Industry Leaders Reflect on '08, Predict '09 Trends

Even as the U.S. economy tries to right itself again after the mortgage meltdown, the credit crisis and a jittery stock market in the last quarter of 2008, the ambulatory surgery industry is attempting to maintain its equilibrium in the midst of this mayhem. Let’s take a look at this year’s big milestones.

The industry has witnessed several important changes to the way it receives reimbursement from the Centers for Medicare and Medicaid Services (CMS) in the last several years, and on July 3, CMS issued its proposed rule for 2009; it proposed additions of nine surgical procedures to the ASC approved list and reflects a mix of previously excluded procedures and newly added CPT codes.

“We had barely mastered the 2008 Medicare conversion to the modified Outpatient Prospective Payment System (OPPS), when CMS published the proposed changes for next year,” observes Caryl A. Serbin, RN, BSN, LHRM, president and founder of Surgery Consultants of America.¹ Serbin enumerates the challenges associated with the new payment system: “Managed care is becoming stronger and less likely to negotiate fair rates. Supplies are increasing in price due to the changing economy. Staffing is becoming more difficult as employees will not travel as far because of the high price of fuel. As these trends continue, ASC management teams must be fully aware of the changes in reimbursement, explore the specific challenges they will confront, and determine how to deal with them and still maintain a profitable center.”

“From a national policy perspective, the most profound event was the commencement of the long anticipated new payment system, which substantially impacts how much Medicare pays an ASC,” concurs Joshua Kaye, JD, a partner at McDermott Will & Emery LLP. “The new system became effective in January and bases ASC facility payments on a percentage of the amount Medicare pays a hospital for the same procedure. CMS also significantly changed how it determines what procedures will be reimbursable when furnished in the ASC setting by replacing a limited list of procedures to an approach that instead allows payment to an ASC for any surgical procedure, except those that CMS determines are either not safe when furnished in an ASC or that require an overnight stay.”

Kaye continues, “While reimbursement for certain procedures may decrease, the new payment methodology includes many important and welcome improvements. The fall-out from the New Jersey trial decision in Garcia v. HealthNet is also noteworthy as it drew into question physician ownership in ASCs on the basis of being operated as an extension of a physician’s practice, as well as co-payment/deductible collection practices by out-of-network facilities.”

“2008 has been an extraordinarily eventful year for the ASC industry,” states Lorin Patterson, JD, partner with ReedSmith. “The implementation of the APC reimbursement scheme involved the complete ‘overhaul’ by CMS of the way it reimburses ASCs for procedures performed within their facilities and its views on the types of procedures, which may be appropriately performed within the ASC setting. Although this scheme will be phased in over four years, we are already witnessing the effects of the rules through increased emphasis on certain specialties, such as orthopedics, which received relatively better treatment than other specialties.”

The stumbling U.S. economy is likely the most pressing issue of the year, according to industry experts we talked to. “The biggest event for ASCs for 2008 has to be the ongoing tumult created by the credit crisis and weakening economy,” says Scott Becker, MBA, JD, a partner at McGuireWoods. “This overall financial challenge has led to a decrease in procedures where patients can choose to delay surgery. It has less to more drastic reductions, depending on how ‘elective’ the surgery is. Further, the credit challenges and overall financial problems are leading employers to reduce payrolls and redouble their efforts to reduce healthcare costs. This is leading to payors who handle employee plans making more aggressive efforts in years to reduce reimbursement rates.”

Rick DeHart, CEO of Pinnacle III, points to the recent financial market corrections as the top event for 2008: “The financial market changes will definitely impact many ambulatory surgery centers, especially in those situations where business growth is tied to the need to secure capital. Capital needs could occur when making leasehold improvements to your facility or purchasing large equipment items. If your facility is established and possesses a good credit history with a lending institution, then you are probably alright. However, if you are a start-up with questionable cash flow, it will likely be very difficult to obtain the additional capital necessary to sustain your facility. De novo facilities will also be impacted, as the financing criteria will change with enhanced scrutiny.”

The proposed change to CMS language restricting overnight stays could impact facilities as significantly as the markets, DeHart adds. “If this language change on overnight stay passes, it will have a significant effect on the industry and healthcare in general. Many states have a 23-hour restriction, allowing a significant number of ASCs the option of performing higher acuity cases. The language change will have a huge financial impact on some facilities, removing the higher acuity volume and pushing it back to the hospital setting. This move will not only hurt ASCs but increase the financial burden on the patient.”

“The industry is still awaiting CMS’s action on the Medicare Conditions of Participation for ASCs,” Patterson confirms. “If the conditions are adopted as proposed, they could significantly curtail the manner in which many ASCs are operating. For example, the proposed conditions contain a requirement that all patients in a Medicare-certified ASC not be retained past midnight. A considerable number of ASCs may have to change their policy on 23-hour stays, even though the states in which they operate may expressly permit this practice.

Bob Zasa, MSHHA, FACMPE, of Woodrum Ambulatory Systems Development, explains that the credit crunch within the financial markets affected the ASC industry negatively in several ways, including the fact that physicians are holding onto their money and that some physicians are hesitant about buying into de novo centers. Zasa adds, “Non-recourse financing for ASCs dried up except for those centers already opened for 3 to 5 years and at least profitable. The financial markets also made a difference in the increasing number of ASCs that requested “reorganization” or turnaround services from mature surgery center management companies who have had a successful track record.”

Zasa adds that he has seen centers reducing their investment in new equipment, preferring to make do with their aging equipment for another year — another sign that the credit crunch is delaying facility capital improvements.

On the clinical side, the industry was rocked earlier this summer when 40,000 patients at the Endoscopy Center of Southern Nevada were potentially exposed to the hepatitis C virus during procedures requiring injected anesthesia. The Southern Nevada Health District notified patients following an investigation of several acute cases of the illness; the notification included patients who had procedures at the clinic between March 2004 and Jan. 11, 2008.

“2008 witnessed overwhelming attention on the preeminent issues of quality and patient safety,” Patterson says. “The debacle in Nevada in which thousands of patients were exposed to hepatitis because of unsafe practices in certain ASCs there has emboldened the opponents of physician-owned ASCs and caused state regulators in states other than Nevada to more closely scrutinize those facilities operating within their jurisdictions.”

Michael Kulczycki, executive director for the Ambulatory Accreditation Program at The Joint Commission, says that this event put the spotlight on infection prevention in ASCs, a topic taken for granted in an industry that has a very low infection rate compared to other healthcare facilities.

“This unfortunate situation created a groundswell of a response in the regulatory community, with rapid reactions both at the federal level with CMS, as well as at individual state levels well beyond Nevada,” Kulczycki says. “It highlights the issue of infection prevention as requiring a systematic response in ASCs, and that accreditation generally offers one system-level approach to an ASC having staff, intellectual and physical resources to combat and prevent infectious outbreaks. While accreditation is no panacea (as evidenced by some of the outbreaks having occurred at accredited facilities), it represents a solid building block for ensuring patient safety. We are also hearing examples from across the country that state surveyors, conducting Medicare resurveys, are also focusing on these issues as well.”

The industry also has weathered an erosion in the physician ranks, according to Elliott Jeter, CFA, CPA, ABV, a principal of VMG Health. “The ASC industry reached a tipping point in 2008, where the number of available physicians per ASC reached a historically low level. This dynamic was caused by not only the large increase in the number of ASCs, but also by the reduced supply of available physicians in certain markets,” Jeter explains. “Competition for available physicians has increased from hospital acquisitions of physician practices, hospital recruitment of new physicians to markets, and new physician-owned specialty and acute-care hospitals. 2009 will be a year of retrenchment. Good management decisions will be crucial. ASCs with excellent management and physician partners will thrive while weak players will consolidate or fail. This is a natural evolutionary phase for a maturing industry and will be healthy for the industry as a whole in the long run.”

Recent years have proved to be watershed years for the not only the survival of the physician-owned facility, but its role in a national move toward consumer-driven healthcare. Molly Sandvig, JD, executive director of Physician Hospitals of America (PHA), notes, “A number of important and interesting events impacting the future of healthcare have occurred this year. For instance, in 2008 more than in the past, healthcare has been very publicly acknowledged as one of the primary drains on the American family’s economic stability. Also, the concept of universal healthcare or universal coverage has recently been used more and more synonymously with the concept of a single-payor health system, which has unfortunately started to gain some traction. However, I believe that the biggest event affecting healthcare in 2008 and beyond has yet to occur — the results of this year’s elections will truly impact the future of healthcare for many years to come.”

Jeff Fox, vice president at Tygris Commercial Finance Group, Inc., formerly MarCap, concurs: “The top issue for 2008 will have taken place on Nov. 4. The Presidential election will be the top issue for 2008 and 2009. Fox predicts further, “Healthcare will be one of the top items that a new administration will have to address and will have some impact on the ASC industry. This depends on any number of issues but certainly the expense of either candidate’s plan will have to come in line with the current administration’s aggressive plans to shore up the U.S. financial system. Both candidates has committed to some action plan to address the uninsured and the rising healthcare costs. Depending on where one stands on the issue, the federal government may not have the ability to react to the healthcare issues as it could have before the recent events that overtook the domestic and global banking systems. This may be viewed as a positive if you believe any change would be negative to our business. The credit crisis may be impacting some ASC projects being delayed, but it appears that this crisis shall pass.”

Looking to 2009

We asked those contacted for this piece to ponder the future of ASCs and specialty hospitals; here’s their take on what they believe will be the most critical issues for 2009.

Lorin Patterson: “The outlook for 2009 can perhaps best be described by two words — “fearful uncertainty.” Under the best of circumstances, the prospects of the election of a new administration with a different healthcare agenda, as well as the possibility of a significant change in the composition of Congress, would create nervousness in the market. The uncharted water that our economy is navigating at this time only amplifies this anxiety. While it is likely that the current financial crisis will impede the immediate implementation of either candidate’s healthcare agenda, some kind of change in the manner in which healthcare is delivered and paid for must be expected. Given the current financial stresses, 2009 would not be a good year for the industry to expect the implementation of any financial policies, such as an increase in reimbursement, which may favor it. On the other hand, government programs, which have historically actually made money for the government, such as fraud and abuse enforcement, should be expected to be even more aggressively pursued.”

Scott Becker: “On the ASC mergers and acquisitions front, the credit challenges have not yet had a real negative impact on transactions. However, as it is early in the most difficult part of this economic slowdown and loss of stock market wealth, it remains to be seen what impact will be had... will deals still close, will pricing for deals remain at solid levels, will buyers be able to finance acquisitions?”

Joshua Kaye: “With 5,500-plus ASCs across the country, surgeons and proceduralists in many geographic markets are already invested in or otherwise have a financial relationship with an existing ASC. As a result, 2009 could very well see quite a bit of mergers and acquisitions, as existing ASCs and ASC management companies look to increase revenue and decrease expenses by consolidating existing ASC facilities. The critical issue will be the impact that the consolidation will have on the multiples being paid and how to continue to attract new physician investors. Additionally, recent changes to the Stark law that become effective on Oct. 1, 2009 will require either the restructuring or unwinding of a number of physician/hospital ASC joint ventures that were structured as ‘under arrangement’ or management arrangement transactions.”

Molly Sandvig: “In 2009, I believe lines will be drawn between the four major financial players in healthcare: government, insurance companies, hospitals and physicians. The events of next year could easily set the groundwork for the parties that will be in control for many years to follow. We must ensure that physicians, as the representatives of patients, keep a seat at the decision-making table and in fact, win the right to control the destiny of their profession. What occurs in 2009 could make the difference between an immediate future allowing the practice of proactive healthcare vs. “check-box” medicine.”

Bob Zasa: “With a new administration in the White House, there will be new national healthcare policies that affect insurance as it is now constituted. There will be more private insurance that is portable and less employer insurance. Look for more broad coverage of children under either administration, as well as tighter cost controls and fewer increases with payors. Payors will most likely continue to withhold monies owed to providers, causing more staffing to audit these claims and re-file them to get proper amounts of money owed to ASCs per the contracts. This will encourage more providers to stay out of network for a while longer with countermeasures by ASCs to collect on the front end with payors who pay claims directly to patients. There will be higher deductibles on insurance products until state insurance commissions and federal regulators within the insurance industry force more even pricing of individual policies so premiums don’t vary by state so much, in order to reduce adverse selection. I also believe we will see more attempts for payors to reduce or discourage out-of-network payments.”

Michael Kulczycki: ”It is likely that the close of 2008 may bring the release from CMS of the final version of the conditions for coverage applicable to Medicare-certified ASCs, with a short window to an effective or implementation date, perhaps as early as January 2009. While much of the industry coverage has focused on the important issue of the definition of overnight stays for ASCs, the industry should be making plans now for responding to potential increases in CFCs affecting governance oversight of patient safety issues, and increased prescriptive expectations for performance improvement and infection prevention. The Joint Commission’s analysis of the proposed CFCs show that accredited centers generally will be in compliance with the revised expectations. However, it is likely that the Nevada situation in early 2008 will heighten, even more, the prescriptiveness of infection control measures in the final release. Hopefully, the ASC industry will quickly respond in aiding its professionals, through education and published information, in timely responses. The second critical issue, probably coming to light mid-year, will be the CMS plans for requiring performance measurement by ASCs. While the industry has been out front in pushing through ASC-specific measures (via NQF endorsement of the ASC Quality Collaborative items), in 2008 CMS was reluctant to move forward. ASCs should expect CMS action in 2009, and The Joint Commission stands ready to partner with the ASC industry to provide support in performance measurement reporting. This topic was among the items discussed earlier this summer in a briefing between Kathy Bryant, president of the ASC Association, and Mark Chassin, MD, MPP, MPN, president of The Joint Commission.”

Rick DeHart: “Politics! The elections and a new president will probably be the most critical issue for 2009. Even though the healthcare proposals from both political parties do not seem to impact the ASC environment, the concern is what could potentially materialize if one party corners the political market. I believe there is a lot of speculation of what might happen but, at this point, the crystal ball is not clear, which places us into a ‘wait and see’ mode.”

Reference:

Serbin, C.A. The Changing Face of ASC Reimbursement. today’s surgicenter. 7, 10: 14-16, October 2008. Accessed at: http://www.surgicenteronline.com/articles/changing-face-of-asc-reimbursement.html