Your Primer to Healthcare Mergers and Acquisitions

4 Trends That Are Transforming The Ambulatory Surgery Center (ASC) Industry

Apr 11, 2017

by Luis de la Prida

By Luis de la Prida, MBA, CM&AA

Volume 4 Issue 8, April 11, 2017

Ambulatory Surgery Centers (ASCs) are healthcare facilities that provide surgical procedures on an outpatient basis and typically do not require an overnight or lengthy stay in a hospital. Examples of this include cataract surgery, upper GI endoscopies, and colonoscopies. Total joint replacement surgeries have also been migrating to ASCs.

ASCs are big business. From the creation of the first ASC in 1970, the industry has grown so rapidly that, as of July 2016, there were 5,486 ASC facilities certified by Medicare, according to the Centers for Medicare and Medicaid Services (CMS).

Why the sharp growth? There are many reasons, but probably the most important is that ASCs can perform surgical procedures at a much lower cost than a hospital. For example, CMS pays ASCs approximately 49% of what it would pay a hospital outpatient department (HOPD), according to the ASCA.

The ASC industry has also benefited from interest by investors, who have been attracted by several of the appealing characteristics of ASCs—demographics, convenient locations, shorter wait times, scheduling ease, and customer satisfaction.

Furthermore, the ASC model has been attractive for physicians, who have at least some ownership in over 90% of ASCs, according to the ASCA. However, hospitals have also been active buyers, and currently have a stake in approximately a quarter of ASCs, primarily through joint ventures.

ASC consolidators/management companies and private equity groups round out the list of buyers. The overall picture is an industry that's still growing, albeit at a slower pace, both organically and through mergers and acquisitions.

At VERTESS, we advise our clients (either buyers or sellers) to take into account the following four key trends as they evaluate their best move in this industry segment:

1. Regulation is shortchanging ASCs, but that may change.

Medicare reimbursement rates used to reimburse ASCs at 86% of fees paid to HOPDs. Currently, however, ASCs receive 49% of what Medicare pays for a comparable procedure done at an HOPD. In other words, ASCs have been getting paid a lot less than they should be—a disparity that has strained the profitability of many ASCs.

However, ASCs stand to benefit from continued efforts to migrate care to more affordable venues—a trend that will hold true regardless of whether Obamacare remains in place or is replaced by another system.

Pay attention to the ASC Quality and Access Act of 2017, which was introduced in the U.S. House of Representatives on March 30, 2017. The bill introduced a series of measure, including changing the rate of inflation, that would achieve greater reimbursement parity between ASCs and HOPDs.

2. Reform is driving innovation in payment methods.

Government reform has raised the importance of revenue cycle management because increased regulation usually means that it's more complicated to get paid. Increasingly, the best run ASCs are those that systematically negotiate rates with payers to ensure that they are appropriate.

As healthcare continues to move away from the traditional fee-for-service model, savvy ASCs operators must understand the alternatives such as bundled payments, capitation, clinical integration, and shared savings.

These payment alternatives integrate care management and risk taking, and therefore require management attention, cost control and a new level of coordination and technology (EMRs). This may require ASCs to make additional technology investments.

3. ASCs are being driven to closely manage costs.

As noted above, ASCs collect less than HOPDs. To make matters even more challenging for ASCs, the way they are reimburse is changing. That not only means less revenue, it means less profitability unless expenses are well managed.

ASCs must pay careful attention to all expenses, especially those related to HR and supplies. Practice managers must assess staffing levels to ensure that they are adequate given volume levels and optimize scheduling to ensure proper utilization of the surgicenter. In addition, ASCs should try to renegotiate supplies and other costs and, where appropriate, use GPOs for further discounts.

4. Consumers and suppliers want "one-stop shopping."

One final trend is the demand for "one-stop shopping" from both consumers and suppliers.

On the consumer side, experts have noted the increasing demands that consumers are making on the healthcare system. Patients want care that is affordable, competent, and convenient. This healthcare-on-demand preference is seen in the rise of urgent care centers, retail clinics, and ASCs, among others.

To address this need, an increasing number of ASCs are recruiting other specialties with surgical cases, such as gynecology and orthopedics, creating and exploring the one-stop-shopping model. If this trend continues, it will result in combinations of ASCs with imaging center, ambulatory groups, such as physical therapy and podiatry practices, and ophthalmology, and otolaryngology.

NOTE: On May 3, 2017, I will join hundreds of healthcare professionals at the annual meeting of the Ambulatory Surgery Center Association (ASCA). The meeting promises to provide the latest business, financial, clinical, and regulatory information--in other words, the very things needed to thrive in the competitive environment that ASCs inhabit. If you're planning on attending and wish to discuss these trends, feel free to contact me so we can coordinate our schedules.

Luis de la Prida

Luis de la Prida MBA, CM&AA

Former Managing Director

Lou is a Certified Merger & Acquisition Advisor (CM&AA), consultant, and healthcare entrepreneur with over 25 years of successful experience advising middle market businesses and Fortune 500 companies.  As a former Chief Operating Officer of a medical practice, he presided over a multi-million operating budget and acquisition efforts, while transforming it into a multi-specialty medical group focused on primary care, urgent care, cardiology, neurology, and home care.

His diverse career includes nearly a decade on Wall Street, where he gained valuable international experience in financial roles at J.P. Morgan and Credit Suisse First Boston.  Lou's professional memberships include the Alliance of Merger & Acquisition Advisors (AM&AA) and the Healthcare Financial Management Association (HFMA).

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