The first six months of 2009 have been an extraordinary time in the healthcare sector. This letter discusses certain observations regarding healthcare reform, current ASC transactional trends, government regulations and new free white papers available.
1. Healthcare reform. The healthcare industry, including both payors and providers, is starting to consolidate its positions against significant healthcare reform. Healthcare reform can briefly be categorized into two distinct parts. First, covering the uninsured. Most parties are wholly for some method of assuring that all people have coverage. With coverage, the core concerns seem to be will coverage lead to reduced reimbursement or to extraordinary national debt. Second, providing an alternative option, a “public option” for insurance, to traditional managed care plans and companies. It is the second part of healthcare reform that has parties greatly concerned.
From a payor perspective, a public option is viewed as government-sponsored competition against them. Further, they have concern that a government- sponsored model will be less expensive, that the government will have to deal with less problems (e.g., can unilaterally set rates and it will be immune from lawsuits) and that it will significantly and negatively impact the number of parties that are covered by the traditional large insurance companies. From a provider perspective, a public option is concerning because providers get paid, on average, substantially less by governmental plans than they do by commercial plans. For example, hospitals are paid approximately 70 percent by government plans compared with what they get paid by commercial plans. Surgery centers and physicians are generally paid between 70-80 percent on average by governmental plans as compared to commercial plans. Thus, the migration of patients from commercial plans to public plans is viewed by providers as likely to cause a substantial negative direct hit to their revenues. This revenue loss would, in most places, be a direct negative reduction to the bottom line.
For a surgery center, a movement of even 10 percent of patients from a commercial model to a governmental model could mean the loss of 25 percent of its profits.
Over the last few months and next several months, as the President increases efforts to implement substantial healthcare reform, it will be interesting to see the extent of efforts by parties such as the American Medical Association, the American Hospital Association and the Association of Health Insurance Plans to respond to the President’s efforts. At first, these parties tended to give positive lip service to the concepts of healthcare reform. Now that they see that the administration seems quite serious about healthcare reform, the gloves are beginning to come off.
2. ASCs: The first six months. After a very challenging January and February, it seems as though ASCs as a whole have held up fairly well over the first six months of this year. Procedures are down a small bit to flat in most markets. On the reimbursement side, day-to-day reimbursement on average cases has remained fairly flat. However, there has been a significant deterioration in the ability to access substantially outsized profits through out-of-network efforts, workers’ compensation and through other types of payors that traditionally provided a significant portion of a surgery center’s profits.
3. Government regulation becomes an increasing distraction. The government continues to impose additional burdens on surgery centers and other healthcare providers. Recently, new regulations have imposed new facility ownership disclosure to patient. Further, there are increased rules under HIPAA as to inadvertent disclosures of data and several other issues. Finally, the government is also imposing what are referred to as “Red Flags Rules.” These rules require many businesses, including healthcare businesses, to implement practices to protect against identify theft. The continuous drum beat of regulation threatens to take facilities and healthcare providers away from their core business. The marginal benefit of certain of these regulations seems very questionable.
4. ASC transactions. The buying and selling of surgery centers has picked up some after an extremely slow first quarter of 2009. 2008 was an extremely busy year for surgery center transactions. These included surgery center transactions to majority interest buyers, minority interest management company buyers, hospitals and physicians. Due to changes in the credit markets, certain national companies had been putting acquisition activities on hold and there were very few majority interest transactions completed in the sector in the first quarter. As the second quarter has evolved, many parties are again searching for acquisitions.
Pricing for majority interest transactions from last year remains down by a multiple turn or two. In essence, transactions are being completed at 5.5-6.5 times EBITDA as opposed to at 6-8 times EBITDA. We are also seeing some increase in hospitals attempting to buy 100 percent of surgery centers. This is almost entirely based on both the elimination of under arrangement models and the reimbursement differentials between what hospitals get paid and what surgery centers get paid for outpatient surgical procedures. It is a trend that has been discussed for years. Currently, and typically in markets where hospitals do not believe that they need physician owner partners in the surgery center, there is an increase in these kinds of efforts.
5. 16th Annual ASC Conference: Improving Profitability, and Business and Legal Issues. ASC Communications with the ASC Association has two large conferences planned for the fall. First, we have our 16th Annual ASCs Improving Profitability, and Business and Legal Conference on Oct. 8-10 at the Westin Hotel in Chicago. This year we have nearly 97 speakers and nearly 70 sessions. We have great speakers from the surgery center industry as well as outstanding outside speakers such as Bill Lane, long-term speech writer for Jack Welch; Norm Ornstein, a political commentator of American Enterprise Institute; Craig Frances, MD, a leader in healthcare investing from Summit Partners, and several others. To register for the event, please contact the ASC Association at (703) 836-5904. The brochure for the event is also online at Becker’s ASC Review. If you register for the event, and provide a copy of this letter (or reference this letter) with your registration, and register by Aug. 15, please feel free to deduct an extra $100 from the conference registration.
6. Hospitals and Health Systems: Improving the Profitability of Orthopedic and Spine Programs. We have a second conference planned for Oct. 7. This conference is titled Hospitals and Health Systems: Improving the Profitability of Orthopedic and Spine Programs – Growing Volumes, Assessing Financial Relationships, and Business and Legal Issues. Should you have an interest in this program, please contact (800) 417-2035 or e-mail Scott Becker at sbecker@mcguirewoods.com.
7. White Papers. If you are interested in any of the following white papers, please feel free to e-mail me at sbecker@mcguirewoods.com or Kirsten Doell at kdoell@mcguirewoods.com and we will be happy to provide them to you.
- 10 Best Practices for Increasing Hospital Profitability, by Lindsey Dunn.
- Improving and Maintaining the Profitability of Orthopedic and Spine Practices – 12 Areas of Focus, by Renée Tomcanin.
- HIPAA Settlements Between Health Care Providers and the Government, by Anna Timmerman.
- What Hospitals Needs to Know about ARRA and the HIPAA Updates, by Anna Timmerman.
8. E-weekly: Becker’s ASC Review and Becker’s Hospital Review. If you would like to be added to the Becker’s ASC Review E-weekly, please go to www.beckersasc.com or e-mail sbecker@ mcguirewoods.com. If you would like us to add you to the Becker’s Hospital Review E-weekly, please e-mail me at sbecker@mcguirewoods.com.
Should you have questions about any of the issues raised in this letter, please feel free to contact me at (312) 750-6016 or at sbecker@mcguirewoods. com.
Very truly yours,
Scott Becker
