Consolidation in Healthcare: Should ASCs Join In?

Healthcare providers have rushed to consolidate market power over the past few years, and 2013 has been no exception.

According to an Irving Levin report on healthcare mergers and acquisitions, activity picked up during the third quarter this year, soaring 16 percent over the second quarter of 2013. There were 267 deals announced, which is 20 percent more than the third quarter last year.
Matt Searles
As health systems purchase hospitals, hospitals purchase physician practices and physician groups merge into "super groups," where do ambulatory surgery centers fit in?

"From a macroeconomic sense, as industries mature you tend to see consolidation," says Matthew Searles, MBA, Partner at Merritt Healthcare. "You see margin compression — reimbursements are tightening and the reality of our costs going up every year, so consolidation is a natural progression. We are going from an entrepreneurial environment to an environment where people consolidate. It's not bad or good, but a natural progression."

Opportunities for independence
Despite the prevalence of consolidation overall, there are still several marketplaces where ASC independence is possible, and even profitable. This is especially true for states with certificate of need legislation where ASCs don't face the same competition and rate of consolidation.

"If you are in a CON state where there aren't a lot of ASCs and there are a fair amount of physicians that could be recruited, I don't know how in need you would be for joining a hospital partner," says Mr. Searles. "There are markets where there are growth opportunities that don't involve a hospital. We may want to take advantage of that before we look at partnering."

In markets where surgeon employment has increased more dramatically, ASCs still offer great value to independent physicians and new physicians entering the market. Whether through ownership opportunities or just providing quality care for the surgeon's patients, the ASC can attract new cases and increase the bottom line.

"ASCs represent two things to surgeons: one is an environment where they have input and control over their procedures; the other is ancillary income," says Mr. Searles. "If the hospital is able to offer a more attractive package, there isn't much you can do but continue to offer efficient centers."

When hospital partners are beneficial
Today's healthcare environment promotes high quality and cost effectiveness — both traits inherent to ambulatory surgery centers. In some markets, ASCs are seeing hospitals come to them for their expertise in this arena.

"In a lot of ways, the hospital needs surgery centers as the outlet for the low cost, high quality surgeries because their quality metrics aren't quite as high," says Mr. Searles.

In communities where surgery centers have difficulty competing with hospitals that employ physicians and keep their patients within the hospital's network. Downward pressure from insurance companies that provide lower reimbursement for ASCs could make hospital joint ventures or transitioning to a hospital outpatient department more attractive.

"There are some markets where consolidation is more important," says Mr. Searles. "It's easier to be independent in some parts of the country than others. If there is a center in a competitive market without growth opportunity, sometimes partnering with a hospital can open up new avenues of growth."

ASC owners and administrators may also consider bringing on a management company to improve their bottom line with or without a hospital partner. "The ASC companies provide economies of scale that are impossible for a single center to achieve itself," says Mr. Searles. "They can also help reach out to the hospital and find avenues for partnership there."

Accountable care organizations
Some surgery centers may find aligning with hospitals for accountable care organizations beneficial. ACOs are designed as risk-sharing ventures that incentivize providers to provide high-quality, low-cost care. If these incentives are truly aligned, ASCs stand to gain tremendously from moving appropriate cases from the hospital into their centers.

"In theory the ACO is looking for the lowest cost area, so the ASC would benefit," says Mr. Searles. "If there's an environment where that's open and unbias, providers will always look for the best opportunity. However, in reality, the ACO may have its own self-interest in mind."

Hospital-controlled ACOs may still avoid performing cases in ASCs, or move outpatient surgeries into an HOPD within their network. As a result, ASCs in some markets feeling squeezed by in-network referrals may choose to sell part or whole ownership to the hospital to become involved in the ACO.

"I've heard of ASCs that have had difficulty getting involved in ACOs," says Mr. Searles. "But there is no other lower cost or higher quality outlet in many markets. I think where we see instances like this, there must be other interests at work keeping the ASCs out."

Surgery center consolidation
A new trend in some areas of the country is consolidation among two different centers. In over saturated markets where multiple ASCs operate at low capacity, there may be an opportunity to merge into one.

"I think that makes a lot of sense, but that's a complex transaction," says Mr. Searles. "The centers have two different ownerships, so it's difficult to structure. You have a lot of potential for cost reduction, but it would be difficult to pull off."

However, if the culture at both centers is similar and physicians are willing to become partners, the single ASC operating at full capacity could reduce overhead, increase profits and lend negotiating power to the owners.

More Articles on Surgery Centers:
Healthcare Reform: Where Do ASCs & Group Practices Stand?

33 Statistics on Surgery Center Case Mix by ASC Volume

5 Tips for Stretching ASC Staff During Holiday Season

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