, divesting in markets where it isn't the No. 1 or No. 2 player as it seeks to hone its most competitive segments and markets.

Just last year, it announced plans to largely exit the Memphis, Tennessee, market with the sale of a number of assets including two hospitals, urgent care centers and the associated physician practices.

In 2018, Tenet shed all of its operations in the U.K. and eight hospitals across the U.S. 

That long-term strategy was made clearer last week when Tenet announced its sale of its urgent care business to FastMed. By selling off its 87 CareSpot and MedPost centers, Tenet said it will allow the company to further focus on its surgery center business.

Tenet has been keen to tout its position of musculosketel procedures — a high growth area compared to other procedure types such as gastroenterology. A 2019 report from Bain and Company expects that orthopaedic and spine procedure volumes will increase the fastest over the next few years.

With the SCD centers in the mix, CEO Ron Rittenmeyer said, "this transaction ensures Tenet will essentially double down and further deepen our concentration in these high growth areas of the future."