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The Outlook for Outpatient Surgery
Two healthcare attorneys chart a course for 2009.
Joseph Sowell II, Matthew Burnstein
Publish Date: January 10, 2009   |  Tags:   News

The new year is expected to bring mixed results for the outpatient surgery market. On one hand, case volume keeps climbing. On the other, reimbursement pressures aren't letting up. Plus, the ongoing economic squeeze appears to be diverting patients from cosmetic surgery and other out-of-pocket elective procedures. Add the effects of federal and state legislation and regulation to the mix, and we're looking at a host of challenges and opportunities for the same-day surgery sector. Here's a rundown of what we're seeing up ahead.

Payors' patterns
Out-of-network reimbursement and revised workers' compensation fee schedules present challenges for outpatient surgery facilities in 2009.

Some providers have opted against contracting with payors and have chosen to waive the out-of-network versus in-network co-pay differential. But while most payors have in the past reimbursed out-of-network claims at reasonable and customary rates, many are now turning to fee schedules to reimburse out-of-network care. This means that providers, who once took the position that the charges shown on their retail charge master represented reasonable and customary charges, now face payors using out-of-network fee schedules that are lower — often much lower — than in-network fee schedules.

In addition, a number of payors are actually taking the offensive against out-of-network billing through lawsuits attempting to recover portions of the lost fees. In the suits, payors argue that reasonable and customary charges are not those set forth on the facility's charge master, but the average reimbursement actually paid by the payor to in-network providers; that waiving the co-pay represents tortious interference in the payor-patient contract; and even that waiving the co-pay constitutes fraud. The state of New York recently investigated outpatient surgery facilities that had billed out-of-network for the treatment of government employees, with one facility ending up on the hook for $2.25 million in fines and reimbursements.

We've also noticed that states have begun adopting workers' compensation fee schedules that amount to less than their previous methods of paying a percentage from a fee schedule. Providers whose case volumes depend on workers' comp cases will see diminishing returns as a result of this trend.

The (mostly) good news
Medicare's ASC conditions of coverage, issued late in October, retreated from an August 2007 proposal that would have excluded treatment involving overnight stays, which CMS defined as "requiring active monitoring by qualified medical personnel, regardless of whether it is provided in the ASC, after 11:59 p.m. on the day of admission," a limit that may have adversely affected many surgery centers. Instead, the conditions define an ASC as "a distinct entity that operates exclusively for the purpose of providing surgical services to patients not requiring hospitalization and in which the expected duration of services would not exceed 24 hours following admission."

CMS's final rules on payment for 2009 added 27 surgical procedures to the agency's ASC reimbursement list, including 14 previously excluded procedures and 13 new CPT codes. While the expansion is a promising sign, observers note the continuing gap between when procedures are approved for reimbursement in hospital outpatient departments and when they're reimbursable at ASCs. The Ambulatory Surgery Center Association continues to lobby for the simultaneous consideration and inclusion of procedures to reimbursement lists.

New business opportunities
Per-click arrangements between hospitals and physician-owned lithotripsy companies will soon be out of bounds. But urologists with ownership stakes in outpatient surgery centers will see an opportunity to lease equipment for use in their facilities. They should, however, be aware of the possibility of increased scrutiny under federal anti-kickback regulations. This oversight is likely to focus more on arrangements in which the cost of leasing the lithotripsy equipment is significantly higher than the cost of purchasing it than on the facility investor's relationship with the physician-owned lessor.

Bariatric surgery, particularly minimally invasive and adjustable gastric banding, continues to gain interest as a potential service line for surgery centers. One popular business model involves a surgeon-facility contract that outlines the relationship's economics, marketing obligations, patient care responsibilities and competition restrictions. Be aware: Federal anti-kickback laws as well as state fee-splitting statutes may tightly regulate such an agreement.

The big picture
We're seeing the potential for increased consolidation in the outpatient surgery industry, based on four factors. First, case volume growth remains positive, even as it decelerates. Second, market competition remains high and barriers to market entry haven't been prohibitively effective. Third, the number of unaffiliated surgeons is on the decline. Fourth, surgery centers continue to face reimbursement pressures. In our view, the largest ASC management companies will increase their efforts to acquire smaller, less capitalized firms. We also expect to see an increase in mergers between surgery facilities serving the same markets.

A valuation consulting firm's recent annual survey confirms that competition for acquisitions remains intense, with orthopedics, ENT and general surgery centers in high demand. HealthCare Appraisers, Inc.'s 2008 ASC Valuation Survey showed that multiples paid to purchase controlling interests remain steady, with more than half of the 13 national ASC management firms surveyed seeing multiples of six to seven times EBITDA and with one-third seeing multiples in excess of seven. For retiring or underperforming physician buyouts, one-third saw multiples of three to 3.5 and another one-third saw four or higher. For new physicians buying into surgery centers, more than three-fourths of the respondents saw multiples priced between 2.5 and four. OSM

Industry Observers' Views on 2009

I think there will be more and more of a push for hospital and physician alignment, not only in terms of hospital-physician joint venture surgery centers, but also in relationships between hospitals and physicians that are more collaborative than competitive. The two groups need each other, but haven't always worked particularly well together. Also, there will be much more focus on how to squeeze every penny out of every dollar out of every case. Running the most profitable operation as possible will be critical. The days of getting high reimbursement and not paying attention to expenses are gone, and the days of investors being fat and happy are over. While surgery centers can still be a great investment, it isn't as easy as it used to be to get the high returns.
— Joan Dentler, principal, ASC Strategies, Austin, Texas

From a transactional perspective, I foresee the continued consolidation of ASCs in 2009 for the purpose of consolidating more ASC revenue into fewer facilities, thereby increasing the profits per facility. In 2009, it's going to remain important for ASCs to syndicate equity to new physicians in order to continue to add volume to the facility and maximize profits generated by physician fee revenue. We also foresee continued acquisitions of ASCs by health systems in light of the health systems' enhanced reimbursement potential and greater leverage with payors.
— Jerry J. Sokol, JD, health law department partner and co-chair of health transactions practice group, McDermott Will & Emery, Miami, Fla.

In 2009, ASCs should concentrate on what they've been successfully doing in the past: providing a great place for physicians to practice and for patients to receive care. However frustrated they may be with the government or with insurers, their success hinges on those qualities. It's no secret there are concerns over the economy and reimbursement. As a result, everyone has to look at being efficient and at delivering services better. One of the good things about ASCs is that they don't just look at cutting costs, but at being as cost-effective as possible.
— Kathy Bryant, president, Ambulatory Surgery Center Association, Alexandria, Va.

The three biggest issues confronting surgery centers in 2009 are physician ownership, physician ownership and physician ownership. I don't mean to sound alarmist. The threat is not on the order of what physician-owned hospitals face. Nonetheless, there is a growing level of scrutiny, and the same arguments that justified physician ownership of ASCs for more than 20 years may no longer be persuasive in today's environment.
— Eric Zimmerman, health law department partner, McDermott Will & Emery, Washington, D.C.

We see continued development or expansion of ambulatory surgery centers, but with additional pressure on reimbursement for both in-network and out-of-network ASCs. In fact, in New Jersey, we've noticed that payors are balking at reimbursing patients if their out-of-network benefits are more than Medicare pays.
—Michael Kulczycki, ambulatory care accreditation program executive director, The Joint Commission, Oakbrook Terrace, Ill.

Despite the continued decline of ASC reimbursement and the current economic decline, there will still be a market for physician-owned entities. The rate of growth may be slowing, but it's still a healthy environment for ASCs. Either mid-year or in the third quarter, we're expecting CMS might issue requirements for increased performance improvement standards, which would be a huge sea change for ASCs. The ambulatory community got out in front of that two years ago with the ASC Quality Collaborative (www.ascquality.org), so the issue won't be foreign territory. We'll already have a sense of collecting good data, but we're waiting to see what's the actual mechanism for reporting this information to CMS.
— John D. Fanburg, JD, health law practice group chairman, WolfBlock Brach Eichler, Roseland, N.J.

You never know what's down the road. That's why independent ASCs should consider affiliating with corporate or hospital partners to protect their value and diversify their investments. The current seller's market provides investors an opportunity to take some money off the table before a market surprise threatens their center's value. The disappearance of credit lines, state laws restricting physician ownership and reimbursement reductions are not presently significant threats, but they're all completely plausible possibilities that will adversely impact values.The time to take advantage of the ASC acquisition trend is when buyers have capital and are competitive, and that time is now.
— Jon Vick, president, ASCs, Inc., Valley Center, Calif.