UnitedHealth to Buy Surgical Care Affiliates for $2.3 billion

Cash-and-stock deal would expand healthcare provider footprint of OptumCare

u1UnitedHealth Group Inc. (NYSE: UNH), a diversified health and well-being company, announced on January 09th, 2017, that its Optum health services arm has agreed to acquire Surgical Care Affiliates Inc. (NASDAQ: SCAI) for about $2.3 billion. The buyout would add a major surgical company to UnitedHealth’s growing roster of doctor groups and clinics as well as create a comprehensive ambulatory care services platform that includes primary care, urgent care, and surgical care.

The cash-and-stock deal substantially expands the healthcare provider footprint of UnitedHealth Group, the parent company of the largest US health insurer, UnitedHealthcare. UnitedHealth Group offers a broad spectrum of products and services through two distinct platforms: UnitedHealthcare, which provides health care coverage and benefits services; and Optum, which provides technology-enabled health services. While the acquisition is a relatively small one for UnitedHealth, whose annual revenues were around $180 billion in 2015, it marks a significant evolution from being a traditional insurer to a diversified health services provider.

Surgical Care Affiliates, which is about 30% owned by affiliates of private-equity firm TPG Capital, is a leader in the outpatient surgery industry, and partners with health plans, medical groups and health systems across the country to develop and optimize surgical facilities. Based in Deerfield, Illinois, it operates 205 surgical facilities, including ambulatory surgery centers and surgical hospitals, in partnership with approximately 3,000 physicians, serving about one million patients per year in more than 33 states across the US. It has about 8,000 employees nationwide, including about 70 in Deerfield.

SCA operates 11 outpatient surgery centers in Illinois. In December 2016, it entered into a joint venture with Advocate Health Care to run the Naperville Surgical Centre, Midwest Center for Day Surgery in Downers Grove, Tinley Woods Surgery Center and Palos Hills Surgery Center. It also partnered with Advocate to become a part owner of the Midwest Center for Day Surgery in December 2016.

Buyout details and deal closure

UnitedHealth said it would acquire Surgical Care Affiliates for $57 per share, with between 51% and 80% of the price coming in the form of UnitedHealth’s stock. UnitedHealth will determine the final percentage in the near future, with the remainder of the payout coming in cash. The fixed offer of $57 per share represents a premium of 17% to Surgical Care Affiliates’ stock as of January 06th, 2017. The transaction is expected to be neutral to UnitedHealth’s forecast for 2017 adjusted net earnings and modestly add to its 2018 earnings. Affiliates of TPG Capital, which own about 30% stake in Surgical Care Affiliates, have agreed to tender their shares as part of the offer. The companies expect the deal to close in the first half of 2017.

UnitedHealth stated that Optum is looking to provide primary care and ambulatory services in 75 markets, reaching out to about two-thirds of the US population. In late November 2016, it had clinical practices across 26 states. As part of these plans, Optum has been acquiring doctor groups in the US as well as a large urgent-care clinic operator, MedExpress. UnitedHealth has said it intends to expand MedExpress in 2017.

u2The takeover of Surgical Care Affiliates will add a group of around 200 outpatient surgery centers, along with a few surgical hospitals and a sleep center for Optum. Adding Surgical Care Affiliates brings another more than $1.5 billion in revenue to OptumCare’s growing portfolio. Surgical Care Affiliates reported operating revenue of around $1.1 billion in 2015.

Synergies in ambulatory care services

The combination of Surgical Care Affiliates with OptumCare, Optum’s primary and urgent care delivery services business working with more than 80 health plans, will position the combined entity as a comprehensive provider of ambulatory care services (ASCs). It would also help expand Surgical Care Affiliates’ network of ASCs and surgical hospitals in partnership with leading health systems, medical groups, and health payers. The combination builds upon the two companies’ successful ASC collaborations and expands OptumCare’s capabilities in outpatient surgical procedures.

Following the acquisition, Surgical Care Affiliates will become part of the OptumCare platform, which serves millions of consumers annually through 20,000 affiliated physicians and hundreds of care facilities. Andrew Hayek, Chairman and Chief Executive Officer of Surgical Care Affiliates, and his leadership team will continue as part of the larger OptumCare platform. The merged entity will offer compelling quality and value to patients and payers and support independent doctors’ practices as eligible surgical cases (e.g., total joint replacements) continue to migrate to the ASC and surgical hospital environments. The combined entity will be able to better compete with the likes of Tenet Healthcare Corp. (NYSE: THC) and Hospital Corporation of America (NYSE: HCA) as well as large non-profit hospital operators.

The acquisition comes at a time when Republicans’ plans to unwind the Affordable Care Act have created uncertainty for healthcare providers, particularly hospitals. In recent years, many patients and doctors have turned to such outpatient surgery centers, also known as ambulatory surgical centers, which provide services more efficiently and at a lower cost than traditional hospitals. The number of such centers across the US grew by 80% between 2000 and 2014, according to the Medicare Payment Advisory Commission.

Given this scenario, lower-cost healthcare services fits UnitedHealth’s strategy to shift the healthcare system away from fee-for-service medicine that emphasizes volume to a value-based care proposition that gets medical treatment done in the right place at the right time. Increasingly, health insurers and the Medicare health insurance program for the elderly are moving to value-based or alternative payments that base reimbursement on health outcomes and how well the care is delivered.

Stock Performance

u3UnitedHealth’s stock stood at $161.58, slipping 0.23%, at the close on Tuesday, January 10th, 2016, having vacillated between an intraday high of $162.98 and a low of $160.50 during the session. The stock’s trading volume was at 3,497,441 for the day. The Company’s market cap was at $153.58 billion as of Tuesday’s close.

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