By Vivek Taparia, Director of Business Development The New Paradigm of Partnership Historically, the relationship between hospitals and ambulatory surgery centers could be characterized in many cases as adversarial. Hospitals often perceived ASCs as a potential threat to their profitable outpatient surgery business, which in turn would hinder their long term ability to offer a general range of healthcare services to their communities. In contrast, ASCs viewed themselves as a low cost alternative to the hospital setting with the simultaneous ability to enable high patient satisfaction rates, increased physician productivity and enhanced clinical outcomes. However, we have seen that in recent years, hospitals have increasingly partnered with ASC management companies in the delivery of the outpatient surgical service line in non-hospital settings. At Regent, more than half of our surgery center partnerships include a hospital partner — a full thirty percent more than the industry average. This change can, in part, be attributed to the magnitude of surgeries which have shifted to the outpatient setting. In fact, outpatient surgery accounts for more than sixty-five percent of all surgeries, up from around twenty percent nearly twenty years ago. Additionally, about forty percent of outpatient procedures take place in the ASC setting, up from less than twenty percent two decades ago. In the past, these joint ventures often took place both out of necessity and after the ASC became an established cash flowing entity. For example, in some states, payor markets have increased their market leverage through consolidation — to the point that certain contracted rates preclude standalone ASCs from covering their operating costs. In such circumstances, ASCs often sell equity stakes to local hospitals in order to assist with payor contracting efforts. In turn, the hospital system invests in existing ASCs in order to participate both in a new revenue stream and a potentially preferred apparatus through which a patient can experience sound surgical care. In contrast to historic norms, hospitals are actively approaching ASC management companies to develop and manage an ASC upon the inception of the facility. It is no longer uncommon for a hospital to run a Request-for-Proposal process to select the most qualified management company, or winner of the ‘beauty contest’, to develop and manage their ASC. In this new paradigm of partnership models, healthcare systems acknowledge that the skill sets required in the development and management of an ASC fundamentally differ from those required to run an acute-care general hospital. Accordingly, the relationship between hospitals and ASCs has shifted from adversarial to amiable, largely due to the realization of key benefits that health systems can accrue and which are outlined in the subsequent sections. Physician Recruitment and Retention Benefits The shortage of surgeon specialists will only be exacerbated as approximately 32 million patients enter the insurance rolls within the coming years. As such, the challenge of recruiting and retaining surgeons will heighten as hospitals compete for the shortage of clinical talent. For various reasons, the potential association with a hospital affiliated ASC can represent a key tool for a hospital not only to recruit surgeons but also to cement the relationships with key surgeons already affiliated with the hospital system. Enhanced Patient Experience Surgeons will be attracted to the enhanced patient experience in the ASC setting. Patient satisfaction rates are often superior in the ASC due to numerous factors including the reduced waiting times and ease of access into and out of the operating room. Additionally, largely because there are no medical admissions, nocosomial infection rates can be meaningfully lower than in the in-patient setting. Enhanced Productivity Surgeons recognize the enhanced productivity they will experience in the ASC environment. For the reason that nurses and operating room technicians, instead of a separate janitorial team, typically turnover the operating room in the ASC, turnover times in the ASC are generally no longer than ten minutes. Furthermore, because ASCs do not need to accommodate unscheduled surgeries originating from the emergency room, surgeries tend to start more punctually than in the ASC environment. A spillover benefit associated with the surgeon’s enhanced productivity in the ASC relates to the level of skill of a surgeon. Finally, the outcomes and precision of a surgeon’s work correlate directly with the frequency the surgeon performs the particular procedure. Ownership Interest Surgeons seek to associate with a hospital with an ASC affiliate due to the economic upside of a potential ownership interest in the ASC. In various ways, the passage of healthcare reform has only exacerbated the concerns clinicians share with regard to their income levels. Potential ownership in an ASC offers a surgeon an additional stable income stream in an increasingly challenged reimbursement environment. Scope clearly exists for hospitals to increase their participation in ASC ventures with physicians. Of the approximately 5,200 ASCs in the country, around nintey percent of them have a form of physician ownership. Only about twenty percent of ASCs have a hospital partner. Market Share Benefits Increase Inpatient & Outpatient Volume There are two ways a hospital can increase its market share by using an ASC as part of its outpatient strategy. The first relates to physician recruitment. Most often, those surgeons recruited to a hospital through an ASC often come from the local market, have established practices, and, especially in suburban and urban environments, operate at greater than one hospital. As such, through the ASC, the hospital will capture outpatient volume in local markets which otherwise went to competing hospitals. Also, because surgeons seek to minimize the distance they travel, these surgeons will likely bring the majority of their inpatient volume to the same hospital system to which they bring the majority of their outpatient volume. At one Regent partner JV, seventy-two percent of current surgical volume comes from surgeons who historically utilized competing hospitals and ASCs. Grow Service Area The location of the ASC will play a pivotal role in capturing market share for the hospital. Hospitals often locate an ASC in new service areas or on the periphery of their existing service area. The location of the ASC in a specific area will enable ease of access to surgical care for the patients in the marketplace and can potentially attract patients who otherwise may have chosen a competing hospital system. Branding The location of the ASC can also benefit the hospital from a branding standpoint. It is typical for surgery centers to be located in non-medical complexes such as commercial intersections and strip mall. Patients will see the ASC during their daily routine activity (grocery shopping, picking up dry cleaning, etc.) and they will notice the ASC is an affiliate of a particular hospital. As such, the presence of the ASC represents a point of contact to message the hospital’s brand to potential patients. Evidence suggests that if the patient experiences surgery in an ASC, the patient will leave with a high satisfaction rate. Should the patient have a pleasant outpatient surgical experience at the facility of ABC Hospital, the patient will likely seek go to ABC Hospital when in need of inpatient surgery. Hospital Operating Room Capacity Freed Up for Higher Acuity Cases A hospital’s involvement in an ASC can benefit the hospital’s internal operations, especially in regard to freeing operating room capacity. Hospitals involved in an ASC are well poised to shift their outpatient volume to the ASC in order free up capacity for both higher acuity and more inpatient cases in the hospital’s main operating rooms. Logically, the hospitals best positioned to deploy such a strategy are those that have operating rooms that are at high capacity utilization. In fact, when a hospital shifts its outpatient surgery from hospital operating rooms to the ASC, the hospital benefits from two revenue streams. Hospital Revenue First, if the hospital replaces the freed operating room capacity with inpatient surgery, the hospital will enhance its profitability, largely because the inpatient contribution margin for a hospital can be over five times greater than the outpatient contribution margin for a procedure in the same surgical specialty. ASC Revenue Second, the hospital will get an additional revenue stream based on its equity interest in the ASC. If the hospital has a majority interest, these revenue streams will be enhanced not only due to the increased ownership, but also due to the improved contracting leverage a majority partner hospital can have with payors. The tradeoff surrounding increased hospital ownership is diminished opportunities for physicians to invest in the ASC, potentially reducing recruitment opportunities. If the operating rooms of the hospital are not at capacity, the hospital should perform a feasibility study to closely understand the volumes of the physicians that will be recruited to the ASC and the associated inpatient cases these surgeons will bring to the hospital. Should these inpatient cases, which are several times more lucrative than outpatient cases, offset the diminished revenues of the outpatient cases that migrate to the ASC, the hospital’s involvement in an ASC will be a financially worthwhile endeavor. Future Paradigms of Delivery The passage of healthcare reform may also influence a health system’s thought process surrounding an ambulatory surgery center. Because of the forecasted bankruptcy of the Medicare program in just over a decade, the government has prioritized piloting an alternative reimbursement model which can eliminate systematic costs. The Patient Protection and Affordable Care Act (Section 3022) has particular relevance to hospitals as it relates to the establishment of Accountable Care Organizations (ACOs), which are mandated to unite providers and physicians in order to harmonize and develop efficient care processes. It is expected that ACOs will receive a global fee for services delivered to a patient and then apportion the money to the relevant providers. The payment will include an incentive if care is delivered at a lower cost than a benchmark level. The stated goal of the legislation is to “encourage investment in infrastructure and redesigned care processes for high quality and efficient service delivery”. Currently, ASCs on average receive Medicare reimbursement at approximately sixty percent of the hospital outpatient departments for the same procedures. Despite the unfavorable reimbursement climate, ASCs continue to grow largely due to high quality and efficient care. One can argue that the ASC represents exactly the type of value-based delivery paradigm the government desires providers to embrace. Aside from the potential recruitment, market share and profitability benefits, a purview to the future of reimbursement also warrants consideration of an ASC as part of an outpatient strategy.