Hospital Ownership, Out-of-Network and Other Pressing ASC Issues: Q&A With Luke Lambert of ASCOA

Luke Lambert, CEO of ASCOA, discusses the biggest issues facing the ASC industry, the growth of hospital ownership and power, and where growth opportunities exist for surgery centers in the next few years.

Q: What do you believe are the biggest issues affecting the ASC industry at this time?

Luke Lambert: One of the biggest drivers I see in our industry has been the divergent compensation that hospitals are getting paid for outpatient surgery, compared to what freestanding surgery centers are getting paid. Because that gap has been increasing over time, it's now reached the point where hospitals find it attractive to buy surgery centers 100 percent and turn them into HOPDs, and thereby reap very attractive returns on investment. That's also driving a big part of the push for surgery centers to partner with hospitals, so that they can pursue better reimbursement.

I think that underlying reality of compensation is driving a lot of the dynamics in the industry. If you go back six years, there were some people pursuing hospital joint ventures, but today, virtually everybody is — and they're doing so quite aggressively to position themselves for the future. Without that hospital association, payors aren't going to pay us well. As a result of that, we're not seeing that many de novo ASCs starting in the industry anymore. It used to be there were hundreds.

Q: Do you believe the rise of hospital ownership of ASCs is a negative trend?

LL: It's bad from some perspectives. It's bad for the consumer, because once the hospital owns the surgery center, the consumer is likely going to pay more. I would say it's bad for physicians because their centers, which were once viable as stand-alone entities, might not be anymore, so they're compelled to seek that strategic partner. Most physicians started their surgery centers because they wanted independence from their local hospitals, and now the economics are bringing them together again. If surgery centers were getting paid the same as hospitals, I don't think you'd see hospitals and surgery centers coming together. I think physicians would be happy to be independent.

Q: Would it solve the problem if ASCs were reimbursed based on the Hospital Market Basket, rather than the CPI-U, as advocated by ASCA?

LL: Even if they correct the index by which our reimbursement rates are updated by the government it won't close the gap. To close the gap, the government would need to make some corrective adjustments. Without an adjustment, the position we're in with a big gap [between reimbursement levels] will persist even if they put us on the same inflation index as the hospitals.

Q: As a management company, how do you view the opportunity for joint ventures between ASCs and hospitals? Do you recommend seeking out those partnerships?

LL: We're oriented towards forging those relationships, and where we have independent, stand-alone centers, we're seeking out hospital relationships. It's a strategy that we have given the realities of our environment, and it's a strategy that we think is important to our future. I think in stand-alone centers, it's often hard for physicians to come to grips with the reality, but they need to look carefully at their situation and say, "Look, in the current environment with healthcare reform, we need to be part of a larger system."

Part of what healthcare reform has driven is greater integration of care by the big health systems, meaning hospitals are employing more surgeons and more primary care physicians. That can put a squeeze on a surgery center, where the leaders are looking around, saying, "Where are we going to find our next group of young doctors to come into the surgery center?" In some instances, there are none because they're going to work for the hospital. Unless the hospital owns the surgery center, the physicians won’t take cases to the surgery center.  
Hospitals recognize that they're getting paid a lot more, the way they keep care from escaping their system is by employing the people who make the referrals. It keeps the business in their system, drives up healthcare costs and grows their market share.

Q: Some people believe hospital employment will see a reversal in a few years, when physicians and hospitals start to express dissatisfaction about their relationships. What do you think?

LL: One motivation for hospital employment is hospitals desiring to control the referrals of the physicians they employ. An orthopedist sends out lots of imaging referrals, and where he does the surgery makes a big difference. If the physician is employed by the hospital, those referrals stay within the system.

But the other motivation for employment is that the independent orthopedic surgeon doesn't get paid very well being independent. They're just a small player in a large market, and they don't have any leverage with payors. The hospital comes in, and they may have hundreds of millions in revenue — hospitals are getting paid more for the same physician services, if the hospital employs the physician than if the physician is on his own. Let's say the hospital gets paid 30 percent more. In that case, the hospital can turn around and pay the surgeon more than he could make being independent.

There is some backlash occurring against this sort of thing. Take, for example, Partners HealthCare in Boston. They've been getting paid substantially more than the rest of the market for many years, and their presence was growing and driving up healthcare costs. Providers are saying, "If I'm going to be in this market, I might as well get paid the best I can," and that means being employed by Partners. The hospitals have been very effective in lobbying government and helping shape policy that supports their institutions, and much more effective than the other players in the healthcare market. As a result, they've been successful in translating that into bigger dollars and more work. The rest who haven't been effective in that lobbying effort are getting paid relatively less. It's a natural consequence that these institutions that are getting paid more are going to grow.

Q: In the surgery centers you've seen succeed, what factors are key to their profitability?

LL: The operational basics are the same as they've always been. The key to controlling surgery center costs, for the most part, is schedule compression, meaning doing as much throughput as possible in your center within any given day that you're open. The other piece is just making sure when your center is created that you build it in a cost-effective way. No one pays you extra because you're in a fashionable location or because you have beautiful paneling on the walls or marble or a fountain out front. Insurance companies don't pay you extra for that. When you created your center, if you did so in an economical way, that positions you long-run for being profitable.

The third key to profitability is making sure you have the volume that is well reimbursed.  In most cases, the strong reimbursement comes from having been effective in payer negotiations. The most important thing you can do to increase leverage is to control where the cases go. If you're working with a group of physicians, they need to be willing to take those cases to the higher-cost hospital if your negotiations haven't gone well. For example, let's say you're negotiating with a payor and you have 1,000 cases a year being done at the hospital.
Maybe that payor is paying $3,000 per case at the hospital, but at your surgery center, you could do well at $1,500 a case. If you can say to the payor, "We'll move these 1,000 cases from the hospital to the surgery center if you pay us $1,500, whereas so far you've only proposed that you're willing to pay us $1,000. At $1,000, we're not doing well enough to take those cases into the center." If you say that to a payor, they'll run the numbers and realize they'd save a lot of money. 

Q: What do you think about the future of out-of-network reimbursement for ASCs? How fast is it dying, and where does it persist?

LL: It's going to persist in certain locations. For example, sometimes in isolated geographies, the hospital might have the payors over a barrel. We see this sometimes. The hospital is getting paid $20,000 a case in-network, for cases that we're doing out-of-network for $3,500. Unfortunately, often when we try to contract, the payors offer us only $1,200. The payors are happy that we're there competing with the hospital, even if we're out-of-network.

Q: How do hospitals gain that much power over a payor, in terms of setting rates?

LL: Like I said, it's isolated geography. The hospital says, "If you want to be in this market, you have to accept what we're asking. If we no longer accept your insurance, if we drop your contract, you're out of this market." Because there's nowhere else for the patients to go. It's what I would call a segmented monopoly; in that little market, the hospital has monopolistic power, and that's why they get paid so much in isolated geographies.

If you're a surgery center in that market, the payor might not offer you a decent contract but will be content for you to be out-of-network, and that situation might persist indefinitely. In other places, it's different. We've been seeing real pressure from payors for probably six years or more, where payors will write nasty letters to physicians, saying, "If you take our patients out-of-network, we'll drop you from our plan," and the physicians will often get intimidated by that. They also put in requirements about taking the beneficiary — the patient — to an out-of-network facility. There are certain approvals that the patient has to go through, and there are hurdles that the payor puts in the way. In addition to that, payors do things like send the reimbursement to the patient rather than the surgery center.

Q: Where do you see growth opportunities for ASCs right now?

LL: I see hospital partnership as the primary opportunity right now. If some states liberalized their CON regulations, that would also provide significant opportunities for growth. There are a lot of states that have restrictions, and if they liberalized them, it would unleash entrepreneurial activity in developing new surgery centers. It would benefit the industry as a whole, because there would be more surgery centers, which saves the health system money and puts a check on hospital dominance. 

Unfortunately, we're in a world where what a service gets paid depends on who owns the service provider. That's driving all kinds of changes, including physician employment and hospitals buying surgery centers. I think it's the overriding theme in our current market, and the reason we're in this situation is because of the effective lobbying and control of healthcare policy that hospitals have had.

ASC advocates are making an effort, but it's tough when you're up against these big guns who do great fundraisers for political candidates, employ huge numbers of people, and, as a result, are very influential. As health systems come to grapple with lowering cost of care through ACOs or other arrangements with payors, it seems surgery centers should be a part of that. We're such a cost-effective and high-quality way to deliver these services. But I think we're still a long way from many hospitals realizing that surgery centers are important to their strategy. There are some enlightened ones getting their ducks in a row, in so that they can be cost-effective providers. They see surgery centers as important to that strategy, but I don't think that vision is widespread yet among hospitals.

Learn more about ASCOA.

Related Articles on the ASC Industry:
10 Surgery Center Administrators on Best Leadership Tactics
Is the ASC at Risk of Vicarious Liability in a Medical Malpractice Lawsuit?
7 Steps to Kick Start a Positive Surgery Center Culture

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