Impact of Budget Act on ASC to HOPD conversions: 4 FAQs

On November 2, Congressional leaders and the Obama administration enacted the Bipartisan Budget Act of 2015. This 144-page bill features several important components, such as funding of the federal government for two years, raising the debt ceiling and averting Medicare premium increases for beneficiaries.

One component of particular interest to hospitals and ambulatory surgery centers (ASCs) is the inclusion of a "site-neutral provision" (section 603). This provision states that as of January 1, 2017, hospitals that set up or acquire off-campus outpatient facilities, such as ASCs and physician offices providing outpatient surgical services, will not be eligible to receive reimbursements under the outpatient prospective payment system (OPPS). Rather, these provider-based entities, often referred to as hospital outpatient departments (HOPDs), would be eligible for reimbursements under the applicable non-hospital payment system — either the physician or ASC payment system. Note: Existing provider-based outpatient departments will be grandfathered in.

Over the past several years, our firm has received numerous questions from physicians and hospital administrators about converting an ASC to HOPD. We attempted to address many of them in two previous Becker's Healthcare columns: "10 Things to Know About Turning a Surgery Center Into a Hospital Outpatient Department," published in 2012, and "6 FAQs about turning a surgery center into a hospital outpatient department," published in 2014.

Not long after the bipartisan agreement on the legislation was announced, we were contacted by a number of providers and publications to address questions on the bill and share our insight on what we believe will be its effects on the hospital and ASC industry.

Here are four of the most frequently asked questions and our responses.

Q: How will this legislation likely impact hospital outpatient strategies?

A: Hospitals and health systems that already have plans to develop an HOPD or acquire an ASC or physician office to convert to an HOPD will try to fast-track those plans to get the facility established before January 1, 2017. This will allow them to take advantage of the grandfather clause and be able to bill at the higher OPPS reimbursement rate.

Hospitals on the fence about whether this is the opportune time to pursue establishment of an HOPD — either through acquisition or development — have a decision to make. Since failing to have their facility grandfathered in would result in lost Medicare revenue, they will need to decide whether the ability to capture that higher reimbursement is enough of a reason to set acquisition or development plans in motion.

Hospitals with a partial ownership interest in an outpatient surgical facility may look to acquire all of the facility before the January 1, 2017, "deadline" to be included in the grandfather clause. In order for an ASC to transition to an HOPD, the hospital must own 100% of the surgery center.

While there may be less of an incentive to establish an HOPD after January 1, 2017, we do not expect this date to be the end of a hospital's interest in establishing HOPDs or pursuing ASC joint ventures. Hospitals will still want to acquire some or all of an outpatient surgical facility to have that asset in their continuum of care for value-based reimbursement, bundled payments, and other new reimbursement methodologies. There will still be tremendous value for having access to lower cost surgical environments.

Q: How will this legislation likely impact physician-owned ASCs?

A: In the short term, surgery centers become more appealing targets for hospital acquisition and subsequent conversion.

If an ASC's owners were already in discussions with prospective hospital buyers to sell less than 100% of the facility, the January 1, 2017,deadline may not impact those discussions or it may lead to hospitals pushing for acquisition of the entire facility.

If an ASC's owners were already in discussion with prospective hospital buyers to sell the entire facility, the deadline may serve to accelerate discussions. Hospitals may be willing to increase their offer as a means to entice the ASC owners to sell sooner than later.

On the other hand, if a hospital senses that the ASC's owners may be dragging their feet on a sale and become concerned that a deal may not be possible before the deadline, the hospital may choose to pursue other HOPD strategies, such as acquiring a different ASC or physician office, or developing its own outpatient surgical facility. The hospital may even choose to give a "take-it-or-leave-it" offer to force ASC owners to make a decision to allow for ample time for the hospital to pursue an alternative strategy if the ASC chooses to "leave it."

After the deadline, and in the long term, ASCs will likely remain appealing acquisition targets for hospitals lacking a strong outpatient surgical infrastructure because of the new reimbursement methodologies described earlier.

Q: How will this legislation likely impact merger and acquisition activity?

A: For reasons already described, it reasonable to expect to see a spike in M&A activity in 2016, with a decline after the January 1, 2017, deadline.

M&A activity levels may drop below recent historical averages for a time, but as the new reimbursement structures become way of life, the activity should eventually return closer to recent historical averages.

Q: How will this legislation likely impact third-party payers?

A: This will be a particularly interesting aspect to watch as it has the potential to have a significant impact on hospitals.

Payers often follow the lead of Medicare and base their reimbursement off current Medicare rates. While HOPDs established prior to January 1, 2017, will receive the higher Medicare payments provided under the OPPS, payers may seek to reduce hospital reimbursement closer to the physician fee schedule and ASC rate for outpatient surgical procedures that HOPDs established after January 1, 2017, will receive. The reason payers may give for pushing for these lower rates is they will technically represent the current Medicare reimbursement rates for HOPDs — just not the current rates HOPDs are receiving from Medicare.

If HOPDs see their commercial rates reduced, their operating margins will become tighter, which will place an even greater emphasis on running these facilities — operationally, financially and clinically — like a low-cost, high-volume ASC. Surgery centers have found success in this model, but it is challenging and requires careful planning and execution, and frequent review of operations to identify and eliminate waste and improve efficiency.

Oftentimes, when ASCs are converted to HOPDs, some of the processes that were critical to the surgery center's success are lost. Hospitals will need to be careful not to lose these processes and replace them with less efficient (i.e., more costly) ones. Concerns about running the facility efficiently (like an ASC) may serve as an impetus for hospitals to pursue co-management models with physicians and/or possibly bring in an outside expert in this area who can help manage the facility and establish the processes needed to ensure viability.

Joan Dentler is president and CEO of Avanza Healthcare Strategies, which provides healthcare organizations with strategic guidance, with a focus on outpatient services and population health management. For more than 25 years Ms. Dentler has been consulting on, developing or operating hospital outpatient services, ambulatory surgery centers and community health initiatives.

The views, opinions and positions expressed within these guest posts are those of the author alone and do not represent those of Becker's Hospital Review/Becker's Healthcare. The accuracy, completeness and validity of any statements made within this article are not guaranteed. We accept no liability for any errors, omissions or representations. The copyright of this content belongs to the author and any liability with regards to infringement of intellectual property rights remains with them.​

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