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14 Observations and Thoughts and Issues for ASCs 2015 – 2016

There are several big themes that currently run throughout the ASC industry. These include pressures on reimbursement and case numbers, reductions in the number of independent physicians, evolving payor control in many markets, issues with hospital control in many markets, the evolution of narrow networks and the movement towards consumer payment. In short, it is a daunting and fascinating time for ASCs.  

Here are 14 issues to consider:

1.    The Big Four ASC Specialties.  The big four specialties for ambulatory surgery centers include ophthalmology, orthopedics, GI and pain management. Overall, these specialties remain strong and reasonably independent. Ophthalmology, GI and pain management provide the largest number of cases to ASCs by case volume. Orthopedics, in contrast, comprises 15 percent of all ASC surgeries, but is very important by revenue.

Ophthalmology remains a stalwart for ASCs for several reasons. First, it is largely paid for by Medicare so the case volumes and payments are not as dependent on changes in the commercial insurance market. (i.e., about 80 percent plus of ophthalmology is likely paid by Medicare.) Second, ophthalmologists remain largely independent as they have not been as sought after by hospitals as employees and are not as dependent on hospital networks for referrals. Third, the volume of cataract surgery continues to rise. The core cases performed by ophthalmology in ASCs can be characterized as medium reimbursement, which means higher volume.
 
Gastroenterology and endoscopy also remain critical to ASCS.  Medicare is the payor for approximately 35 to 40 percent of GI procedures and the reimbursement of screening colonoscopies. The growth of colon cancer and awareness has meant that gastroenterologists remain very busy. Further, gastroenterologists while pursued by hospitals have been able to remain fairly independent and thrive to date. Thus, it’s also a specialty not dominated by hospital employment. GI procedures in ASCs are generally thought of as high volume, low to medium reimbursement.

Pain management has been more challenging for ASCs. Here there has been great growth in pain management procedures but also pressure from payors on the number of procedures performed and pressure from Medicare on utilization. While pain management physicians remain fairly independent, surgery centers have faced pressure as pain management reimbursement has led many pain physicians to move cases from ASCs to their offices. More complex procedures remain in ASCs. Pain management is generally thought of as high volume, low reimbursement. 

Orthopedics in ASCs remains critical. Of the big specialties, it has the highest average reimbursement coupled with fairly strong case numbers.  Overall, orthopedics are more dependent on commercial reimbursement than the other three big specialties. Orthopedic physicians are also very sought after as hospital employees. However, mature and market leading physicians and practices have been able to remain fairly independent and strong economically without joining hospitals as employees.

The highest case volumes for specific cases are for colonoscopies, cataracts and pain injections. Cataract removal is the most common service provided by ASCs, comprising 17 percent of all ASC Medicare procedures.

2.     Spine.  Spine continues to grow in ASCs. However, there continues to be problems relating to payors. In many places, surgery centers have trouble getting payors to pay for spine procedures. Medicare has moved to allow certain spine procedures to be performed in ASCs, which may help with payors. ASCs can offer a huge amount of cost savings per spine procedure.

CMS finalized the addition of nine spine codes regarding the ASC-payable list that were implemented Jan. 1, 2015. Additionally, CPT codes 22551, 22554, 22612 were moved to codes APC 0425, resulting in a higher reimbursement.

Kenny Hancock, President and Chief Development Officer at Meridian Surgical Partners, states, "We believe there will be more spine surgeons looking to develop ASCs in the future. We believe this is driven largely because of patient demand. It’s where the consumer market is headed. Patients are seeking high quality surgical care in a safe and lower cost environment. With the abundance of online resources related to spine surgical options such as videos, presentations, white papers and other educational materials, patients can easily obtain information and are being directed toward minimally invasive surgical techniques and surgeons who provide that alternative."

3.    Payor Consolidation is Daunting.  Presently, the five key commercial payors control approximately 50 percent of all covered lives. The big five payors include BlueCross, United, Cigna, Aetna and Humana. The companies are consolidating, resulting in less payors. Less payors in a community translates into less market options for surgery centers. In essence, if there are only a few key payors in a community, an ASC must either contract with them or face challenges of being out-of-network with them. Aetna recently announced its $36 billion merger with Humana in July. As the pool of payors continues to decrease, this is of great concern for surgery centers.

ASCs, unless primarily ophthalmology driven, rely very heavily on commercial reimbursement. Thus, the growing market power of payor gives ASCs more concern as they have less options to negotiate with. Further, ASC find that the payors that they do negotiate with have substantial market share and power.

4.    Consumer Paid Healthcare.  Over the last few years, there has been significant movement to high deductible plans and to health savings accounts. This can impact cases and collections. For example, as consumers are responsible for a greater portion of the cost, this may lead to price shopping in the long-term, which has advantages to ASCs. In the short-term, however, it can make parties delay surgeries that can be delayed. In 2015, approximately 80 percent of the plans offered by employers are expected to be high deductible with deductibles reaching $1,200 or higher. In many situations, annual deductibles are much higher.

Many ASCs and other providers perceive that higher deductibles reduce case volumes. Perhaps as importantly, they make the ASCs very dependent on collecting from the beneficiary/patient. This can make payments harder to collect. Even a few percentage points lost in reimbursement can have a major impact on profits.   

5.    Hospital Physician Joint Ventures.  The growth in hospital employment and hospital consolidation and payor control has tended to lead to more not less physician hospital joint venture ASCs. For example, certain national companies are focused on hospital joint ventures as a go-to market strategy. The perception being that a hospital partner can make payor contracting easier and can help with physician relationships in a specific area. Hospitals in many markets have grown to view ASC joint ventures as a critical strategy for either freeing up hospital operating rooms, developing closer relationships with physicians and for having a low cost site of services for outpatient surgery.    

Many hospital systems are quite proactive in their efforts as opposed to simply defensive. Independent surgery centers in some markets have gravitated to hospital partners for much the same reasons the national ASC chains have. Some national chains and independent ASCs have heavily resisted hospital partnership. Of all the ASCs operating in the United States, approximately 20 to 25 percent have some ownership by a hospital partner.

Ambulatory Surgical Centers of America (ASCOA) CEO Luke Lambert says, "Hospitals now see ASCs as essential to a future where quality and cost effectiveness will be demanded. Regulators are beginning to appreciate how important ASCs are to access and controlling costs. Payors have become much more active in creating incentives for patients and physicians to make use of ASCs. With this growing level of recognition and appreciation, hospitals, payors and risk taking provider groups are buying and partnering with surgery centers like never before."

6.    Out-of-Network Remains a Challenge.  Each year, there are approximately $600 billion of out-of-network claims that are processed throughout the country. Increasingly, big payors and small payors are clamping down on out-of-network payments. They either look to pay a smaller amount or don’t pay, or the ASC has to fight to get paid. This has become a constant issue with surgery centers and physicians. In fact, certain companies have evolved like CollectRX in part to focus very directly on these issues. 

Naya Kehayes, CEO and managing principle of Eveia Health Consulting & Management, says, "Payors are being held accountable by employers and are scrutinizing out-of-network claims. As a result, payors are implementing aggressive audit procedures and demanding refunds from providers who offer out-of-network patients discounts. Payors are also implementing compensation penalties to physicians utilizers of out-of-network surgery centers and some are terminating contractual relationships with providers to deter physicians from providing surgery in an out of network surgery center."

7.    The Number of Surgery Centers.  There are currently approximately 5,400 to 5,700 Medicare-certified surgery centers in the country. In contrast, there are about 5,000 acute care hospitals. Of the 5,400 to 5,700 surgery centers, we would expect that approximately 30 percent to 40 percent have a hospital or a management company partner. This means that there are still several thousand that are "independent."

John Newman from Constitution Surgery Centers says, "To paraphrase Dickens, this is the both the best of times and the worst of times for ASCs. Never have the challenges been greater for the industry. Overall, the ambulatory surgery center space reflects a mature market, with fewer opportunities for true de novo development. There also are a number of challenges for existing facilities. These range from the impact of hospital physician employment to price transparency initiatives and other increased regulatory burdens to third party payor cost-containment measures, including in particular out-of-network constraints. That having been said, I remain bullish on the future for ambulatory surgery centers. ASCs fundamentally empower physicians to promote efficiency in patient care. As long as ASCs maintain their inherent capacity to be both simultaneously cost-effective and qualitatively superior clinically, they will always have a place in the market. With technological advances, I see this role only growing for well-managed facilities to undertake a broader array of more complex surgical services. The key is for ASC owner operators to really know their markets and be masters of the data and analytics necessary to demonstrate and be compensated for their financial and clinical merit."

8.    Reimbursement.  Medicare reimbursement remains relatively flat for surgery centers. From a commercial reimbursement perspective, the movement in reimbursement is all over the place. Surgery centers are often most at risk in situations where they have received great reimbursement from payors in the past. In contrast, there does not seem be draconian reductions in reimbursement. The bigger challenge in markets appears to be just getting a good contract at all with payors in certain areas.

Naya Kehayes, CEO and managing principle of Eveia Health Consulting & Management presents some interesting insight on payor contracting issues and reimbursement. She says, "ASCs may not present an opportunity for savings to payors in certain markets due to market competition and increased rate competition by hospitals for outpatient surgery. With the migration of surgery out of the hospital setting, hospitals focus their efforts on increasing reimbursement rates for services they provide and they may reduce reimbursement rates on outpatient surgery in exchange for increases to rates on services they provide as part of their negotiation with payors. Therefore, hospitals may have lower reimbursement rates than an ASC for traditional outpatient surgical procedures. This is impacting the ASCs ability to negotiate contracts in markets where hospitals are undercutting surgery pricing."

9.    The Large Chains – Majority and Minority Investment.   The large chains seem to be thriving and recovering fairly well. A couple years ago it seemed like a couple of the chains had negative growth. Now it seems like they have returned to relatively positive growth. Many of them are very strategic in their development and growth. Just this past spring in March, Tenet Healthcare formed a joint venture ambulatory business with United Surgical Partners International, thus forming the largest ASC company in the current market.

Further, AmSurg has diversified through acquisition, Surgery Partners and Symbion combined and SCA seems to be growing rapidly and thriving.  

Many of the chains that focus on ownership of a minority of an ASC also seem to be thriving. These include companies like ASCOA, Regent Surgical Health, Nueterra, Blue Chip Surgical Partners, ASD Management, Merritt Healthcare, Constitution Surgery Centers, Physicians Endoscopy, Surgical Management Professionals, Pinnacle III, Foundation Healthcare, Practice Partners in Healthcare and more. MFC and Meridian Surgical Partners who focus on majority ownership, also seems to be thriving.  
 
ASCOA CEO Luke Lambert says, "In the next five years, we'll continue to see physicians selling ownership in their ASCs to hospital systems, specialized ASC companies, and risk taking provider groups. In states where the hospital lobby largely restricted ASC development we’ll see hospitals leading the development of new centers in partnership with physicians and ASC development companies. Overall the ASC industry’s growth will be modest but those that have aligned themselves will prosper.”

10.    Surgery Centers at Some Point Might Employ Physicians.  This may be an offensive or defensive effort. There are certain ASC companies that employ physicians. This may become a trend where ASCs or companies perceive there is no choice if there continues to be a decrease in the number of independent physicians otherwise available to invest in surgery centers.  

Ambulatory Surgical Centers of America (ASCOA) CEO Luke Lambert says, "For the past 40 years, the surgery center industry was largely built by physician entrepreneurs. They put their capital at risk to better serve the patients, improve their productivity and create an additional source of income. While patients could directly appreciate the dramatic cost savings and higher quality care they received in ASCs these physician-driven ventures were largely unappreciated by hospitals, regulators and payors."

As independent physicians become less available to build and use ASCs, companies may increasingly employ physicians. This is not a clear trend as of yet.

11.     Geography Remains Critical to Success.  The area of the country that an ASC is in remains critical. In some areas of the country or some communities, there are either (1) minimal or substantial independent physicians, (2) a presence of CON law, (3) there may or may not be an interest in joint ventures by the local hospitals, or (4) there is a great deal of hospital employment or not. Finally in many markets, there may be excellent or poor market reimbursement as well as there may be extensive or limited payor control.

12.    Legal.  From a legal perspective, there are a handful of issues that drive the greatest amount of attention for surgery centers. These include issues like redemptions of physicians, enforcement of non-competes, compliance with safe harbors and other financial relationships with physicians. In addition, the following issues also have great impact for surgery centers: the price at which you can sell shares to physicians, anesthesia relationships between ASCs and their physicians, the use of pathology labs specifically by GI driven surgery centers, the compliance with HIPAA and data privacy rules and labor and employment issues. Finally, there is generally more time spent on healthcare compliance, and billing and coding issues and audits than ever before.

As to legal issues, the industry has seen several? false claims cases related to the pricing of shares and related to anesthesia relationships with surgery centers.   The ASA (American Society of Anesthesia) has attempted to cause the Department of Justice to attack such ASC anesthesia relationships and the OIG has responded negatively to an ASC anesthesia relationship in OIG Advisory Opinion 12-6. 

Many of these legal issues are very nuanced with a tremendous amount of interpretation and gray areas.

13.    Hospital-Employed Physicians as Investors.  From a legal perspective, there are strong arguments that hospital-employed physicians should be able to invest in joint venture ASCs where the hospital is a partner. Sixty-seven percent of ambulatory surgery centers report being moderately to severely impacted by the increase in hospital-physician employment. Here, there would have to be certain caveats and requirements to allow such investment. For example, the physicians would be treated like any other physician in that the physician could not be helped in their investment by the hospital and the hospital cannot force the physician to invest.

This concept of whether hospital-employed physicians can invest has become a bigger issue as more physicians are employed and as hospital become more active with ASCS.  

14.    Direct Marketing by ASCs.  In certain specialties and centers, direct consumer marketing is very strong. The specialties where it seems to be the strongest include pain management, plastic surgery and spine. Direct marketing and marketing arrangements by ASCs also seems to be a growing trend in the arena of orthopedics and GI.

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