This past year has resulted in some new trends related to ambulatory surgery center (ASC) development. These have included reimbursement changes, proposed healthcare reform legislation particularly in the form of accountable care organizations (ACOs), and an increase in hospital acquisition of ASCs. There is speculation that there will be consolidation of ASCs given these recent trends. Undoubtedly, competition will increase and there will be continued pressure to enhance patient satisfaction as well as ensuring that the needs of physicians performing surgical cases in ASCs are being met by the owners of those organizations.
What physicians want
What accounts for physician satisfaction in an ASC? The answer to this question, which is multi-factorial, should not be rhetorical in nature. Factors of importance to physicians include, but are not limited to, equity opportunities, tangible participation in the governance of the facility, evidence of expertise in scheduling, efficiency related to throughput, adequate staffing, appropriate mix of cases that can safely and profitably be performed in an ASC, opportunities to participate in the selection of surgical equipment, and a reasonable complement of surgeons who are experienced and capable of functioning effectively in this venue.
Considering a joint venture
Because of anticipated 2012 MedPAC reimbursement recommendations, it appears that ASC payments will remain relatively flat in the near future. The challenge, however, for ASCs will be their ability to deal with value-based purchasing initiatives while maintaining current reimbursement levels as a result of being required to demonstrate the quality of services they provide.
With hospitals and physicians struggling with declining reimbursements, both entities need to consider the value of establishing joint venture ASCs. The likelihood is that both physicians and hospitals can also benefit from having as a joint venture partner a professional ASC development and management company that has an established track record and infrastructure. Although hospitals and ASCs have historically competed for facility fees, as reimbursement continues to decline, there will be incentive for these parties to integrate.
Benefits to physicians and hospitals
Why would physicians be attracted to an ASC? Clearly, there are financial benefits that can be attributed to ownership. In addition, the lack of emergency cases performed in this setting improves the surgeons’ quality of life by enabling them to perform their work in a timely manner, thereby opening up time to address other clinical or personal needs. Further, an efficient ASC environment provides a fast turnaround time between cases that is difficult to match in a hospital setting. Convenience increases for both physicians and patients in an ASC. Patients also tend to appreciate the non-institutional ambience of an ASC.
Conversely, hospitals increasingly will become attracted to ASCs particularly when they find that their operating rooms are at, or near capacity. Adding capacity through taking an ownership position in an ASC is generally a more expedient, economical, and pragmatic approach than simply trying to expand the current capacity in the hospital setting. Such a strategy may also augment the institution’s ACO plan if it is contemplating proactive measures.
The ASC will offer a viable profit center and a cost effective venue for ambulatory cases. In addition, progressive hospitals will seize the opportunity to attract new surgeons and retain high-value physicians who may be inclined to leave due to multiple factors, e.g., lack of equity opportunity, inability to procure adequate block time or simply available time on the OR schedule, inefficiencies ranging from scheduling to turnaround time and concerns over available and experienced nursing, anesthesia, and ancillary personnel. The hospital can also use the ASC as a strategy to increase market share and expand its service area. Those hospitals that may own an ASC, even if it is one that is faltering, will often find that changing the structure and bringing in other partners, both physicians and a competent ASC development and management company, will not only serve to achieve a successful turnaround, but will validate the strategy.
Concessions and objectives
In any successful joint venture ASC, both the hospital and physicians need to be amenable to considering some sacrifices before embarking on this endeavor. For example, hospitals have to be realistic in relinquishing some control over clinical and operational issues. Both parties should recognize that the objectives should be to deliver superior surgical outcomes, achieve optimal patient and physician satisfaction, maximize all efficiency and scheduling practices while establishing and enforcing proven benchmarks, and overall secure a healthy return-on-investment for all of the joint venture partners.
Particularly in those geographic markets where the hospital has the ability to command higher reimbursement rates from the payers compared to what the physicians or ASC may be able to procure on their own, physicians may need to relinquish majority interest in the ASC in order to access hospital contracts. The value of having an experienced and trusted ASC development and management company as one of the partners is that it can serve as an impartial intermediary in aligning the long-term interests of all parties. This group can also neutralize and or mediate through internal politics that can be disruptive and in some cases threaten the viability of the project.
By operating as a separate business with its own mission, governance structure, and financial and accounting systems, neither the hospital nor the physicians will have to enter into what have traditionally been contentious negotiations with either side. When decisions, for example, have to be made relative to investment in new medical technology/equipment or other possible capital needs, the owners of the ASC consisting of all three parties will base their decisions on the results of the cost-benefit analyses that prove best for the venture rather than for the direct benefit of only one of the partners.
Keys to success
A key factor contributing to an ASC’s financial success is based on its ability to effectively manage labor costs. If the ASC is managed strictly by the hospital, the current hospital staffing structure would likely be applied to the ASC. Because ASCs are reimbursed significantly less than hospital outpatient departments, they are not afforded the luxury of over-staffing or down-time between cases. Management by an outside entity can alleviate this problem. In addition, separate human relations policies apart from the hospital will avoid confusion within the labor force.
It is also advisable that the ASC not be bound by any contractual obligations it may have through the provision of services such as anesthesia. It is conceivable that the all of the parties may agree to have the anesthesia provider of the hospital be selected to work in the ASC, but if this decision is made, it should be based on independent and thoughtful due diligence, on behalf of all partners, rather than a contractual obligation.
A joint venture ASC will incentivize all of the parties to openly evaluate the merits of introducing certain specialties and procedures and most importantly expand the level and mix of physician participation as well as the referral base. The expectation is that the parties should use the opportunity to also aggressively recruit physicians who may not currently be affiliated with the hospital. This component will significantly contribute to the growth of market share. An ASC development and management company will likely have greater success to attract “non-admitting” surgeons who otherwise may be more reluctant to respond simply to overtures by the hospital or physician group.
An additional advantage of the joint venture model is that there will be greater certainty that the facility and specifically the number of ORs will be “sized” appropriately, based on the projected volume and types of cases that will be performed. It is not infrequent that some physician groups or even hospitals may overstate projected volume based on optimism or inaccurate information provided to them. The third partner, i.e., the ASC development and management company, can provide the objective analytical validation that will mitigate against false assertions. Failure to rigorously scrutinize the projections will inevitably have profound and dire financial consequences.
Shared objectives
Increasing shareholder value should be the predominate concern of the joint venture. This can be accomplished though implementing different programs and services designed to lower the cost of the provision of care. Success will only be realized when the partners share in the risks and rewards associated with ownership. At different intervals, opportunities may present themselves for the partners to sell a portion or the entire ASC. The benefit of an ASC development and management company partner is that it can work on behalf of the partnership to maximize the value of the venture by expediting the analysis and due diligence that will help determine whether there is any benefit to such overtures.
Given the current and anticipated economic and regulatory environment, progressive hospitals and physician groups will increasingly see the benefit of collaborating through such structures rather than attempting to grapple separately with these challenging market conditions.
Allan Fine is senior vice president and chief strategy and operations officer for The New York Eye and Ear Infirmary in New York City. Brandon Frazier is vice president of development & acquisitions for ?Ambulatory Surgical Centers of America in Hanover, MA.