Sea Change: Hospitals Pursue Independent ASCs
Ophthalmic surgery centers, long ignored by the big fish, are now being swallowed up by hospital networks.
BY Jerry Helzner. SENIOR EDITOR
ILLUSTRATION BY BOB KAYGANISH/DEBORAH WOLFE, LTD.
Historically, general hospitals have shown little interest in providing ophthalmic care. Unlike such specialties as oncology, cardiology and orthopedics, eye care doesn’t offer hospitals the financial rewards of in-patient days, repeat visits, significant lab work, physical therapy and other ancillary services that hospitals rely on to generate income. And since ophthalmologists don’t like performing their procedures in generally less efficient, less patient-friendly hospital operating rooms, ophthalmic surgeons and hospitals were happy to swim in different waters.
However, as one recent acquisition of a large New England ophthalmic ASC by a large regional hospital illustrates, ophthalmology is in the midst of a sea change. General hospitals now view well-run, high-volume ophthalmic surgery centers as a preferred buyout target. One of the key factors that can spur these transactions is the potential of much higher Medicare reimbursement by converting an ASC to hospital outpatient department status — which gives them a nice billings boost, thanks to a CMS provision that pays hospitals about 40% more than ASCs for essentially the same care.
“When I was getting into the surgery center business about 20 years ago, I looked at some studies of how much of their revenue and income hospitals derived from ophthalmic care and it was around one or two percent,” says Glenn deBrueys, CEO of American SurgiSite Centers, which has management agreements and ownership stakes in four multispecialty centers and five ophthalmology-only surgery centers in the Northeast. “So I never really worried about hospital ORs being a serious competitor to our highly efficient ASCs.”
Stanley Braverman, MD, a highly respected ophthalmologist in private practice at Braverman Eye Center in Hallandale Beach, Fla., was formerly chairman of the Department of Ophthalmology at Memorial Regional Hospital in nearby Hollywood, Fla. He recalls that his department had three major responsibilities.
“Hospital-affiliated ophthalmologists covered the emergency department, delivered indigent care and provided consults when there were ocular issues in patients who had multiple health problems or significant trauma,” says Dr. Braverman. “Otherwise, we looked at ophthalmology as essentially an outpatient specialty.”
But that was then. This is now. A complex combination of factors is luring hospitals into acquiring first-rate single-specialty and multi-specialty ASCs.
What’s Changed
■ First, we are entering a new healthcare environment. When big-city and regional hospitals look just over the healthcare horizon, they see that the coming years will almost certainly see the formation of so-called accountable care organizations, or ACOs. Because hospital-centered ACOs will be seeking to lock up high-volume, efficient medical practices and facilities with superior records of patient care, first-rate ophthalmic and multispecialty ASCs will be nice, if relatively small, additions to the healthcare systems of the future.
■ Many original ophthalmic ASC partners are nearing retirement. The physicians who created the first ophthalmic ASCs in the 1980s and 1990s are reaching an age where they are thinking of cashing out their investment. In some cases, the number of ophthalmologist-owners who desire to cash out of a single facility presents too great a financial burden to the remaining partners. In these instances, a totally new owner, such as a hospital, becomes a viable alternative. One potential consequence of hospital ownership of outpatient surgery centers could be that as hospitals acquire full ownership of more of these facilities, they may want to ensure a high level of procedure volume by hiring physicians as direct employees of the hospital.
William Rich, MD, medical director of health policy for the American Academy of Ophthalmology, notes that hospital-employed physicians now represent a significant percentage of the practicing doctors in such specialties as cardiology and oncology, and that about half of the young physicians completing residency programs now take positions as hospital employees.
■ The demographics are perfect. With the vanguard of the huge 78-million-strong baby boomer cohort having turned 65 last year, ophthalmic ASCs can count on increasing numbers of cataract surgeries in the coming years, with many patients choosing premium procedures that generate higher profit margins. Knowing that future volume is assured provides an additional incentive to potential ASC buyers to purchase these facilities.
■ ASC to HOPD conversions are advantageous to hospitals. When a hospital buys 100% ownership of an existing ASC, it can usually meet a set of specific but fairly easily attainable conditions and convert the ASC to a hospital outpatient department (HOPD), thus qualifying for Medicare payments far in excess of the reimbursement rates given to ASCs. For example, in some instances the surgery center can be located as far as 35 miles from the main hospital campus and still qualify as an HOPD, although the conditions that must be met are stricter than for an “on campus” surgery center. In eye care, the buyout trend is just starting to show up on the radar screen, with last year’s $27 million purchase by Hartford Hospital of Constitution Eye, one of the largest ophthalmic-only ASCs in New England.
An Unpopular Topic
When Ophthalmology Management contacted a number of people who are knowledgeable about the current market for ASC sales and ownership structures, the phrase “hospital conversions” invariably drew silence, then a chuckle, and then a request not to be quoted by name.
“I do deals with hospitals,” said one. “I’d rather not be quoted on this subject.”
One person who didn’t chuckle or stay silent was Michael Guarino, who manages five single- and multispecialty ASCs and is on the board of the Ambulatory Surgery Center Association. On September 9, 2011, Mr. Guarino appeared before a Congressional Ways and Means Subcommittee on Health to offer his views on hospitals buying ASCs and converting them to HOPD status, thus qualifying for much higher Medicare payments.
Mr. Guarino, who told Ophthalmology Management that he believes HOPD conversions pose a real danger to the future of independent ASCs, opened his testimony by voicing concern about consolidation that is now taking place in the healthcare system, particularly the form of anti-competitive consolidation which results in “virtual monopolies in certain markets where patients are funneled into higher-cost settings.”
A Drain on Medicare?
Mr. Guarino then got into specifics, telling the committee that “Medicare now pays ASCs about 59% on average of the HOPD payment for providing identical services” (down from 86% of the HOPD payment just eight years ago). He introduced a chart showing the great disparity between ASC and HOPD reimbursement for cataract surgery, YAG laser surgery and a number of other, non-ophthalmic outpatient procedures. The only relief ASCs have gotten in recent years is an upgrade in payment for retina procedures, which constitute only a small percentage of all ophthalmic outpatient surgeries.
He noted that ASCs “are an enormous source of savings for the Medicare program — cutting costs for the program by approximately $2.55 billion a year.” He asserted that Medicare could generate much greater savings (for itself and for patients) if more procedures were taken out of the HOPD environment and performed in ASCs.
Instead, he said, just the opposite is happening. As the disparity between ASC and HOPD reimbursement continues to grow, “there is now a growing payment incentive to treat these patients in the HOPD instead of the more economical ASC setting. Indeed, we are now starting to see a number of hospitals acquiring ASCs and converting them to HOPDs.” Mr. Guarino then referred to a survey conducted by his association that indicated that of 179 ASC closures since 2009, about one-third were purchased by hospitals, with many of these centers destined for conversion to HOPDs.
Why does this great disparity in reimbursement even exist? Some point to the powerful hospital lobby, which attempts to influence both MedPAC (which advises Congress on Medicare payment rates) and Congress itself, which approves rates for outpatient procedures covered by Medicare.
Hospitals Making Offers
Mr. Guarino continued his testimony by recounting how he has been approached numerous times by hospitals interested in purchasing the ASCs of which he is an owner/manager.
“One hospital presented an economic analysis showing that one ASC could increase its annual revenue by $4 million to $6 million simply by allowing the hospital to acquire the ASC,” he noted. The jump in revenue would all be attributed to higher reimbursement for the same cases formerly reimbursed at ASC rates.
Mr. deBrueys says he has experienced similar interest from hospitals in regard to one or more of American SurgiSite’s ASCs.
Mr. Guarino also went on to cite an assertion in a Certificate of Need (CON) made by Hartford Hospital in January 2011 when it acquired Constitution Eye (now called Hartford Hospital Eye Surgery Center). Mr. Guarino quoted from the CON that “the surgery center is expected to produce incremental operating gains of $5 million in 2011, which would rise to $7 million in 2012 and every year thereafter.” The implication in Mr. Guarino’s testimony is that the gains would largely come from conversion to HOPD reimbursement rates.
The former Constitution Eye ASC in Newington, Conn., was purchased by Hartford Hospital in 2011 and converted to an outpatient department of the hospital.
| The Hospital’s Perspective on ASC Conversions By Jerry Sokol, Esq., and Amanda Jester, Esq. |
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| While acquisition of an ASC and conversion to an HOPD may be attractive to both the selling physician owners and the acquiring hospital from an economic perspective (a liquidity event for the physicians; the promise of an immediate return through higher reimbursement rates for the hospital), there are certain practical and regulatory issues and obstacles that the acquiring hospital must consider when evaluating the ability to actually accomplish these transactions. In order to convert to an HOPD, the operations must be wholly owned by the hospital (i.e., no physician ownership). When an ASC is at least partially owned by its referring physicians, the physicians have “skin in the game” and incentive to ensure the financial success and operational efficiency of the facility. After an HOPD conversion, retaining this incentive will be a challenge for the hospital. As discussed in the main article, one way to align the hospital and physicians’ interest is through a post-conversion employment arrangement. Many physicians, and especially the seasoned physicians who are responsible for making the ASC profitable and efficient, however, may not be interested in being employed. Also, hospitals may not be interested in the substantial undertaking of a physician employment strategy. Assuming that an employment relationship between the hospital and the selling physicians is not an option, another possibility is a management arrangement whereby the former physician owners of the facility play a role in managing the HOPD post-closing in exchange for a management fee. While selling physicians see these arrangements as an easy way to maintain some control of the facility post-closing and continue to collect an annuity from their referral stream, the reality is that the regulatory environment limits both the services that may be provided and the compensation that may be paid under management arrangements. These limitations are discussed below. Commercial Reasonableness Since the Stark Law is implicated in any relationship between a hospital and a referring physician, the commercial reasonableness of the arrangement must be considered. This goes to, among other things, the services that will be provided under the management agreement. For example, the parties must be able to prove that it is reasonable for a hospital that has historically managed its own outpatient department to engage a group of physicians to manage one facility within its outpatient department. What can these physicians achieve that the hospital on its own, or an independent third-party manager, could not? Would the hospital engage these physicians to manage the facility were it not for their referral stream? While there are circumstances where there are good arguments for the commercial reasonableness of the arrangement — such as where the hospital’s outpatient department has historically underperformed while the ASC has consistently overperformed — the commercial reasonableness of the arrangement must not be assumed. Rather, the unique circumstances surrounding each arrangement should be analyzed on a case-by-case basis and the services to be provided under the arrangement should be tailored to justify why the hospital would procure services from these physicians, regardless of the volume or value of referrals the physicians may send to the hospital. Paying the same physicians to provide basic back-office management services like billing services when the hospital performs its own billing services for all other departments would be difficult to justify. In order to have regulatory comfort, the hospital should take the time to document its arguments for the commercial reasonableness of engaging the physicians to provide the services under the arrangement. Fair Market Value Assuming the parties determine there is a commercially reasonable basis for the arrangement, the next issue is that the compensation paid under the arrangement must be fair market value for the services provided. Ideally, compensation will be evaluated for fair market value by an independent third-party appraiser. Many physicians come to the table with a number in mind that turns out to be much larger than the actual fair market value that will be approved by an independent appraiser. Particularly, where a large group of doctors is involved, the fair market value for the services may turn out to be very little per physician. Physicians are likely to be disappointed with the compensation they may receive under a compliant management arrangement. In support of the fair market value analysis, most management arrangements have a compensation structure that includes a variable component whereby the physicians receive a bonus payment if certain quality benchmarks are met. It is important that these benchmarks are based on independently verifiable, objective data that is periodically reviewed and tailored to address the changing needs of the HOPD. In addition, the benchmarks need to be high enough that they are actually a challenge for the physicians to meet them, and to do so would result in an improvement for the hospital. Also, to the extent that the HOPD is located in a facility that is financed with tax-exempt bonds, there are additional limitations on the length of the term of the management agreement and the percentage of the total compensation that may be variable. The bottom line: when considering an ASC acquisition for purposes of converting to an HOPD, hospitals will be required to address practical and regulatory obstacles which may greatly impact the ability to successfully complete this type of a transaction. So, the theoretical “win-win” may not be as practical to accomplish as it may first appear. Jerry J. Sokol is a partner in the Health Law Department with McDermott Will & Emery LLP, where he has a particular practice focus on ASCs. Phone: 305-347-6514; Email: jsokol@mwe.com. Amanda Jester is also a partner in Health Law Department with McDermott Will & Emery LLP, and her practice is centered around ambulatory surgery center transactions. Phone: 305- 347-6523; Email: ajester@mwe.com. |
In response to a series of questions Ophthalmology Management posed regarding the Constitution Eye acquisition, Hartford Hospital vice president of Patient Care Services Cheryl Ficara first noted that, in response to changes in healthcare, Constitution Eye put itself up for sale, spoke to several potential suitors and ultimately chose to align with Hartford Hospital “because of the ability to work collaboratively and create a true institutional center of excellence.”
| If a Hospital Offers to Buy Your ASC By Jerry Helzner, Senior Editor |
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| If you have an ownership stake in a high-volume, well-run ophthalmic ASC, you may be approached by a hospital seeking to buy it. The good news is that you will probably get a good price for the facility, as the hospital is almost certainly going to look to convert your ASC into a hospital outpatient department, with the much higher reimbursement that the HOPD designation entails. The hospital may also see your center as a nice piece in its formation of an ACO. The bad news is that once the hospital becomes the owner of the center, you might have to play by their rules. The advice of attorneys and others who have a good deal of experience in ASC sales is that your best chance to make a good deal, both financially and as to how the facility is managed, is before any papers are signed. Once the hospital is the 100% owner, it might be too late to negotiate the concessions that you and your partners may want. Seek a Management Contract The hospital may be the new owner but the former physician/owners who know the facility intimately can often obtain a management contract to operate the facility. The management contract not only provides some additional income to the former owners, it also gives them a strong say in how the facility will be staffed, scheduled, supplied and equipped. “ASCs have been known for efficiency and innovation,” says Glenn deBrueys, CEO of American SurgiSite, which manages and partners in ophthalmic ASCs. “With hospital ownership and management of surgery centers, you are likely to see more bureaucracy and less innovation.” What Are the Hospital’s Intentions? Before you agree to a sale, get a definite idea of how the hospital intends to market the facility. They are required to re-brand it with the name of the hospital on the sign. That can be a good thing if the hospital is well-known in the region and has a good reputation. For example, Wills Eye has a majority ownership stake in a number of ASCs in the eastern Pennsylvania, southern New Jersey market. The Wills signage on these centers attracts doctors who are aware of Wills reputation as one of the world’s leading eyecare institutions. Few hospitals can rival Wills’ clout in eyecare but it is possible that the local or regional hospital brand can be more of a drawing card for doctors (and their patients) than a generic name (like Possum Valley Surgery Center) based only on the location of the ASC. In addition, ask the hospital to disclose its marketing plan for the center. Branding is one thing but we are still talking about an off-site, freestanding facility that may be miles away from the hospital’s main campus. Your center might not get the marketing dollars it deserves if personnel from the main hospital don’t pay much attention to you. Ask the hospital’s marketing department to specifically assign one of its top people to the facility — and ask for input into any new marketing concepts. After all, it’s the physicians and their management team that made the center a success in the first place. The Bottom Line If it’s inevitable that the ASC will be sold to a hospital, the best approach, according to professionals in this area, is to negotiate the best upfront price for the facility and be firm in attempting to maintain as much future control of the management of the facility as possible. The hospital may go along with you, as you have more experience in successful operation of an outpatient surgery center than the hospital does. |
Ms. Ficara then went on to confirm that the eye center is now an outpatient department of Hartford Hospital. “By becoming part of the hospital, the center was able to receive an infusion of resources to improve the electronic medical records system and connect with the rest of the healthcare system,” she asserted. Ms. Ficara also noted additional benefits derived from being a part of the hospital, primarily in the form of cost-effective efficiencies in areas such as patient tests.
Ms. Ficara pointed out that “many steps and criteria have to be met” in order for a facility to become integrated into a hospital outpatient department. “Many of them are at the state level — Certificate of Need, licensure and certifications, while others are federal requirements such as those set forth through Medicare and Medicaid,” she said.
Asked what advantages the acquisition of Constitution Eye brings to Hartford Hospital, Ms. Ficara cited an increased ability to recruit the best physicians, thereby providing patients “with the most innovative care and treatment at the best value.” She did not mention higher reimbursement as an advantage to the hospital of the conversion to HOPD status.
Ms. Ficara said the greatest challenge in integrating the eye center to the overall hospital system was going through the regulatory approval process. She asserted that the ophthalmic surgeons who use the facility have joined with Hartford Hospital leadership in a “special board and operations team to oversee the Center.”
Possible Solutions
The more ASCs that are converted to HOPDs, the more the costs to Medicare will increase, with a potential negative impact on future reimbursement across all specialties that encompass outpatient procedures.
Kreg Palko, who manages outpatient facilities in New England for Constitution Surgery Centers, says the trend toward conversions is almost a self-fulfilling product of the widening disparity between ASC and HOPD reimbursement. “It is getting more difficult to generate a reasonable profit, given the decrease in ASC rates,” he notes. “If ASC reimbursement was better, you wouldn’t see this trend toward conversions.”
Ophthalmology Management was granted an interview with CMS on a “background” basis to see how the federal government might respond to having to make greatly increased Medicare payments for the same procedures, performed by the same surgeons, in the same facilities — with the only real difference being who owns the facility.
CMS officials said that they were “aware of the issue” and could consider changing the existing regulations if they felt that sufficient reason for a change existed. They pointed out that any proposed change would have to go through a “notice and comment” process that would allow a 60-day window for public comment from all interested parties.
Will CMS take action to narrow the HOPD-ASC reimbursement differential? One recent straw in the wind is that MedPAC has proposed to close the HOPD’s approximately 80% reimbursement advantage over office-based physicians fees for patients who are seen for “Evaluation and Management” visits. Hospital advocacy organizations are fighting hard to justify the differential and maintain it.
Finally, this recent statement from MedPAC Chairman Glenn Hackbarth that may have a chilling effect on hospital administrators who have already committed to ASC-to-HOPD conversions: “Medicare needs to move, over time, to paying the same amount for the same service, regardless of the provider type,” said Mr. Hackbarth. OM
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