Will the Physician-Owned Surgery Center Remain a Viable Business Model: Q & A With Healthcare Futurist Joe Flower

Joe Flower, a healthcare futurist with 30 years' experience who has worked with clients ranging from World Health Organization to the Global Business Network and numerous hospital associations and a keynote speaker at the 8th Annual Orthopedic, Spine and Pain Management Driven ASC Conference, explores the question: "Will physician-owned surgery centers remain a viable business model given current and future healthcare reform efforts?"



Q: Do you think physician-owned surgery centers will remain viable?


Joe Flower: As a futurist, I look at the forces out there affecting this question and if those forces are getting stronger or weaker. The essential question, here, of whether or not physician-owned surgery centers can remain viable, I took to mean, "Can they continue to expect the kind of growth and profitability they have historically seen over the past several decades?"  

Surgeons have long argued the cost-effectiveness of their operations, since an ASC gets much lower reimbursements than a hospital. But increasingly, the competition will not be with the hospital price, but with the overseas price (which can be 25 percent or less than ASC pricing), the price of medical management of a condition (which can be 10 percent or less than ASC pricing) or zero — the price of doing nothing at all.

Q: So, what are the various forces influencing the future viability of surgery centers?

JF: Well, there are several that, when combined, seem to challenge the viability of the ASC model. First, we have already seen the emergence of studies questioning the cost-effectiveness of some surgical operations for some diagnoses. While these operations may be medically appropriate and effective, they might cost more than other modalities deemed equally effective. Comparative effectiveness research is on the rise (now at $1 billion per year), and we expect the government and private insurers to eventually refuse to cover more expensive procedures that appear to be no more effective than less-expensive procedures. This is concerning for ASCs because this research focuses especially on high-cost areas of healthcare thought to have a possibly viable alternative, and many of the diagnoses explored are the same ones being treated at ASCs. While patients can always go outside insurance for treatment, when this occurs, costs have traditionally dropped dramatically, as has been the case in the cosmetic surgery and laser eye surgery markets.

Second, we will see steeply rising premiums in private insurance. Coverage mandates don't go into effect until 2014, and the recession has caused more and more individuals to go without insurance. Healthy people are more likely to go without than are those with costly chronic conditions, which drives up the cost of coverage. Even after the mandates go into effect, the healthy are likely to enroll in plans with high deductibles and less comprehensive coverage. Additionally, the new healthcare law will only allow insurers to discriminate pricing based on age, not gender or medical conditions. The law also includes a provision that the cost of insurance for the older enrollees can be no more than three times the cost of coverage for younger enrollees. This means rather than bringing down the cost for older individuals, the cost for younger enrollees will go up. As costs increase, we'll see a movement of more and more people to "skinny," high-deductible plans in which people assume more of the burden of payment for actual medical services, and this includes most of the newly insured in 2014. The reasons that cause the currently uninsured not to have insurance will cause most of them to choose HDHPs when coverage is required.

Therefore, ever-increasing pressures on cost, and even the possibility of a second round of healthcare reform after the 2012 election, perhaps much more draconian, focused on cost alone, also further challenges the viability of surgery centers. During this round of health reform, providers largely escaped caps or other dictations on price, but this may not always be the case. It would be very difficult, politically, to drive down Medicare payments, but it may end up being something that needs to be done. Caps on private insurers would probably be less politically difficult because more voters are exposed to this market, and voters would probably cheer it on if it meant driving down their healthcare costs.

Finally, there is a flood of new information sources to help people make medical decisions, especially focused on high-cost areas that may have a viable alternative. As healthcare costs increase for consumers, the end customer is going to feel much more pressure to make a wise decision because their money is now on the line.

Q: With more money from consumers on the line, wouldn't ASCs benefit from being cost-effective facilities?

JF: While currently a cost-effective option, ASCs will increasingly face competition from oversees facilities and medical management, both of which are almost impossible to compete with on costs alone. Some insurers and self-insured organizations today are covering procedures at foreign facilities, and I expect more insurers to cover these in the years to come. Different diagnoses have different possibilities of being performed out of the country, of course, but the ones that are more vulnerable to go overseas are the ones most often associated with ASCs.

With patient costs on the rise and greater consumer access to comparative effectiveness research, we may also see more patients foregoing surgery and instead using other non-invasive treatments for their conditions. We may also see more health plans require medical management for a certain amount of time before they agree to cover surgery. Patients, however, can always go to outside payors. If this occurs, more surgeries could become like cosmetic surgery — perfectly legal, widely available, but bought out of one's own pocket. ASCs could market to these consumers, but as I mentioned before, if this occurs, costs to consumers will drop, likely reducing ASC revenue.

Q: Given these forces of cost pressures, increasing patient responsibility and growing consumer access to comparative effectiveness and cost information, how will the healthcare industry as a whole adapt?


JF: Insurers will likely move to capitated plans (where a physician is paid each month for overall care of a patient or care of a certain condition) and bundled payments. In order to profit given these payment arrangements, we will see providers consolidate and integrate and offer more bundled products (such as for a hip transplant), with transparent, stable prices and warranties.

Q: If these forces do indeed create more integrated healthcare delivery systems, what happens to the standalone ASC?


JF: These and other pressures make it appear that the small, highly-focused, independent ASC will likely become a much more difficult business model to maintain at current levels of growth and profitability. We are likely to see more consolidation into larger organizations treating a wider variety of diagnoses, and more consolidation of free-standing surgery centers into the larger corporate context of hospitals and healthcare systems.

Q: And what about the entrepreneurial physician, will that concept become obsolete?

JF: Not every physician is going to end up being on salary to a healthcare system. Some models will emerge with varying levels of integration. Some systems might be similar to Kaiser, while others might be modeled after the Mayo Clinic, which is a large doctor-owned multispecialty practice with its own facilities. There may also be more loosely jointed networks similar to Intermountain Healthcare, where the physicians work closely with the system but aren't necessarily on its payroll. These consolidations need not come in the form of monolithic hierarchies. There are multiple business structures available in which surgery centers and other specialty organizations can work with larger entities. All things considered, the coming years are likely to be as great a period of change for ASCs as they are for the rest of healthcare.

Hear Joe Flower speak on "The Changing Future of Healthcare in the United States" at the 8th Annual Orthopedic, Spine and Pain Management Driven ASC Conference: Improving Profitability and Business and Legal Issues (June 10-12, 2010: Chicago).



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