Riskier Times Ahead for Surgery Center Owners?

Patient Safety

By: Jon Vick

Published: 10/10/2007

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After years of explosive growth and big payoffs, the ASC industry may be headed for a stretch of tough luck. Here's how to make sure you come out ahead of the game.


Will the future be riskier for owners of surgery centers? The headlines so far in 2003 strongly suggest that we are moving from a cycle of exceptional growth and prosperity to a cycle of greater scrutiny and financial risk:

  • HealthSouth: Too Good To Be True
    (Business Week, April 14, 2003)
  • Surgery Center Partners of HealthSouth Mull Bailing Out
    (WSJ, April 8, 2003)
  • California: Legislation Banning Physician Ownership of ASCs Proposed
    (CASA Alert, April 7, 2003)
  • CMS: Medicare Removes 144 Procedures From ASC List
    (Regulatory Update, March 24, 2003)
  • Congress Weighs Surgical Hospital Anti-Kickback Bill
    (Outpatient Surgery, April 7, 2003)
  • OIG Says Sanctions Possible for ASC Joint Venture that Includes Primary Care Physicians
    (ASC Compliance Insider, April 2003)

Looking at these headlines, any sane person would think twice before investing in a surgery center today. The industry suddenly looks like a minefield for regulatory attacks, with state and federal governments, congress, OIG and CMS lining up to take their best shots. What happened to the praise for the ASC industry for being efficient, cost-effective, patient-friendly and profitable? Here are some suggestions for devising new strategies for success.

Construction Still Growing, Capital Still Flowing

While ASCs have been around for about 30 years, the frenetic pace of recent industry activity more resembles that of a start-up market rather than a mature industry sector that just turned 30. The ASC landscape is rapidly expanding on two fronts.

  • Facility building. The number of sites and centers in the planning and construction phases are multiplying - this de novo construction is occurring for both multiple- and single-specialty ASCs. The rationale for new physician partners is quite clear. Hospitals and health systems are interested in capping market erosion with the election to participate in ASCs as more procedures break from the costlier hospital venue. Management firms are very actively pursuing equity positions in existing ASCs to minimize start-up costs and to reach critical mass, thereby realizing economies of scale and becoming more appealing to investors.

  • Finance. Existing ASCs are selling equity interests to new physician partners, health systems or hospital partners and/or ASC management firms. Multi-specialty ASCs are preferred and orthopedics is the favored single-specialty acquisition candidate, according to a recent survey of ASC management companies conducted by HealthCare Appraisers, Inc. Most companies consider sites in CON states a plus because of significant barriers to entering the competition - which makes for less of it. On the other hand, ASC management firms fully realize expansion in those states could be equally as difficult for them.

- Christine Hughes

Ms. Hughes ("[email protected]")) is vice president, partnership development, at Physicians Endoscopy, in Doylestown, Pa.

It's all cyclical
In the ASC industry, just as in other industries, events happen in cycles. In the rapid growth period of the mid-90s, more and larger ASCs were built (50 percent increase in the number of facilities from 1996-2001), ASC procedural volume exploded (60 percent increase from 1997-2001), facility fees increased and ASCs earned the highest EBITDA (earnings before interest, taxes, depreciation and amortization) margins in the healthcare industry. Over the last few years, this vitality attracted hundreds of millions of dollars of public and private investment capital. Today, many well-capitalized ASC companies have acquired surgery centers and are operating multi-facility ASC networks. Many physician-owners of independent ASCs have sold a portion of their centers at attractive multiples of earnings and ASC companies, such as United Surgical Partners International and AmSurg, consolidated revenues and earnings, went public and trade today at over 20 times trailing earnings.

Implications of phenomenal growth
The ASC industry is estimated to generate $10 billion a year in revenues. As the ASC industry continues to grow and mature (more than 3,500 Medicare-certified ASCs are operating today), it assumes an increasingly important and established place in the healthcare system and comes under increased scrutiny by its customers (government programs, insurers, patients), its competitors (hospitals) and regulators (state and federal). Some examples:

  • HealthSouth self-destructs. This seems to be a simple case of greed and extreme bad judgment. HealthSouth executives have pleaded guilty to falsifying accounting records that added $2.5 billion to earnings to meet Wall Street projections and thus to bolster the stock price. According to Business Week, "'HealthSouth faces an almost certain breakup ... is about to be carved up and sold off to competitors." The physician-owners of the 203 HealthSouth ASCs may have the option of buying the portion of the ASC that HealthSouth owns, or attracting a replacement corporate partner to buy HealthSouth's interest.
  • New California legislation proposed. There is currently no ASC fee schedule in California for workers' compensation cases and excessive ASC facility fees ($10,000 or more for some procedures are not uncommon) have contributed to the failure of dozens of small worker's compensation insurance companies and an increase in claims handled by the state from $50 million a year to $900 million per year. "Sixty percent of ' costs go to outpatient surgery centers that aren't regulated by the state and aren't accountable to anyone." It appears that the greed of a few ASC operators is causing increased scrutiny of all ASCs in California. While this legislation was originally introduced to ban physician ownership of ASCs in the state, it has been modified to curb self-referral by prohibiting physicians from referring workers comp patients to ASCs in which they have financial interests.
  • Medicare removing 144 CPTs from ASC list. On balance, Medicare is also adding 288 procedures to the approved ASC procedure list. Medicare will systematically add and delete procedures from the ASC list as procedures migrate to physician's offices and as new technology makes more complex procedures appropriate for surgery centers. These changes primarily impact ASCs that rely predominately on single specialties such as gastroenterology and ophthalmology.
  • Surgical hospitals under intense scrutiny. Competitive forces being brought to bear by hospitals that fear losing profitable cases to surgical hospitals, and Federal and State regulator's concerns about potential self-referral issues, are causing increased scrutiny of surgical hospitals. In April, Reps. Pete Stark (D-Calif.) and Jerry Kleczka (D-Wis.) introduced a bill that would prohibit physicians from referring patients to surgical hospitals in which they hold "preferential interests." Mr. Stark says the bill is intended to plug loopholes in existing laws that allow physicians (including primary care physicians) who already are prohibited from referring patients to clinical laboratories and diagnostic centers they own to invest in for-profit surgical hospitals. A similar bill was recently introduced and defeated in Ohio.

Why Wall Street is Bullish on ASCs

Here are five reasons why Lehman Brothers investment firm is bullish on surgery centers:

  • Rising healthcare costs should translate into an increased number of surgeries pushed into outpatient settings and more outpatient visits than inpatient admissions.
  • A surgery center has significantly lower costs. For example, colonoscopy procedures done in a surgery center could be up to 77 percent less expensive than the same procedure done in a hospital.
  • Technology will drive more minimally invasive procedures to the outpatient setting.
  • Inpatient capacity constraints are driving cases to outpatient settings. Hospitals are crowded with acute labor shortages and new-hospital construction is at a low.
  • A small percentage of outpatient surgeries are performed in ASCs, indicating a potential for growth and case migration. The percentage of outpatient surgeries done in ASCs has grown from 6 percent about 20 years ago to 28 percent today; while growth is solid, the number of procedures done in ASCs is relatively small.

    - Christine Hughes

    • Hedging your bets
    So, what can surgery center owners do to reduce their risk while increasing the value of their centers? The "value" of a surgery center depends on several variables: perceived "risk" to the buyer, the availability of buyers with investment capital, competition among buyers to acquire licensed ASCs with growth potential and sustainable ASC profitability. Increased surgical volume and higher facility fees from more complex procedures promise continued increases in surgery center profits. However, the value of surgery centers depends on the continued demand for acquisitions by surgery center companies with capital to invest. Based on the activity in the marketplace, here are four suggestions:

    • Develop strategies to sustain and increase profitability (for example, add new users, procedures, high-tech equipment and contracts).
    • Avoid dependency on single-specialty or workers' comp cases.
    • Develop an exit strategy as a part of your strategic and operating plans.
    • Consider selecting a corporate partner to purchase a minority or majority interest to diversify your investments and protect you against adverse legislation.

    You can expect that surgery centers will have to play on an increasingly crowded playing field made treacherous by further scrutiny. To minimize the risks of ownership and maximize value, ASC owners may want to plan an exit strategy with a corporate partner while it is still a seller's market.

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