Following recent Medicare payment cuts to ASCs, industry observers say there are still sound reasons for hospitals to expand their ownership beyond the more than a quarter of all ASCs that they already own.

Jan. 26—Hospitals and health systems are diversifying their portfolios and buying ambulatory surgery centers (ASCs), a new report from Fitch Ratings revealed this week.

The Fitch report cited recent acquisitions, such as UnitedHealth’s Optum group’s purchase of Surgical Care Affiliates, Tenet Healthcare’s majority stake in United Surgical Partners International as examples of deals.

What’s driving this movement? ASC industry experts said a number of factors are moving hospitals closer to ASCs. The Fitch report pointed to “the growing need of the largest ASC providers to associate with either larger provider networks or health insurers.”

The report said that healthcare providers focusing on a narrow spectrum of the delivery system are “increasingly incentivized to join forces with insurers or hospital systems as these players continue to amass scale to leverage against unaffiliated providers through horizontal consolidation and physician employment.”

The authors said remaining independent of insurers or health systems may present challenges for narrowly focused providers, potentially weakening their negotiation power and allowing less opportunities to be risk-sharing partners for health systems and insurers.

“ASCs are desirable targets for health systems and insurers partial to vertical integration strategies because they offer a compelling value proposition as volumes continue to shift to an outpatient setting,” the Fitch report said. “Treatment in an outpatient surgery setting is cheaper than in an acute care hospital due to a more flexible operating model and cheaper capital plant.”

Caitlin Blalock, an associate director at Fitch and a coauthor of the report, said hospitals buying ASCs can track patient care throughout the various points of the care continuum to monitor quality.

“From an ASC’s perspective, hospitals have bigger infrastructure and that can save them money,” Blalock said in an interview. “It’s also good for them to have a network to send patients directly to.”

Blalock said hospitals are losing revenue to ASCs, which deliver care in lower cost settings.

“Hospitals are motivated to capture that volume and many ASCs are interested in being acquired by hospitals because it gives them more negotiating power when they contract with insurers. Partnering with a hospital makes them more attractive in physician recruiting as well,” Blalock said.

Daniel Steingart, vice president and senior analyst at Moody’s Investors Service, coauthored a May 2016 report identifying how not-for-profit hospitals are increasingly partnering in nontraditional ways to diversify their operations and revenue streams. The report cited hospital joint ventures such as Baylor Scott & White Health’s partnership with United Surgical Partners Holdings to operate ASCs and short stay surgical hospitals.

Who’s Buying

The Moody’s report said the hospitals participating in these nontraditional partnerships are typically larger healthcare systems with multiple campuses that “have the management expertise, critical mass, and financial resources to manage the risk these nontraditional partnerships sometimes bring.”

Steingart said while big chain acquisitions make news, Moody’s is seeing many small community hospitals doing partnering with ASCs, too, often off the radar. Capital allocation and access to capital also are driving the trend.

“Hospitals want to deploy their resources most efficiently and there are many calls on capital now,” he said in an interview. “While they are giving up some potential profit, they’re expanding their footprint.”

While Steingart said the practice of hospitals buying or joint venturing with doctors in ASCs has been occurring for years, there are now a greater variety of ownership models available.

“We’re seeing fewer physicians opening ASCs,” he said. “Physician payments have been squeezed. And hospitals have been buying many physician practices and employing more doctors. Ultimately the pendulum is swinging back to hospitals. It’s not just hospitals versus physicians anymore. The power dynamic has shifted.”

Payment Cuts

In 2015 Congress somewhat altered the value proposition of hospital-owned ASCs after lowering ASC payments through a budget resolution. ASCs currently receive about 50 percent of what hospital outpatient departments receive for identical services and procedures. Before 2015, hospitals could buy ASCs, convert them into hospital outpatient departments without changing the facility, and charge those hospital outpatient rates for all Medicare beneficiaries.

Miller said ASCA doesn’t expect a Trump administration to reverse payment cuts, but last year the Obama administration did approve the ‘grandfathering’ of some facilities.

Payment “disparity between ASCs and hospital outpatient departments continues to grow,” Miller said in an interview.

An ASC collects a facility fee of $980 for a cataract procedure. But if a physician performs the same procedure in a hospital outpatient department, it is paid about $1,760.  “There are still sound reasons for buying ASCs, but they no longer can bill Medicare at the higher rate,” Miller said.

Capturing greater market share is one motivation.

“Hospitals also may want to keep the ASC as part of their network through an accountable care organization or value-based purchasing arrangement,” Miller said.

Not all hospital-ASC transactions are outright purchases. Some involve joint ventures or affiliation partnerships.

“The affiliation could also support an improved ability to migrate more procedures to the most appropriate, lower cost setting for the patient,” Miller said.

A Hospital’s Perspective

Steven Bjelich, president and CEO of Cape Girardeau, Mo.-based St. Francis Healthcare System, said his system joint ventured with a group of 17 surgeons in an ASC.

“It’s provided an alternate revenue stream for us and given us a less expensive setting to compete with narrow networks. We’re part of a bundled payment project, so it has helped us there and has expanded our portfolio,” said Bjelich in an interview. “The ASC has also helped us work more closely with our physicians and lower costs by standardizing some of our practices. This has been a great opportunity for us to collaborate with our physicians, too.”

Clinton Flume, a director with the healthcare valuations firm, VMG Health, has seen the growing activity in the marketplace.  

“ASC management companies are looking to further align with both for-profit and not-for-profit hospital systems,” Flume said in an interview. “It is a consolidation effort that is occurring more often in larger major metro areas than in rural markets. That growth and alignment has been spurred by the opportunities to diversify portfolios and integrate into larger health networks.”

He said the end-game is to leverage better contracts and a stronger foothold in the marketplace.

“I think it is a trend, but one that’s been going on for years and is just growing bigger now. We’re starting to see some big players coming in late into the game,” Flume said.

“Hospitals also want to make sure they have lower cost alternatives both for private payers and government-based payers,” Flume said. “Hospitals are looking to diversity their revenue streams and leverage [payment] rates and ASCs offer that opportunity.”

Steve Miller, chief operating officer for the Ambulatory Surgery Center Association (ASCA), said there is growing recognition of the value that ASCs provide.

Miller said hospitals and health systems already own an estimated 25 percent to 30 percent of existing ASCs.

Mark Taylor is a freelance writer based in Chicago.

Publication Date: Thursday, January 26, 2017