The Federal Reserve’s recent decision to cut interest rates by half a percentage point marks a shift in monetary policy, signaling that inflation is cooling and that the central bank may now be focused on keeping the labor market stable.
In turn, that could mean there’s more ambulatory surgery center (ASC) transaction activity on the horizon.
“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with this inflation. That’s what we’re trying to do, and I think you could take today’s action as a sign of our strong commitment to achieve that goal,” Chair Jerome Powell said at a news conference following the decision.
This reduction, which lowers rates to approximately 4.9%, could have meaningful implications for the health care sector, particularly ASCs, and the broader M&A landscape.
Generally, health care M&A activity – similar to global M&A across all sectors – has dipped over the past few years. Among the factors that have depressed dealmaking: high interest rates, which impact access to capital; global unrest, which disrupts supply-chain considerations; and ongoing valuation gaps between sellers and buyers.
While that’s true, M&A around ambulatory care and outpatient settings has been more resilient.
The recent decision to lower interest rates could lessen some of those speed bumps.
For ASC operators, lower interest rates could create opportunities for expansion and investment. Borrowing costs for new facilities or equipment upgrades may decrease, making capital expenditures more feasible. This is particularly important for smaller, physician-led ASCs that may rely on favorable financing conditions to fund growth.
Lower borrowing costs could also support strategic initiatives such as expanding services or investing in new technologies.
Additionally, the rate cut could stimulate increased M&A activity within the health care sector. With access to cheaper capital, private equity firms and large health care systems may find it more attractive to acquire ASCs, which have become a hot target due to their efficiency and profitability.
“We’re at the tail end of an almost five-year cycle that started with COVID and the Fed stimulating the economy,” Mertz Taggart Managing Partner Cory Mertz told ASC News sister publication Home Health Care News. “Interest rates went to about zero. Sellers were burned out. They wanted to get out early before the election and a new administration increased the capital gains tax rate. It was really a perfect storm of activity, and it was, quite frankly, a bubble. The Fed raised fund rates at a pretty healthy clip starting in 2022, and that really slowed everything down for a couple of years. But now, we’re starting to see signs of life.”
The lower interest rates make it easier to finance acquisitions, potentially accelerating consolidation trends that were already underway.
Operators may find themselves receiving more offers from larger entities looking to expand their outpatient surgical capabilities.
“The [0.5 percentage point] rate cut is more aggressive than the .25 cut many observers anticipated, which will stimulate even more enthusiasm for buyers to get back into the game,” Dexter Braff, founder and president of the M&A firm The Braff Group, told ASC News sister publication Behavioral Health Business.
The U.S. ASC market is expected to expand from its 2023 size of about $46.6 billion to about $75.2 billion by 2030, with a compound annual growth rate (CAGR) of 7.1%, according to a Feb. 2024 report from Fortune Business Insights.
Going forward, M&A activity related to ASCs should increase as capital markets become less constrained.
“Strategic and financial investors alike see tremendous upside in ASCs, and recent deals illustrate the market dynamics that are shaping the sector,” Mertz Taggart and McDonald Hopkins point out in a report published earlier this year on ASC News.
There have been several recent ASC-related transactions.
In September, Ophthalmology practice Collins Vision bought Eye Care and Surgery Center of Southwest Florida.
In August, a post from a legal firm suggested that Surgery Partners (Nasdaq: SGRY) acquired two ASCs as part of a larger transaction.In July, Excel Health acquired Journey Surgery Center.
