Luke Lambert, CEO of ASCOA, discusses the opportunities for new ambulatory surgery centers in the future. Q: Is it still possible to develop de novo ambulatory surgery centers today? Where will there be the biggest opportunity for development in the future?
Luke Lambert: In the states where physicians can start surgery centers without needing to get a certificate of need, most of the markets have reached what I consider a saturation point. Most of the practices that want an ambulatory surgery center have one. In those environments, you only see new opportunities where there is a particular practice growing or newly organized where they can support one, or they are expanding to a market where they didn't have a presence before.
However, when development is unrestricted practices often do better to buy into an existing surgery center. Given that surgery center reimbursement has been pretty static over the past decade and costs have crept up, most ASCs are trying to maintain profitability by growing case volumes and that comes from recruiting new surgeons to the centers. There are ample opportunities for surgeons to join existing centers, which can be more attractive than developing from scratch.
Q: What about surgery centers in CON states? Do they have a better outlook?
LL: In states where CONs are required, surgeons must figure out the conditions needed for approval. The approval process is a limiting factor and in some states the standards are objective enough that you can know whether you are going to get approval or not; however, most of the time it's a political process where if you have support of favored constituents you get it. Often joint venturing with the local hospital can be the ticket to approval.
However, in a significant state like Virginia, if the lawmakers decided to do away with the CON for ASCs, you would see a tremendous amount of ASC development in the state. More than a decade ago, Pennsylvania did away with the CON requirement and over the subsequent years many ASCs developed.
Q: In what situations are hospitals most willing to partner with physicians on new ASCs or enter into a joint venture?
LL: Usually hospitals need to see the project as giving them a direct help of some sort, such as a city hospital with constricted real estate. This hospital might be reaching capacity so instead of spending $20 million to $30 million on a project reconfiguring the hospital — which would be disruptive and costly — they might find it worthwhile to develop an ASC that's not on their campus where they can move smaller cases to free up their operating rooms for larger inpatient procedures. When hospitals are capacity they often see the small cases as a nuisance and they're willing to move them into an ASC.
Hospitals are also excited to support and partner with surgery centers when they fit into their market share growth strategy. They might set up an ASC in their competitor's back yard, and in a cluster employing primary care physicians, specialists and develop urgent care centers, and imaging modalities. Building a surgery center can be a good way to co-op specialists and help realign them with their system as opposed to the competing system. Normally such surgery centers would be joint ventured with the hospital because co-management arrangements are not as attractive to physicians generally.
Q: If a specialty practice decides they would like to invest in a surgery center, how can they tell whether this is a smart move for their group?
LL: New groups that don't have an ASC already can develop their own if they have sufficient case volume to make it economically viable. That said, in most circumstances groups will find it advantageous to buy into an existing center. They are likely to have higher profitability that way because they are in the projects with existing surgeons who are sharing overhead costs and there is an enhanced potential for strong profitability.
Q: With the best opportunity being to join an existing center, do you think there will be a trend toward expanding centers to accommodate new specialists in the future?
LL: There are some centers we've had that expanded over the years. We also see centers that would expand if they could, but their real estate is situated such that they can’t. Nevertheless, excess capacity is more the norm in the industry.
Q: What is the biggest challenge existing ASCs and specialty groups face in growing their centers in the future?
LL: One of the biggest challenges is hospital employment of physicians. Historically the users of surgery centers have been independent physicians. There are fewer independent specialists today because hospitals are employing them. This trend will limit the development of new centers and hurt the existing centers because cases are going back to the hospitals.
Hospitals get paid more per case, so it makes sense to have everything under the hospital's umbrella. From society's perspective, it doesn't make sense because it increases the cost of care. Healthcare reform is banking on integrated service delivery to realize savings, but in the short term there is less competition and that drives up costs.
When a health system gets paid more than other providers, surgeons find they can work for them and be paid more. Over time more and more care gravitates under their umbrella because they have better reimbursement. That's why you see hospitals purchasing surgery centers; they can buy them based on their current profitability and triple the profitability by converting them to a hospital outpatient department.
Q: Where do you see the trend of hospitals purchasing ASCs headed in the future?
LL: If payors don't compensate ASCs enough to perform their services, they won't provide them. The procedures will stay in the hospital or migrate back to the hospitals. ASCs aren't currently being paid enough in many markets and they have to revert back to hospital ownership where they can be paid more. Payors think they can squeeze these relatively unpowerful market players like ASCs to save money, but if they squeeze them enough they fall into the arms of the hospitals and insurance companies are back to paying more.
I think many policy makers believe that a system with fewer and larger players will be easier to control and to drive cost savings. For the foreseeable future, the concentration of services is leading to higher costs. As you feed the big systems and starve everyone else, you will just be left with the big systems.
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