18 Top ASC Stories for 2010 — A Look at the Biggest Issues Shaping the Industry

1. Mature market. The ASC industry hit a watershed this year. "The number of ASCs will decline this year for the first time in the history of our industry," says Andrew Hayek, president and CEO of Surgical Care Affiliates. "We have gone from 8-10 percent growth to negative growth. This is a fundamental shift, reflecting that ASCs are now a mature market."

 

Mr. Hayek says successful ASCs will need to continue adding volume in the face of rising costs and flat, even declining reimbursements. "Achieving distribution growth will require a deep focus on systems, efficiencies and processes," he says. "The growth years are over," says Jon Vick, president of ASCs Inc. "Most of the good doctors are already affiliated with ASCs." As the nation climbs out of the recession, he predicts a growth rate of about 1 percent a year.


2. Disappointing reimbursements. In CMS's transition to the new ASC payment system, based on HOPD rates, Mr. Vick says ASCs had hoped reimbursements would be greater than 60 percent of the HOPD rate, but they turned out to less than 60 percent of HOPD. ASCs received a 1.2 percent inflation update in 2010, compared with a 2.1 percent update in HOPD rates. Reimbursement updates for ASCs are now based on the consumer price index, which has been rising slowly because inflation is very low.

 

Mr. Hayek says next year will also be disappointing, with ASCs getting a zero percent increase in Medicare rates, which many private payors use as well. Starting in 2011, the healthcare reform law provides healthcare facilities with a "productivity adjustment," a reduction in annual reimbursement updates, based on the estimated amount that labor productivity improves in the general economy, Mr. Hayek says. The productivity adjustment for 2011 is 1.6 percent, canceling out ASCs' estimated reimbursement increase for 2011, based on the CPI. Stagnant reimbursements come at a time when labor and supply costs are growing by 2-4 percent a year, he says.

 

Mr. Hayek says things could get worse. Beyond 2011, "there may also be additional cuts to provider rates, as the federal deficit worsens, and there may continue pressure on surgical volumes with more plans raising co-pays and deductibles," he says. "It's a very different industry than it was 10 years ago."


3. Slightly lower profits. Mr. Vick sees a slight overall decline in profitability this year, caused by the lower reimbursements and some decline in volume. However, spine-based ASCs are doing better because reimbursements are high. Bariatric procedures also command high reimbursements but volume is down due to the economy. Mr. Vick says independent centers, in particular, have seen a decline in profits. For example, he says one Michigan ASC went from $2 million in profits last year to only $500,000 in 2010, reducing its worth from $12-$14 million to less than $4-5 million. But he adds that high-performing centers have been able to make up for the losses by contracting for better rates, bringing in higher-priced cases and increasing volume.

 

Mr. Hayek sees a similar picture. "As we evaluate acquisitions, we see that most ASCs have flat to declining profits," he says. He attributes this to the new Medicare reimbursement structure and "a very difficult managed care rate environment." Most publicly traded companies generally report outpatient surgical volumes down 3-5 percent, and several reports suggest physician office visits are down 4-6 percent this year, he says.


4. Patients assume more financial risk. The rapid growth of health savings accounts and, more recently, high-deductible plans, means patients are highly incentivized to look for less costly alternatives, says Joe Flower, a healthcare futurist. To save money, patients are choosing less complex operations or no surgery at all, even if the medical literature calls for surgery. "The patient may choose just to endure the pain, to just to live with it," Mr. Flower says.

 

5. Administrators have more business acumen. The typical ASC administrator used to be a nurse promoted from inside, with no experience with contracting, recruiting and cost-accounting, Mr. Vick says. But as volume and reimbursement issues worsen, "ASCs have to be better managed to maintain their profitability," he says. "Now you see administrators with degrees." Mr. Hayek agrees. "Their job is becoming more and more complex," he says.

 

6. Management companies on a shopping spree. Mr. Hayek says at his management company, Surgical Care Affiliates, acquisitions have more than doubled over 2009 and they will be even greater next year. SCA now manages 130 centers. Mr. Hayek says physician-owners sell because they are concerned about more regulations, more personal taxes and lower reimbursements.

 

"There is a very strong movement toward management companies," says Mr. Vick, whose company represents physicians seeking to sell their centers. Clients typically are looking for more partners and want help with recruitment and contracting, he says. They can choose from among at least 40 companies that want part-ownership in the ASC. Companies have had a lot of access to capital because investors see ASCs as a good investment. "This trend is going to continue," says Fred W. Ortmann III, founder and CEO of Ortmann Healthcare Consultants. "National companies will come to the forefront because ASCs have problems accessing capital, and a lot of the management companies have plenty of money."


7. Hospitals also acquiring ASCs. "This is the biggest story of the year," says Ms. Joan G. Dentler, president of ASC Strategies, who usually represents hospitals in ASC sales. "It's a trend that is growing exponentially." She says ASCs that sell to hospitals have watched their out-of-network payments evaporate, need to start contracting with payors and realize they have no clout. A hospital may have that clout. Mr. Vick says hospitals are more interested in ASCs because they have lost a lot of business to surgery centers and continue to lose business in areas like spine and bariatrics.

 

Mr. Ortmann, a former hospital administrator, says ASC owners should not be bought by hospitals because hospitals do "a notoriously horrible job" of managing ASCs. "It's an issue of focus," he says. The ASC becomes just one of many sections within the hospital. Mr. Vick says hospitals tend to want control in the form of majority interest or the opportunity to convert the ASC into an HOPD. "Hospitals are taking advantage of the increasing payment disparities between ASCs and HOPDs," Mr. Hayek says. "As the payment disparity widens you'll see more of these conversions."


8. Rise of hybrid ownership. The most successful joint ventures with hospitals are hybrids, Mr. Vick says. That is, a management company manages the ASC, the hospital is a minority partner and physicians retain the largest interest. The most common arrangement is 40 percent ownership by physicians, 30 percent hospital and 30 percent management company, he says. Physicians can refer patients and share in revenue and profits.

 

Some management companies, however, still want a 51 percent share, which wouldn't fit into the hybrid model because the 49 percent remainder, split between the hospital and physicians, is not enough. In a three-way deal, Mr. Vick recommends first selling to the management company, because the management company pays a higher price than what the hospital would pay. "This establishes a fair market value that the hospital has to follow," he says.


9. Some specialty-specific ASCs stay independent. While hospitals gobble up orthopedic and ENT surgery centers, ophthalmology and GI centers have retained their independence. Hospitals lose money on ophthalmology, making ASCs with a focus in the specialty unappealing as an acquisition target, says Mr. Ortmann.


10. Physicians employed by hospitals. Half of physician practices in the country are now owned by hospitals or health systems, Mr. Hayek says. Primary care physicians and cardiologists have highest proportion of employed physicians, while surgeons are more likely to remain independent. But surgeons may still feel the consequences of hospital employment, Mr. Vick says. In some cases when primary care physicians are employed by the hospital, they may insist to the surgeons they refer to that any surgeries be performed in the hospital, he says.


11. Independent physicians won't die out. In almost every community, Mr. Hayek says, a strong group of independent physicians remain and they are committed to remaining independent. He thinks the pendulum might eventually swing back to independent practice. "We will learn a lot in the next few years about whether this trend will continue, as many of the employment agreements come up for renewal," he says. Mr. Ortmann says hospital employment is not something most surgeons would like. "They are a very independent group of people," he says.


12. Payors becoming more aggressive. Increasingly, health insurers are refusing to pay for surgery they deem unnecessary, Mr. Flower says. If the peer-reviewed literature shows a non-surgical intervention or less complex surgery is just as effective, the insurer will be more likely not to pay, he says. However, when there is no real medical alternative to surgery and patients cannot forego surgery, he thinks ASCs will flourish.

 

13. Retreat from out-of-network. At Surgical Care Affiliates, Mr. Hayek says less than one-half of one percent of revenue comes from out-of-network payments. "The strategy of being out-of-network is sun-setting over the long term," he says. "Payors are implementing a variety of strategies to limit out-of-network benefits across many states."

 

Mr. Vick agrees. "Any center than depends on out-of-network business for revenue is seeing a significant decline in value," he says. "You can get away with it still in most places but it's considered a short-term strategy." He also says patients frequently object when they see the high out-of-network rate on the bill, even if they don't have to pay it, and that harms the ASC's image.

 

Mr. Vick says an ASC moving away from out-of-network status has to start negotiating contracts, which is a key factor in why ASCs are linking up with a management companies and hospitals.

 

However, just when many surgery centers are walking away from out-of-network status, recent legal victories for ASCs suggest there might be some hope left for the approach. In April, for example, an Illinois trial court's decision to award a podiatric ASC almost $3 million in damages against Blue Cross Blue Shield of Illinois for refusing to pay an out-of-network claim, even though the center had obtained preauthorization. Blue Cross is appealing parts of Chatham Surgicore v. Health Care Service Corporation, but two related cases against Blue Cross are making their way through the courts.

 

Tom Pliura, MD, JD, a legal counsel for some Illinois surgical centers and manager of several ASCs in central Illinois, believes the Chatham ruling should embolden ASCs across the country to use the out-of-network option. "This case highlights that if you're willing to challenge an aggressive insurer on out-of-network status, you can win," he says.


14. More and tougher Medicare inspections. CMS has beefed up enforcement of its Conditions for Coverage for ASCs, This year, Mr. Hayek says, "we are seeing four times the rate of CMS surveys over last year, and the surveys have become more difficult and complex." The Conditions for Coverage were revised in 2009 and now include, for example, a 12-page checklist for infection control process. In addition, the 2009 economic stimulus bill stepped up funding for more on-site surveys. HHS Secretary Kathleen Sebelius stated that one in three ASCs would be surveyed this year, compared to historical rate of about one in 10. The new actions show that "when people on Capitol HiIl say ASCs are unregulated, they could not be further from the truth," Mr. Hayek says.


15. Specter of healthcare reform. A common concern is that the direction the new reform law is taking healthcare may not benefit ASCs much. "In general, healthcare reform means greater regulation, greater cost cutting, greater personal taxes," Mr. Hayek says. The reform law will expand coverage to some 30 million people by 2014, but half of them will be on Medicaid, which is not profitable for ASCs, he says. "Now that there is a stake in the ground, the government will take a bigger role in healthcare, which means volume with a zero to negative margin," Mr. Hayek adds. "We have this issue of the federal deficit. To combat it, government will have to reduce rates. There will be greater cuts in Medicare just to finance the healthcare reform law." For all of its unpopularity, however, Mr. Hayek believes the law will stick. "The odds of repealing healthcare reform are low," he says.


16. Rise of accountable care organizations. One possibly positive consequence of the reform law is the introduction of accountable care organizations. In theory, at least, surgery centers are the low-cost, high-quality alternative, which is exactly what ACOs want. However, Mr. Hayek notes many ACOs will be hospital-led and hospitals would have to agree to shift volume from their own HOPDs to ASCs. "The question is," he says, "Will there be enough of a benefit from savings at ACOs to outweigh the hospital's potential loss in revenue? As a hospital leader, you have to weigh the relative benefit of this shift as it impacts the financial health of your institution."

 

Mr. Flower says ACOs require different mindset than ASCs are used to. "A surgery center is pretty much the opposite of an ACO," he observes. While the ACO is concerned about the entire continuum of care, the ASC is used to focusing on one niche. "A surgery center does certain kinds of procedures efficiently and well," Mr. Flower says. "But in an ACO, providers are incentivized to have a longer-term relationship with the patient." He adds that as ACOs drive for lower costs, non-surgical options may become more common. While many take ACOs very seriously, Mr. Vick doesn’t think they'll amount to much. "I have been in this business since 1984," he says. "Every other year there has been something new that creates a threat. Healthcare reform is in the same category."


17. Increased lobbying. This year, as some key healthcare reform regulations are being drafted and the November elections may well change the balance of power in Washington, the industry has been stepping up its lobbying presence. The ASC Advocacy Committee, launched in mid-2009, has doubled the lobbying dollars behind surgery centers by picking up extra contributions from companies and state societies in addition to what they contributed to other ASC organizations.

 

This new wave of lobbying has to contend with a perception in some quarters that ASCs are on the defensive in Washington. "ASCs don't have that much political force today," Mr. Ortmann says. "The hospital lobby got a ban on physician-owned hospitals, which is a sign of their strength. If they could do that, why couldn’t they go ahead and ban ASCs?"

 

But Mr. Hayek, who chairs the advocacy committee, says ASCs' power in Washington is rising, although it may take years for the current lobbying efforts to fully pay off. In August, for example, more than 20 U.S. senators signed a letter asking CMS to fix the ASC reimbursement update, more than double the number of senators who signed a similar letter last year. "We are doing a better job as an industry in tackling the issues," Mr. Hayek says. "In this past year, there has been more coordinated work in Washington than we did previously."

 

18. New executive director at ASC Association. The ASC Association has a new executive director. As of Oct. 4, the organization will be headed by William Prentice, a seasoned healthcare lobbyist, well schooled in the ways of Capitol Hill. Mr. Prentice, who has been senior vice president for government and public affairs at the American Dental Association, succeeds Kathy Bryant, who also had a great deal of Washington experience. "I'd like to broaden our advocacy and work for new and creative ways to advocate for regulatory changes that can benefit ASCs," Mr. Prentice said when his appointment was announced. "I believe the ASC industry offers one of the most significant opportunities to be a leader in the changes that will occur with healthcare reform."

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