New King of the Ambulatory Surgical Jungle

There is a new King in the ambulatory surgical center (ASC) jungle.

On March 23, 2015 Tenet Healthcare Corporation and United Surgical Partners International (USPI) announced they were creating the biggest ASC provider organization of ambulatory surgery in the U.S. The new partnership, which will maintain the USPI brand, has 244 short-stay surgery and imaging center assets, 16 short-stay surgical hospitals and 20 imaging centers in 29 states.

There is a lot at stake here with about 22 million surgical procedures performed at approximately 6, 000 surgical centers in the U.S. every year.

For over 40 years, ASCs, which were first developed by a couple of physicians in Phoenix, have been an oasis for physicians who want to own their own means of production, control their practices and realize generous financial benefits of owning facilities.

But now the consolidation fever that has captured “Big Health” is hitting ASCs. Tenet’s joint venture with USPI signals a move by hospitals to acquire the physician practice model that has moved millions of patients from hospitals to outpatient centers.

Wayne Smith, chairman, president and CEO of Community Health Systems, says that the Affordable Care Act froze physician investment in hospitals and forbade new investment, such as physician syndication deals. “That leaves joint ventures with physicians in ambulatory surgery centers as about the only equity method of aligning with physicians, ” he said shortly after the law was passed.

With over 110, 000 employees operating 80 hospitals, 214 outpatient centers, 6 health plans and Conifer Health Solutions, a leading provider of healthcare business process services, Tenet qualifies as a “Big Health” provider.

USPI was taken public in 2001, but returned to being private in 2007.

Trevor Fetter, Tenet’s president and CEO said the partnership “accelerates” plans to expand the company’s ambulatory services to meet “growing consumer demand for services that are provided in a lower cost, more convenient setting and that are aligned with the long-term transition to value-based care.”

That’s “Big Health Speak” for pay-for-performance.

Initially, Tenet will own a little over 50% of the deal and eventually all of it. The joint venture will have partnerships with 50 health systems and more than 4, 000 physicians at the facility level. The partnership touts its relationship with non-profit providers.

AmSurg Corp. out of Nashville, Tennessee, is going to get kicked down to the number two spot with around 200 centers in its network, followed by Surgical Care Affiliates with 125 centers and HCA (Hospital Corporation of America) with 111. The top 10 ASC providers in the country, according to ASCA (Ambulatory Surgical Center Association), the industry trade group, own approximately 766 ASCs.

Tenet is also reaching into the United Kingdom’s version of ASCs by agreeing to buy Aspen Healthcare Ltd.’s nine private hospitals and clinics from Welsh, Carson, Anderson & Stowe. Welsh Carson also owns USPI, which acquired Aspen in April of 2000.

Regulatory approvals are expected by the end of September 2015.

ASCs

ASCs boast that they improve quality and customer service while reducing costs. ASCs also provide financial benefits to individual physician owners of ASCs to the extent that they are able to realize favorable passive income benefits from owning their facilities.

ASCs also save the government, third party payors and patients lots of money.

On average, Medicare saves more than $2.6 billion each year because of the significantly lower rates paid for the procedures performed at the ASC instead of a hospital. It’s estimated that if just half of the eligible surgical procedures moved from hospital outpatient departments to ASCs, Medicare would save another $2.5 billion a year.

Physicians continue to have at least some ownership in virtually all (90%) ASCs. But many ASCs are now jointly owned with local hospitals that see a financial benefit. According to the most recent data available, hospitals have ownership interest in 23% of all ASCs and 2% are owned entirely by hospitals.

Show Me the Money

Currently, Medicare pays ASCs 58% of the amount paid to hospital outpatient departments for performing the same services. In 2003, Medicare paid hospitals only 16% more, on average, than it paid ASCs. Today, Medicare pays hospitals 81% more than ASCs for outpatient surgery.

Medicare payments to ASCs have increased $1 billion between 2004 and 2011. In 2004, Medicare paid ASCs $2.5 billion. By 2011 ASCs received $3.5 billion, according to MedPAC data.

However, commercial payers are reportedly the largest group within ASC payer mix at an average of 59% of gross charges. Medicare is second, with 24%.

Patients typically pay less coinsurance for procedures performed in the ASC than for comparable procedures in the hospital setting. For example, according to the ASCA, a Medicare beneficiary could pay as much as $496 in coinsurance for a cataract extraction procedure performed in a hospital outpatient department, whereas that same beneficiary’s copayment in the ASC would be only $195.

Consolidation

The growing payment differential, the financial need for healthcare systems to generate billions in revenue and payer pressure are contributing to a market dynamic whereby ASCs are being purchased by hospitals and converted into hospital outpatient departments. Even if an ASC is not physically located next to a hospital, once it is part of a hospital, it can terminate its ASC license and become a unit of the hospital, entitling the hospital to bill for Medicare services provided in the former ASC at the 81% higher hospital outpatient rates.

Hospitals are reading the math tea leaves with 83% of ASC management companies reporting they are selling a controlling interest in a surgery center to a hospital, health system or other third party. However, according to Scott Becker of Becker’s ASCReview, when a hospital invests in a center, there is no certainty that this will improve reimbursement rates.

The move to consolidate is not likely to slow anytime soon. In July 2013, Becker wrote that of 20 major ASC management and development companies, 53% said they intend to purchase 1 to 5 ASCs within the next year.

With 65% of hospital revenue now coming from outpatient services and providers seeing 10 outpatients for every inpatient, “It’s not a question—they have to, ” said Blayne Rush, president of Ambulatory Alliances, an investment banking and mergers and acquisitions firm in a March 25, 2015 Modern Healthcare article. “We’re going to see more and more of these types of deals.”

“Everything I’m seeing is pointing to that direction, ” added Joan Dentler, CEO of Avanza Healthcare Strategies, a consulting firm on outpatient and population health strategies. “The hospitals taking aggressive stances and aggressive acquisition strategies are going to continue to do that.”

AAOS and Device Makers

The American Academy of Orthopaedic Surgeons (AAOS) has taken note that orthopedic procedures are shifting to outpatient settings and offered a session at its recent annual meeting to inform surgeons about their opportunities.

Device makers, according to Needham & Company analyst, Mike Matson, are offering programs to enable their customers to perform outpatient reconstructive procedures.

“Products used in the procedures are essentially the same as those used for inpatients. The programs, such as [Zimmer Holdings Inc.’s] Z23, instead focus on patient selection and pre- and post-operative care. While it seems all but inevitable that some of these procedures (especially in younger, healthier patients) will be shifted to the outpatient setting, we see risk that this increases implant pricing pressure since outpatient reimbursement tends to be lower and since many ambulatory surgery centers are owned (or partly owned) by surgeons, ” wrote Matson.

The Dark Side of ASCs

ASCs, while purportedly highly regulated and certified by Medicare, also come with some baggage. Safety questions arise in such highly publicized cases as the death of Joan Rivers who died while undergoing routine throat procedures at Yorkville Endoscopy, a year-old free-standing center located in Manhattan.

“Anytime there is a major or minor accident, people begin to question the safety record, ” said anesthesiologist David Shapiro, M.D., past president of the ASCA. Rivers’ death, Shapiro said, is an aberration. “We have an exceptional, exceptional success rate, ” he said, adding that his industry is “very, very tightly regulated.” Since 2006, he noted, an industry group called the ASC Quality Collaboration has been reporting aggregate data on complications including burns, falls and surgery on the wrong site or wrong patient.

But Lisa McGiffert, director of Consumer Union’s Safe Patient Program, said in a 2014 Kaiser News article, “There’s not much known about what happens within the walls of these places by regulators or by the public. Hospitals are more tightly regulated” than outpatient surgery centers. “They have to report on many more aspects of what they do, such as errors and certain infections.”

USPI 2.0

The new entity is going to keep USPI’s brand name and the guys currently in charge of USPI, Bill Wilcox, the CEO will remain as CEO, and Brett Brodnax, will lead the company’s strategy and growth efforts. Kyle Burnett, Tenet’s senior vice president for outpatient services, will become president of ambulatory services and will take on the additional role of chief integration officer for the new venture.

Tenet’s imaging facilities will also be included in the joint venture, and the companies anticipate adding other ambulatory services in the future as part of a strategy to offer a full range of ambulatory solutions and participate in value-based and other risk-based models with payers.

The venture expects to realize approximately $50 million of corporate and facility level synergies over the next three years.

Tenet executives say they intend to raise $2.2 billion of debt related to these transactions, to be used principally to refinance $1.5 billion in existing debt of USPI, make the $0.6 billion in cash payments to Welsh Carson for USPI and Aspen, and for related transaction expenses.

Still a Jungle Out There

With the top 10 ASC providers in the country only owning around 766 out of an estimated total of 6, 000 facilities, the ASC jungle remains highly fragmented. But by becoming the lead player, Tenet is bulking up to become and stay the 800-pound silverback, King of the Jungle.