The following article is the first in a series providing analysis of current trends and anticipated developments in the healthcare industry.

The outlook for the ambulatory surgery center (ASC) industry in 2009 is mixed. While there is continued growth in procedure volume, there is continued pressure on reimbursement and a reduction in elective procedures that are typically self-pay (e.g., cosmetic surgery). Much has been written on certain developments, such as the abolition of "under arrangements" transactions, the prognosis for physician-owned hospitals, and issues particular to the New Jersey and California markets, all of which are noteworthy. In addition, Waller Lansden is tracking a number of other items of interest to the ASC industry, a few of the most significant include:

1. Potential for Increased Consolidation. We have observed several factors that are likely to increase consolidation in the industry:

  • There is decelerating (although still positive) growth in procedure-volume.
  • Permanent reimbursement pressures exist.
  • Competition remains high and barriers to entry are not terribly effective.
  • The supply of unaffiliated surgeons is dwindling.

As a result, we expect an increased focus on the acquisition by national ASC companies of smaller and less capitalized regional and national companies, as well as the combination of in-market ASCs followed by the continued operation of both facilities or the shut-down of one of the facilities.

2. Workers' Compensation Fee Revisions. We have observed a trend towards states adopting workers' compensation fee schedules that are less than the historical method of paying a percentage of schedule. This will have obvious implications for ASCs that rely on workers' comp cases for a significant percentage of volume.

3. Out-of-Network Issues. A number of ASCs have elected to not enter into contracts with payors and to waive the differential between out-of-network and in-network co-pays. Historically, most payors have reimbursed out-of-network claims at reasonable and customary charges. ASCs have taken the position that the charges set forth on their retail charge master represent ordinary and customary charges. Consequently, it is not unusual to see out-of-network reimbursement be as much as five times higher than contracted reimbursement rates. Payors have launched a series of attacks on out-of-network billing. Payors have filed litigation against ASCs that bill out-of-network attempting to recover a substantial portion of the out-of-network fees on a number of theories, including:

  • The waiver of the co-pay is fraudulent
  • Waiving the co-pay is tortious interference with the contract between the patient and the payor
  • Customary and ordinary charges are not the charges set forth on the surgery center's charge master, but the average reimbursement actually paid by the payor to in-network ASCs.

Prospectively, payors are changing the manner in which out-of-network care is reimbursed from a percentage of ordinary and customary charges to a fee schedule typically published on the payor's website. The out-of-network fee schedule is typically lower than the in-network fee schedule. The state of New York has recently instituted an investigation of ASCs who billed out-of-network for government workers. Recently, one ASC in New York paid $2.25 million in reimbursements and fines to the state of New York.

4. Lithotripsy Opportunity. With the coming illegality of per-click arrangements between hospitals and physician-owned lithotripsy companies, an opportunity exists for urologists to lease equipment for use in the ASC setting where the urologist is a physician-investor. We expect substantially increased scrutiny under anti-kickback theories, however, focusing particularly on those arrangements where the real cost to the ASC of leasing the lithotripsy equipment is materially higher than the cost-to-own the equipment and avoid altogether the relationship with the physician-owned lessor.

5. Opportunities in Bariatric Surgery. We are seeing increasing interest in ASC-based performance of lap-banding and other bariatric surgery. One model gaining favor is a contractual arrangement between the surgeon and the ASC addressing the economics of the relationship, obligations with respect to marketing and patient care and restrictions on competition. Regulatory issues may arise in these arrangements, such as the implications of state fee-splitting statutes and the anti-kickback laws.

6. Expansion of Medicare ASC-Approved Procedures. Although the 2009 payment changes for hospital outpatient department (HOPD) and ASCs continue an expansion of the variety and numbers of procedures approved for ASC reimbursement, there remains a disconnect between the process for approving procedures for performance in the HOPD and approving procedures for performance in the ASC. This unnecessarily delays an ASC's ability to perform certain procedures, in many cases more efficiently than the services can otherwise be provided. The ASC Association continues to lobby to have procedures simultaneously considered for inclusion on both lists, rather then the current process which sees procedures added to the HOPD-approved list well in advance of the ASC-approved list--if the procedures are added to the ASC-approved list at all.

7. New Medicare Conditions of Coverage. CMS recently finalized new Medicare conditions of coverage for ASCs. Earlier, CMS had proposed changing the conditions to prohibit overnight stays, which would have adversely affected many existing surgery centers. CMS fortunately retreated from that position in the final rule. The new conditions of coverage allow ASCs to perform procedures as long as the expected time for the procedure and recovery does not exceed 24 hours. The new conditions also place greater obligations on the ASC to provide patients with information about their patient rights and about whether there is physician ownership in the ASC.

8. ASC Valuation Survey Results. HealthCare Appraisers Inc. recently announced the results of its 2008 ASC Survey to which 13 national ASC companies responded. Among the key findings:

  • Multiples paid to purchase a controlling interest remained steady in 2007, as nearly 60 percent of respondents saw 6.0x to 7.0x multiples of EBITDA and 33 percent of respondents saw multiples in excess of 7.0x.
  • Competition for acquisitions remains intense.
  • For the buy-out of physicians who do not use an ASC as an extension of practice, one-third of respondents saw multiples of 4.0x EBITDA or higher and one-third of respondents saw multiples of between 3.0x and 3.5x EBITDA.
  • For new physicians buying in to an ASC, 77 percent of respondents saw pricing multiples of between 2.5x and 4.0x EBITDA.
  • Orthopedics, ENT and general surgery remain preferred specialties for ASC physician partners.

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