Your Primer to Healthcare Mergers and Acquisitions

7 Trends Transforming the Ambulatory Surgery Center Industry

Apr 9, 2019

by Hilsman Knight

by Hilsman Knight, CM&AA, Managing Director

Volume 6 Issue 7, April 9, 2019

One could argue that few healthcare industries had a better 2018 than ambulatory surgery centers (ASCs). The numerous developments from last year — and the past several years, for that matter — have ASCs well-positioned to take on a greater role in meeting the ever-growing surgical needs of patient populations.

At VERTESS, we advise our clients — either buyers or sellers — to consider the following key trends as they evaluate moves in this dynamic industry segment:

1. Rising Reimbursement

When the Centers for Medicare & Medicaid Services (CMS) released the 2019 final payment rule for ASCs and hospital outpatient departments (HOPDs), it finalized the proposal to align ASC and HOPD payment update factors. ASCs were receiving payment updates based on the Consumer Price Index for All Urban Consumers (CPI-U). Under the final rule, CMS will now use the hospital market basket to update ASC payments from 2019 through 2023. With this change, reimbursement for ASC procedures received an effective update of 2.1% on average over all covered procedures for 2019.

ASCs can look forward to higher annual payment updates than they are used to, at least through 2023. Since private payers often base their ASC reimbursement on a Medicare rates, the shift to the hospital market basket should have a positive ripple effect on payments.

2. Expanding CMS-approved procedure list

The final rule delivered other noteworthy wins for ASCs, including CMS lowering the device-intensive procedure threshold. This resulted in an increase of more than 140 new device-intensive procedures ASCs can now afford to provide for Medicare beneficiaries. CMS also chose to keep all procedures that were added to the ASC-payable list from 2015-2017 on the covered procedures list. This included numerous spine surgery codes.

Furthermore, a revision by CMS to the definition of "surgery" in the ASC payment system resulted in the addition of a dozen cardiac catheterization procedures. CMS also added five additional procedures performed during cardiac catherization procedures.

While CMS did not add any total joint replacement codes, it is believed that such procedures remain under consideration for future addition.

3. Continued outpatient migration

These new rules will serve to further drive a trend that has contributed to the proliferation and growth of ASCs: outpatient migration.

As a Becker's Hospital Review article notes, "Numerous statistics demonstrate that outpatient migration continues to gain steam. There's no reason to believe this will stop soon. Factors contributing to the momentum include development of advanced technology and anesthetics, physicians becoming more comfortable with minimally invasive approaches to care, consumer and payor demand for lower-cost care, and tightening reimbursement."

Another significant factor: ASC physicians are increasingly — and safely — performing more complex, higher-acuity procedures. These include total and partial joint replacements; spinal procedures (e.g., cervical disc replacement, lumbar fusion); the previously mentioned cardiac catheterization procedures; and retina cases.

Medical device companies, observing this ongoing shift, are increasingly catering to the needs of ASCs. One example: robotics technology. Now that some systems are entering their second or third generation of design, prices are declining. Furthermore, surgeons have become more comfortable with the technology (from using it at hospitals) and performing more complex cases on an outpatient basis. Robotics companies are increasingly pursuing ASCs as new clients, and a growing number of centers are investing in the technology.

ASCs stand to benefit from continued efforts to migrate care to more affordable venues — a trend that should hold true regardless of whether the Affordable Care Act (i.e., Obamacare) remains in place or is eventually replaced.

4. Growing interest in the model

ASCs are a hot commodity. In recent years, we have seen an increase in hospital and health system acquisitions of as well as joint ventures with ASCs — a trend not likely to slow down any time soon.

A 2018 national survey of health system and hospital senior executives and clinical leaders at health systems and hospitals showed that more than 40% of their organizations owned or are affiliated with a freestanding ASC; roughly two-thirds are joint ventures with physicians. The survey also showed that nearly half of the organizations intend to pursue more ASC investments in the coming years.

Health systems and hospitals have competition. ASC management and development companies (e.g., AMSURG, Surgical Care Affiliates (SCA), United Surgical Partners International, Surgery Partners) continue to seek new partnership opportunities and build ASCs. As we saw with the 2017 acquisition of SCA by Optum, a division of UnitedHealth Group, payers are interested in adding surgery centers to their portfolio. Finally, private equity firms getting into the ASC ownership game, primarily through investments into medical groups with affiliated surgery centers.

5. Cost management remains key

Despite some positive news concerning reimbursement, ASCs continue to be paid much less than HOPDs. Many ASCs are also seeing increases in their operating expenses attributable to greater spending in areas including staffing, due to greater competition for personnel; technology (e.g., electronic medical records (EMRs)); capital equipment, and cybersecurity.

Surgery center profitability hinges upon the ability to provide fast, efficient, and safe procedures at low costs. Successful ASCs pay careful attention to all expenses, especially those related to human resources and supplies. Managers must assess staffing levels to ensure that they are adequate given volume levels and optimize scheduling to ensure proper use of the center. In addition, ASCs must continuously work to renegotiate supplies, service contracts, and other costs, using group purchasing organizations for further discounts.

6. New payment methods

While fee-for-service (FFS) remains the predominant ASC payment model, there has been an uptick in new models. Savvy ASC operators are increasingly exploring alternatives such as bundled payments, capitation, clinical integration, and shared savings.

Such payment alternatives integrate care management and risk taking, therefore requiring management attention, cost control, and a new level of coordination and technology (e.g., EMRs). To take advantage of new payment models may require ASCs to make additional technology and service investments.

7. Demand for "one-stop shopping"

One final trend worth noting is the growing demand for "one-stop shopping" from consumers and suppliers. On the consumer side, patients want care that is affordable (especially considering the increases in patient financial responsibility), competent, and convenient. This healthcare-on-demand preference is seen in the rise of ASCs, urgent care centers, and retail clinics, among others.

To address this need, an increasing number of ASCs —typically larger operations — are adding ancillary services. These include imaging, pathology, and physical therapy. Such investments can make an ASC more attractive to patients, physicians, and potential business partners.

Hilsman Knight

Hilsman Knight CM&AA

Managing Director

Hilsman's career has been focused on facilitating M+A transactions in the healthcare industry. He has successfully led business owners through a transition of their business and has a comprehensive understanding of the financial and strategic buyers in the healthcare marketplace. In his previous position with CKS Advisors, he worked with physician practices, ambulatory surgery centers, and retail healthcare businesses. As a Managing Director at VERTESS, Hilsman helps healthcare business owners achieve their objectives and maximize their value in transactions.

We can help you with more information on this and related topics. Contact us today!

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