OR Manager - February 2020 - 27

AMBULATORY
SURGERY CENTERS
patient-friendly. Surgeons often have
problems accessing the OR schedule,
and may be reluctant to partner with the
hospital to develop an ambulatory center;
they usually prefer to either partner
with an experienced management company
or have independent ownership.
Difficulty agreeing on a revenue
split. Hospitals and physicians in the
US have traditionally been reimbursed
through separate fee-for-service systems.
Gainsharing arrangements between
hospitals and surgeons have
often been characterized by difficult negotiations
or failure to agree.
Hospital payment advantage. Traditionally,
reimbursement for a hospitalbased
ambulatory procedure has been
92% higher than reimbursement for
the same procedure performed in an
ASC. Under this payment structure, the
average facility fee for a simple lumbar
spine fusion was $11,000 when
performed in an HOPD, compared with
$5,000 in an ASC setting. The HOPD reimbursement
advantage has kept hospitals
profitable, and there has been little
need to share revenue with surgeons.
But the more recent trends of lower
HOPD revenue and higher costs have
led to a search for other sources of revenue
and diversification.
Forest vs trees. The current fiscal
woes of the typical US hospital are
keeping executives and board members
focused on day-to-day operations. Longer-range
strategic planning-including
expansion into the ASC market-is usually
very low on the priority list.
Strategies for market expansion
Hospitals have four potential strategies
to consider for expanding into the
ASC setting.
Option 1: Avoid ASC expansion
and improve HOPD services. Current
regulations do not permit gainsharing in
the hospital HOPD setting, so financial
support from surgeons is not possible.
Perhaps most
important,
the typical
hospital OR is less efficient than those
in the ambulatory setting, and transwww.ormanager.com
ASCs
perform 50% more volume
per room compared with hospitals.
forming the HOPD culture will not be
easy. One possible exception: Rural
hospitals usually face a less competitive
ambulatory surgery market, so expanding
and improving HOPD services
may be a successful strategy for them.
Option 2: Convert an HOPD into an
ASC. Hospital leaders may wish to convert
an existing HOPD into a joint venture
with an ASC. If a gainsharing model
is part of this ASC transition, a careful
choice of surgeon-owners and specialties
is important. Although net reimbursement
is reduced, transitioning to
an ASC gainsharing model can ensure
continued surgical volume and surgeon
commitment. However, success hinges
on adapting to the ASC's operational
and cultural expectations.
Option 3: Build a new freestanding
ASC. Assuming certificate of need
(CON) issues have been addressed and
market research confirms an opportunity,
building a freestanding ASC can cost less
than purchasing an existing ASC. For example,
it costs between $5 million and
$10 million to build an average four-room
ASC versus at least $20 million to buy
an existing ASC with the same number
of rooms and a yearly EBITDA (earnings
before interest, tax, depreciation, and
amortization) of $3 million. In addition,
the " building new " option enables a hospital
to carefully select its surgeon partners,
though it may take up to 3 years to
reach full procedure volume. One overall
caution: This option should be avoided in
a saturated ASC market.
Option 4: Purchase an existing
ASC. The main advantage of purchasing
an existing ASC is that it is a known
entity, with well-established volume and
processes. However, an efficient and
profitable ASC can be costly, with a purchase
price that is typically 6 to 7 times
EBITDA. Hospitals considering an ASC
purchase should move with caution and
consider these factors:
* Not all ASCs are profitable or provide
consistently high-quality patient care.
According to the most recent CMS
data, for every two ASCs beginning
operations, one closes its doors.
* ASC management companies and
investment firms have a significant
presence and expertise in this market.
Competing against these experienced
companies for existing ASCs
can be challenging. Additionally, on
average, only 2% of existing ASCs
are sold yearly.
* Most ASCs have a limited life expectancy.
Under a gainsharing model,
the share price in a successful ASC
rises steeply with increasing EBITDA.
This benefits surgeon owners, but
effectively eliminates the possibility
of adding new surgeon partners
through additional share allocation.
As its owners age, the ASC eventually
reaches a time for either resyndication
or closure. Beware of
an ASC seeking a hospital buyout
with a high asking price, and carefully
review financial and operational
performance.
Stay focused and move forward
With hospital outpatient surgical volume
continuing to decline, hospital survival
will ultimately depend on a strategic plan
that includes both hospital and ambulatory-based
procedural care. It's important
to focus on the basic market realities
and keep three ideas front of mind:
* Continued advances in procedural
science and the ongoing search for
value will likely leave the average
urban hospital with only complex surgical
care. HOPD ambulatory care
will continue to decline as ASC and
office-based surgery providers perform
more procedures.
Continued on page 29
OR Manager | February 2020 27
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