Budget deal could deter hospitals from buying surgery centers

A proposed change to how hospital-owned ambulatory surgery centers are paid could further suppress the appetite of hospitals to own these capital-intensive outpatient facilities.

Specialties like orthopedics and plastic surgery once represented high-margin service lines for hospitals. But changing payment models have been slowly chipping away at some of that return.

The latest federal budget bill, passed by Congress last week, reduces Medicare rates for off-campus outpatient centers owned by hospitals. The measure eliminates hospitals' ability to charge a facility fee and creates more parity in payment between hospital-owned and free-standing outpatient centers.

The cut would only apply to new off-campus outpatient centers, not those currently owned and operated by hospitals. It also excludes stand-alone emergency departments.

As a result, looser alliances between health systems and ambulatory surgery centers will look more appealing. “It makes you look more closely at what are the benefits of owning” an ASC, said Joan Dentler, CEO of Avanza Healthcare Strategies, a consulting firm on outpatient and population- health strategies. “The hospital doesn't even care about having ownership, but (about) having the ambulatory surgery center in their network.”

Before the rule change, payers and patients, especially those in high deductible plans, paid more after hospitals purchased an ASC. “Nothing changed but the name on the door,” said Greg Maddrey, accountable care solutions director at the Chartis Group, a consulting firm.

The higher facility fee allowed a hospital to earn an immediate return on its investment in an outpatient center by charging higher rates. The new payment model, however, takes away that benefit.

Moreover, facility fees are being de-emphasized under the CMS' bundled-payment initiative. The CMS in July proposed rolling out a mandatory Medicare bundled payment for hip and knee replacements in 75 markets, which will hold hospitals accountable for outcomes up to 90 days post-discharge.

“The landscape is going to change very dramatically,” said Dr. Tom Graf, national leader for population health management at the Chartis Group. “The only thing that's really relevant is how much it costs you to provide the service.”

The bundled-payment program also sets explicit legal protections allowing doctors and hospitals to share savings, Graf noted. “That really changes the dynamic,” he said. “The focus is on the care rather than the site of care.”

Health systems, of course, still need to have an ambulatory surgery strategy as more procedures are performed on an outpatient basis. And they still must align their cost structure with payment models.

Eliminating the facility fee may encourage more hospitals to develop ASCs as joint ventures with one of the many investor-owned companies in the sector, such as AmSurg, Surgical Care Affiliates and United Surgical Partners International, now owned by Tenet Healthcare Corp.

Those joint-venture ASCs are already paid at stand-alone rates, which are about 55% of what hospital-owned ASCs receive. So the new budget proposal shouldn't affect them and may even bring new business, wrote Jefferies analyst Brian Tanquilut in a note to clients.

But the shift to non-ownership agreements could put the most pressure on independent, physician-owned ambulatory surgery centers. Hospitals and systems are increasingly being approached by interested sellers across the country, said Jeff Hoffman, a senior partner at consulting firm Kurt Salmon.

The trends are magnified for imaging centers, which could see as much as a 30% drop in utilization under value-based payment models, he added. “As those surgery centers and imaging centers age, they need capital infusions,” Hoffman said. “A lot of those physicians are nervous about making those investments. You're going to invest millions of dollars in a nongrowth market.”

Physicians also are concerned about being left out of the narrow networks that health insurers are developing to control their costs, he said.

Hospitals used to be more willing to bail out a struggling ambulatory surgery or imaging center, but now they're more carefully weighing the pros and cons of ownership versus partnership, Maddrey said. “With any capital-intensive modality, you have to be very thoughtful on how you manage capital spend,” he said. “You can see the sands shift very quickly.”