10 Things to Know About Turning a Surgery Center Into a Hospital Outpatient Department

Hospitals are investing more in outpatient services, and wisely so. The migration of procedures from inpatient to outpatient settings is steadily increasing, as is the demand — from payors, physicians and patients — for outpatient care. The Agency for Healthcare Research and Quality reported that in 1980, 16 percent of surgical procedures were performed on an outpatient basis. This number grew to 57.7 percent in 2007.

To address this growing need, hospitals are typically taking two approaches: (1) building satellite, freestanding outpatient centers; and (2) acquiring operating freestanding ambulatory facilities (which is also a component of many hospitals' physician integration strategies).

But just because the hospital is or becomes the owner of these facilities does not immediately result in their classification as a hospital outpatient department, and bring with it the financial fruit — access to the hospital's payor contracts — that come with such a label. In fact, building a freestanding outpatient center and running it as an HOPD or turning a freestanding facility into an HOPD is not easy from a regulatory standpoint. It's also challenging from a cultural perspective. The catch-22 is proving the outpatient center has become an HOPD — and is therefore a true component of the hospital — while ensuring the qualities that make freestanding facilities efficient and profitable are not lost by operating the outpatient facility as a hospital department.

Here are 10 things — five regulatory and five operational — to know about turning an outpatient surgery center into an HOPD.


1. Review Medicare's requirements. Hospitals interested in opening or converting a freestanding facility to an HOPD should review Medicare's requirements for provider-based entities (42 C.F.R. §413.65), which can be found here. A hospital will need to follow these guidelines, and it is certainly worthwhile to consult with legal counsel to discuss these requirements and any other state-specific rules that may apply.

2. Report costs appropriately. While it is important to follow all of the federal government's requirements, there are a few rules from within §413.65 that are particularly worth noting to ensure the outpatient entity meets the requirements needed to operate as an HOPD. This includes §413.65(d)(3), which speaks to financial integration. The regulation reads as the following:

The financial operations of the provider-based entity are fully integrated within the financial system of the main hospital. The costs of a hospital department are reported in a cost center of the main hospital, costs of a provider-based facility are reported in the appropriate cost center or cost centers of the main hospital, and the financial status of any provider-based facility is incorporated and readily identified in the main hospital's trial balance.

In short, the rule states that the costs of the outpatient center are integrated into the hospital's bookkeeping, addressed like the costs of any hospital department and reported appropriately as such.

3. Identify the facility as a hospital entity. Requirement §413.65(d)(4) concerns public awareness of the outpatient center as a hospital-owned entity. It reads as follows:

The provider-based entity is held out to the public and other [payors] as part of the main hospital. When patients enter the provider-based facility, they are aware that they are entering the main hospital and are billed accordingly.

To meet this requirement, a hospital must work to ensure patients and payors understand that the facility is part of the hospital. This is often conveyed through the name of the facility, which may include the hospital's name in it. And the hospital's name, if it is not included in the facility's name, should be on consents, bills, marketing materials and other documentation.

4. Understand location rules. Medicare has specific requirements for the location of the outpatient center. Medicare expects the facility to be located on the main hospital's campus, defined as that area within 250 yards of the main provider's main buildings (§413.65(a)(2)) or the entity needs to be located within a 35-mile radius of the main provider (§413.65(e)(3)(i)).

To summarize: The outpatient center needs to at least be located within a 35-mile radius of the main provider. If a hospital builds the center next to the hospital, and it falls within 250 yards of the provider's main buildings, the center is essentially considered an on-campus entity. If considered an on-campus entity, the HOPD designation will be easier and faster.

If the outpatient center is acquired or built at a distance greater than 250 yards from the main buildings but is still located within a 35-mile radius, the outpatient center is considered an off-campus entity. The hospital will need to apply for a special disposition to receive the HOPD designation. It is also likely that an application to operate as an HOPD will receive a closer review to ensure the outpatient center is meeting the rules and regulations to operate as a hospital entity.  

If plans are to acquire or build a facility located more than a 35-mile radius from the hospital campus, do not plan on operating it as a department of the hospital.

5. Avoid physician ownership. Medicare is very clear when addressing ownership of the entity. Within §413.65(e)(1) there states the following:

The business enterprise that constitutes the facility or organization is 100 percent owned by the main provider.

Since the hospital is the main provider, is must own the entire outpatient center, which precludes physicians from owning a portion of the center, unless there is already physician ownership in the hospital.


6. Allow for physician involvement. While a hospital needs to avoid physician ownership of the outpatient center, it should do the opposite for physician involvement in the facility.

By including physicians in the decision-making process, seeking their input on areas for improvement and engaging them whenever the opportunity presents itself, the hospital is more likely to ensure physicians remain invested in the success of the center. 

7. Emphasize physician and patient satisfaction. The two customers of outpatient centers are physicians and patients, and their satisfaction needs to be a priority of the hospital and the staff of the outpatient center.

For physicians, their satisfaction is not only linked to involvement in the facility's operations. Physicians also need independence to provide what they feel is the most appropriate care for a patient. They need an attentive staff that is ready to support them in any way possible, and they need a working environment that caters to their strengths as caregivers.

For patients, their satisfaction is primarily linked to positive outcomes. But since they are coming to outpatient centers for elective reasons, their satisfaction is also determined by the support provided by and kindness of all staff and physicians, the flexibility to undergo a procedure at a time that works with their schedule and an experience that is safer and smoother than care they receive in an inpatient setting.

8. Pay close attention to culture and mission. The culture of an outpatient center is critical to the short- and long-term success of the facility. An outpatient center's culture reflects the facility's mission, and for outpatient centers to be successful, they need to be efficient and cost effective, with low turnaround times, standardized processes, a focus on high quality care with few, if any, surprises.

The entire outpatient center staff needs to develop and embrace a mentality of efficiency and consistency, with an understanding that their daily objective is to help deliver exceptional patient outcomes. If the staff begins to deviate from the culture and mission, even in the slightest, the benefits associated with the outpatient model will quickly deteriorate.

9. Function like a freestanding facility. Whenever possible, the outpatient center's functions should be run like a freestanding facility rather than an HOPD. These include the following:
  • Scheduling, pre-certification and registration
  • Billing
  • Equipment and supplies
  • Staffing
  • IT
This can be tricky because of the requirements associated with Medicare's requirements for provider-based entities (42 C.F.R. §413.65). But hospitals should look for every opportunity to adopt a freestanding-culture in these facilities and migrate that culture as much as possible back to the main campus.

10. Recruit from the freestanding world. The best way to capture outpatient efficiencies is to employ and contract with individuals who understand the outpatient environment and what makes it most effective.

When filling open positions or bringing in third parties for consultation, an outpatient center will typically be best served by individuals with experience in such a setting because they are well-positioned to introduce and preserve outpatient efficiencies and less likely to introduce operationally harmful inpatient processes.

OIG evaluating ASC conversions to HOPDs

A hospital should want its outpatient centers run as efficiently as possible because that will keep costs low and the quality of care provided high. But hospitals have an even greater reason to focus on efficiencies in these settings: the possibility of decreasing reimbursement.

In the HHS Office of Inspector General Work Plan for Fiscal Year 2013, the OIG states the following:

We will determine the extent to which hospitals acquire ASCs and convert them to hospital outpatient departments. We will also determine the effect of such acquisitions on Medicare payments and beneficiary cost sharing. Medicare reimburses outpatient surgical services performed in hospital outpatient departments at a higher rate than similar services performed in ASCs. Hospitals may be acquiring ASCs and providing outpatient surgical services in that setting.

Medicare pays ASCs, on average, 58 percent of the amount paid to HOPDs for performing identical services. The Work Plan indicates that the federal government is examining why services that were previously reimbursed at a lower rate should be reimbursed at a higher rate when the services do not change, and all that essentially changes is the classification of the facility. Private payors are asking similar questions, and some are already making a case in negotiations for a lower reimbursement rate for HOPDs.

Hospitals would be wise to examine their outpatient services and identify opportunities for improvement that will not only improve the overall standard of care but also strengthen the bottom line. Even if the hospital is able to collect higher rates than a freestanding facility, its expense targets should remain at freestanding benchmarks.

Joan Dentler is the president and founder of Outpatient Strategies and ASC Strategies (www.ascstrategies.com) in Austin, Texas. She can be reached at jdentler@ascstrategies.com or (512) 479-6700.

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