HOPD or ASC: 5 questions for hospitals to consider

Jessica Nantz, President and Founder, Outpatient Healthcare Strategies -

Hospital case volume continues to migrate from inpatient to outpatient settings, and this is a trend likely to continue.

At a November 2014 MedPAC meeting, Jeff Stensland and Zach Gaumer delivered a presentation that examined preliminary Medicare claims data. It revealed inpatient discharges per Part A beneficiary dropped 17% since 2006, while outpatient visits per Part B beneficiary have risen 33% over the same time period. In a 2013 report, Sg2, an Illinois-based provider of healthcare market data and information, predicted outpatient volumes would grow 17 percent over the next five years, while inpatient discharges may decrease 3 percent.

One reason for this decrease in volume from the hospital side is attributable to improvements in surgical technique and technology. One way hospitals and health systems are working to retain this migrating volume and capture new volume is by acquiring ambulatory surgery centers (ASCs) and often converting them to hospital outpatient departments (HOPDs). According to the data from an Ambulatory Surgery Center Association (ASCA) analysis of ASC closures, one-third of the ASCs that have closed since 2009 did so after being purchased by hospitals and converted to HOPDs.

From a hospital reimbursement perspective, this is a financially viable decision. According to the ASCA analysis, when an ASC is converted to an HOPD, the hospital is entitled to receive for services billed, on average, an 81 percent higher reimbursement rate.

But this factor should not be the only reason a hospital converts an ASC to an HOPD. In fact, in spite of the potential for higher reimbursement, it may actually be a better decision in the long run not to convert the facility but rather joint venture the ASC with physicians and continue to operate the facility as an ASC.

Here are five questions for hospital leadership to address before acquiring and then converting an ASC to an HOPD. Note: Many of the answers to these questions and the factors hospitals must consider are influenced by market conditions, and vary greatly by market.

1. What is the best way to build or maintain physician alignment? For an ASC to be converted to an HOPD, the hospital must own 100% of the facility. Another way to look at this is physicians cannot maintain any ownership stake in the facility if a hospital wants to covert the facility from an ASC to an HOPD.

When physicians maintain ownership in an ASC, they have a direct financial interest in the success of the facility, and work to ensure this success. As such, many hospitals will choose to purchase a portion of the ASC and enter into a joint venture agreement with physicians. In this arrangement, both the hospital's and the physicians' financial interests are aligned.

However, physicians maintaining ownership in the ASC carries a financial risk (in the form of possible loss of investment). Especially with healthcare being in such a state of flux, many physicians are increasingly willing to sell all of their interest in an ASC to a hospital and receive a large payout in the process. But this lack of ownership can create a challenge for hospitals as physicians may not be as invested in the success of the facility once they lack direct equity ownership, and may not find the prospect of becoming a hospital employee appealing.

To try to maintain physician involvement in the success of the HOPD, hospitals have explored entering into a co-management agreement with the physicians to manage the converted ASC, after receiving clearance from legal counsel. But even this approach has its shortcomings. The co-management payment to the physicians may be lower than what physicians believe they could have earned in a joint venture.

While entering into a joint venture with physicians will not allow for the conversion of the ASC to an HOPD, it may be a better decision for the hospital over the long term. The hospital can send lower acuity, lower reimbursing cases (e.g., ophthalmology and gastroenterology procedures) to the ASC and still make money off of them while freeing up the hospital's operating rooms (ORs) for higher acuity, higher reimbursing cases. Physicians remain engaged as owners, and the hospital builds stronger alignment with these physicians.

But many physicians may not have interest in this model, and may seek to sell all of their ASC and ultimately become employees of the hospital. In many markets, the number of independent practices is shrinking, independent referrals are becoming harder to come by (in part because of hospital acquisition of primary care providers), ASC reimbursement is tightening and costs continue to rise. The opportunity to eliminate the risk associated with owning an ASC and gain the stability that comes with being an employee may be all the motivation physicians need to not only sell the ASC, but support the decision to convert the facility to an HOPD.

2. Are the specialties that are or will be provided in the facility right for the HOPD model? Not all specialties are necessarily are a good fit for an HOPD, specifically ophthalmology, pain management and gastroenterology/endoscopy. Usually the ability to maintain a good profitability for these specialties is based upon the ability to process a large amount of volume in a short period. In fact, many hospitals end up not performing these specialty cases because they are unable to meet the physicians' expectations of the number of cases per month.

Additionally, over the past few years, both MedPAC and the OIG have suggested CMS consider reducing HOPD reimbursement. MedPAC specifically identified ophthalmology and pain cases as good candidates for payment reduction. OIG gave recommendations for CMS to seek legislation to make it possible to reduce rates and then actually reduce the rates for low-risk patients.

If specialties such as ophthalmology and pain saw their HOPD Medicare payment reduced, a hospital may find many of these procedures to no longer be profitable when considering the cost of equipment needed to perform them.

3. How might commercial payers respond to a conversion? Commercial payers that have been reimbursing at the lower ASC rate may not be pleased to learn they are expected to reimburse at the higher HOPD rate simply because the hospital is now running what is essentially the same facility but with a different designation.

For example, as several ophthalmology associations noted in a letter to CMS concerning proposed changes to the ASC payment system and calendar year 2015 payment rates, facility payment for cataract removal (CPT 66984) would be $957 in an ASC, while reimbursement for the same procedure in the HOPD would be $1,767.

Hospitals may find that commercial payers are unwilling to increase their reimbursement for some ASC procedures so substantially. In fact, commercial payers may threaten not to provide coverage of some ASC procedures to be done in an HOPD. Hospitals would be wise to try to gauge how payers will respond to the news of an ASC they have a contract with converting to an HOPD.

4. Will growing patient financial responsibility affect case volume? Consumers are paying closer attention to their healthcare costs as they are bearing more of the burden in the form of higher deductibles, co-pays and premiums. As a result, consumers are taking a more active role in researching their provider options and asking questions about the costs they are likely to incur when undergoing a procedure.

Patients researching their options may gravitate toward less expensive providers, which will often be an ASC over an HOPD. For example, patients undergoing a screening colonoscopy at an ASC may only need to pay a co-pay, whereas patients who underwent the same procedure in an HOPD may need to pay more as part of their deductible. As another example, as the ophthalmology associations noted in the letter to CMS, a beneficiary's financial obligation in the form of copayments for cataract removal is around $190 in the ASC and in the range of $350 in the HOPD.

If patients believe they can save money by traveling a bit further to an ASC outside of their market, they may choose to do so rather than go to an HOPD.

5. How will operational efficiency be maintained? Financially successful ASCs almost always have one thing in common: Their operations tend to be highly efficient. Patients are scheduled throughout the day to fill OR block time. They are in and out of the facility as fast as possible, without any sacrifice in quality or safety. Medical supply closets are stocked with the devices and supplies the ASC needs, and little more. OR turnover times are very low.

What often makes these facilities very efficient is personnel must wear multiple hats, and often have additional specific responsibilities throughout the day. These can include quality review, chart reviews and quality studies. Personnel are rarely, if ever, left with nothing to do. If personnel assignments are complete, staff is sent home to help decrease overall staffing costs.

A possible danger of converting an ASC to an HOPD is losing some of this efficiency, and with it, some of the profitability of the facility. If a hospital decides to convert an acquired ASC to an HOPD, it would be wise to take the time to understand what allows a surgery center to operate at such a high level of efficiency and try to maintain this even after the conversion.

Ways to help do so include bringing in management with an understanding of ASC operations, requesting input on important decisions from physicians who previously worked at the ASC, staffing the ASC with employees who have experience working in surgery centers, selecting an anesthesia provider with ASC experience and allowing the HOPD's clinical operations to closely mirror what was done in the ASC. The HOPD may benefit from having processes such as billing, human resources and purchasing/materials management overseen by hospital departments.

Jessica Nantz (jessica@outpatienthcs.com) is president and founder of Outpatient Healthcare Strategies, a consulting management services firm focusing on operational improvement and efficiencies for ambulatory surgery centers, hospital perioperative services and hospital outpatient departments.

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