Hospitals see opportunity, risk in ambulatory surgery centers

Allegheny Health Network’s ambulatory surgery centers had a record year in 2020.

Surgeries were up around 10% at the Pittsburgh-based integrated health system’s 10 ASCs, and Allegheny plans to move even more procedures into those facilities. Surgery centers generally have high physician and patient satisfaction given their convenience and efficiency and ASCs help ensure that more acute patients can be treated in hospitals, said Dr. Sricharan Chalikonda, Allegheny’s chief medical operations officer.

Health systems continue to invest in ambulatory surgery centers. While reimbursement rates are typically significantly lower than the inpatient setting, ASCs provide lower-cost alternatives and free up inpatient capacity.

Allegheny opts for the fully owned model rather than splitting equity with doctors, in part, because it wants to eliminate any perverse incentives that value finances over care quality, Chalikonda said, adding, “We have seen some situations where doctors say, ‘if this was a joint-venture arrangement, I would bring more cases here.’ But the reality is that we need to hold true to our values around quality patient outcomes. We want patients to want to come to ASCs versus doctors having a financial incentive to do procedures there.”

Joint ventures with physicians, though, can help systems attract and retain top talent. Along with investment, compliance risk for those that pursue the joint-venture route grows.

While systems aren’t legally obligated to meet each element of the anti-kickback statutes’ related safe harbors, ASC joint ventures could yield hefty fines if there is clear intent to boost referrals.

“If hospitals are potentially using ASCs to attract physicians, that does beg the question—what is exactly involved in the structure of the ASCs that is helping recruit and retain physicians?” said Susan Edwards, branch chief of HHS’ Office of Inspector General industry guidance branch. “There will obviously be attention on the construct of an ASC if a hospital is using it to recruit or retain physicians.”

Health systems are doubling down on ambulatory surgery centers as payers push for lower costs.

The share of providers planning to boost ASC investment rose to 67% in 2020, up from 44% in 2019, according to Avanza Healthcare Strategies’ survey of more than 100 executives who were polled prior to the COVID-19 pandemic. The predominant goal was to increase surgical capacity, while around 40% of respondents said they aimed to enhance physician relationships.

The strategy aligns with CMS phasing out its inpatient-only list, which is a set of procedures that Medicare will  only reimburse in inpatient settings.

In 2018, CMS removed total knee replacements from the inpatient-only list and started reimbursing ASCs for those surgeries, several heart procedures, among others, in 2019. Last year, the agency removed total hip replacements, six spinal procedures and certain anesthesia services from the inpatient-only list. Medicare started to pay for those procedures, along with more than 250 musculoskeletal-related services, provided in ASCs in 2021.

Some physician groups opposed the changes to knee and hip replacements, claiming that outpatient venues were less safe. But CMS countered those claims, arguing that there are many less medically complex Medicare beneficiaries who could receive those procedures in ASCs, length of stay is significantly lower in outpatient facilities and that there is less of a need for sophisticated inpatient services.

Those claims were backed by the Medicare Payment Advisory Commission, which found that care quality metrics modestly improved from 2013 to 2017. The share of ASCs without any patient falls increased from 91% to 95% over that span, while subsequent hospital admissions for ASC colonoscopy patients were less frequent than those who received care in hospital-owned inpatient departments.

“The removal of procedures from the inpatient-only list and the growing push for price transparency will drive health systems to develop more ASCs and related joint ventures,” said Jake Beechy, a senior consultant at Advis who specializes in compliance. “There’s going to be quite a bit of change in the orthopedic space.”

Orthopedics is the primary focus of Tenet Healthcare Corp. as it builds out its ASC portfolio. The Dallas-based hospital chain in December announced plans to acquire up to 45 centers from SurgCenter Development for $1.1 billion.

Tenet’s ambulatory surgery center subsidiary United Surgical Partners International will operate the centers, most of which will perform orthopedics, pain and spine procedures. Under the deal, Tenet will own a majority interest in all but two of the centers and the remainder will be owned by physician partners.

“We’re shifting the enterprise portfolio where our hospital business is not the primary driver, and is effectively balanced with the robust and growing ambulatory platform that provides a unique and productive partnership in patient services,” Tenet CEO Ron Rittenmeyer said during a presentation at the recent J.P Morgan Healthcare Conference. “Our care model embraces the acute-care setting—so vital to our communities—and the more affordable ambulatory care setting to provide excellent care in these specialty areas.”

USPI has become more profitable over the past several years, resulting in 61 new centers to bring its total to 310. It also added 73 service lines and 3,700 physicians to its medical staff in 2020, Tenet said. It plans to funnel at least $150 million to ASC acquisitions or new centers and expects 6% annual same store surgical revenue growth next year.

Tenet’s ambulatory earnings are positioned to account for about half of its annual revenue.

“The company performs over half a million procedures a year in the musculoskeletal space,” Dr. Saum Sutaria, Tenet chief operating officer, said during the presentation, adding that musculoskeletal procedures have been growing faster in the ambulatory environment than the hospital setting. “The amount of scale that Tenet has achieved with USPI in this arena surpasses anything we have seen in this environment under a single entity.”

Tenet is well-equipped to handle the pent-up demand for care deferred during the COVID-19 pandemic in both its inpatient and outpatient settings, he added.

“Surgery centers play a role in a hospital’s ability to attract and retain superstar surgeons who otherwise may not want to be on staff,” said Jill Gordon, a partner at Nixon Peabody who focuses on hospital-physician alignment. “As more and more surgeries are pushed into the ambulatory setting and no longer need inpatient support, a lot of hospitals look to ASCs to decant some of their volume, improve access and relieve tension on the inpatient side related to inadequate operating rooms and scheduling.”

St. Louis-based Ascension plans to double its current footprint of 61 surgery centers over the next two years as it continues to shift from its hospital-centric focus.

One of the integrated health system’s priorities is to broaden access points for patients by acquiring ASCs and building new facilities, some of which will operate under joint ventures and partnerships with physicians, said Eduardo Conrado, Ascension’s chief strategy and innovation officer.

“As surgeries in outpatient settings continue to increase, we remain committed to providing our patients with high-quality, compassionate care in the most clinically appropriate setting,” he said.

HHS in December updated its anti-kickback statute as it aims to foster more value-based care. The most recent adjustments to the anti-kickback statute revolve around value-based enterprises, which can include formal or informal arrangements that attempt to coordinate care for a certain population (free of profit-driven motives), improve care quality, reduce costs without diminishing quality or transition from fee-for-service payment models.

Enterprises that take on full risk, where a lump-sum payment is made prior to treatment, have the most flexibility under the fraud and abuse laws. Those that tie at least 30% of the global payment to outcomes or 20% per episode of care—have more flexibility. Care coordination agreements that involve no downside risk have the least flexibility.

“It is going to take some time to see how these new exceptions are applied and they will likely need to be tested in the courts. There is a certain amount of risk for those interpreting these regulations in the first instance,” said Adam Tarosky, partner at Nixon Peabody. “There will be a lot of hand-wringing—these are huge new rules that in some cases have undefined strange terms.”

The value-based safe harbors would not protect any returns on investment from an ASC to the physician investor, OIG’s Edwards said.

It’s also uncertain how much of the existing regulatory framework the Biden administration will keep intact, said Brad Bonde, a shareholder at LBMC.

“There is probably a little hesitancy to make an assumption on what came out last year until there is more clarity or any indication on if regulators have the desire to go in and change it,” he said. 

Several safe harbors in previous iterations of the anti-kickback statute remain intact. While all the safe-harbor criteria do not have to be met, providers that do not hit most of the conditions invite regulatory scrutiny.

A physician’s investment interest must not be tied to referrals and returns must be directly proportional to the amount of capital invested. Hospitals cannot directly or indirectly influence referrals and real estate, equipment and compensation must be offered at fair market value.

The so-called “one-third” rule has historically been hard to meet. It stipulates that at least a third of a physician’s total practice income must come from ASC procedures and the doctor must perform at least a third of such procedures at the ASC that they’ve invested in.

“A lot of times specialists won’t meet the strict requirements of the one-third rule because the reimbursement on the inpatient side is so much higher than the type of cases you can do on the outpatient side,” Gordon said. “What the feds are looking for is that physicians who invest have to be generating the referrals themselves—they have to be the surgeons that are doing the cases and use the center as an extension of the practice.”

While most hospitals with ASCs operate them as physician joint ventures, only a third allowed employed physicians to invest in ASCs—the lowest number in three years, according to the Avanza report. That could be related to hospitals with low risk tolerance, experts said.

“Rather than risk being out of compliance with the complicated law, which could in turn increase their risk profile, some hospitals are choosing not to permit physician ownership,” said Katie Tarr, a shareholder at LBMC.

Seventy-nine percent of hospitals prefer to own more than 50% of the equity of a joint venture, which allows ASCs to use hospitals’ payer contracts to obtain higher reimbursement rates, according to the Avanza report.

Competition also comes into play. As private equity firms, insurers and health systems vie for the best doctors and their business, stakeholders will boost their recruitment campaigns, experts said.

“Hospitals have been doing this dance with physicians, pursing joint ventures to keep them engaged and keep volume in ASCs. But in doing that, you are giving away a piece of the economics and control,” Gordon said. “Also, what happens when ASCs don’t have adequate volumes? Physicians look to hospitals to (limit) financial risk, which can create a PR problem for hospitals and potential compliance issues.”

Although ambulatory arrangements aren’t often prime targets of fraud investigators, those that have violated the anti-kickback statute have incurred large settlements.

The Oklahoma Center for Orthopaedic & Multi-Specialty Surgery last July reached a $72.3 million settlement with the Justice Department to resolve allegations that it unlawfully solicited referrals. Investigators alleged that the management company offered free or below-fair market office space, employees and supplies to its physicians, compensation in excess of fair market value, equity buyback provisions for doctors exceeding fair market value and preferential investment opportunities in exchange for referrals. The settlement also came with a five-year oversight program.

“The OIG has had long-standing concerns about investments in ASCs as a vehicle to inform referrals, but there is also a recognition that some partially physician owned ASCs can be beneficial to beneficiaries and the programs themselves,” Edwards said.

In a review of several advisory opinions, where OIG offers guidance to specific cases as requested by providers, Edwards found some common red flags. For one, few investing physicians used the surgery center. 

In one case, optometrists who invested in an ophthalmology ASC did not perform any procedures in the ASC, but generated referrals to other investors. “If investing physicians are not using the ASC, those are riskier, especially when primary-care physicians are generating a significant number of referrals,” Edwards said.

Even with the potential compliance risk, hospitals will continue to invest in ASCs, said Paul Jawin, executive vice president of provider and network development at Phoenix-based Healthcare Outcomes Performance Co., which helps hospitals manage outpatient facilities.

“They see more and more shifting to the ASC with value-based care and the general push by payers to provide care in the most appropriate setting,” he said. “They realize if they don’t have an ownership interest there, as inpatient volume flows to the outpatient setting and to ASCs, the hospitals will be left holding nothing.”