11 Trends Facing Surgery Centers

The surgery center business has become a much more difficult business over the last several years. This is due to several factors.

First, surgery centers are generally utilized by physicians who are not hospital-employed and who are not already investors in another surgery center.  With the explosive growth in surgery centers over the last 15 years, there are not that many surgeons who are still independent and do not have an interest in some sort of surgery center.  Further, as hospitals have increasingly employed physicians, this also reduces the pool of available surgeons.  

Second, in addition to the number of cases performed by independent physicians, the second part of the revenue equation for surgery centers is based on reimbursement per case.  Over the last several years, certain key surgery centers areas of reimbursement have declined.  At one point, surgery centers made a disproportionate percentage of profits from workers' compensation cases and out-of-network cases.  Many states have implemented fee schedules for workers' compensation. In addition, payers have become increasingly reluctant to provide out-of-network reimbursement at higher billed rates.

This article briefly describes 10 different trends and issues related to surgery centers.

1. Key specialties.  The most important specialties by dollar volume and by procedures for surgery centers are ophthalmology, orthopedics, gastroenterology and pain management.  Approximately 30 percent of all ASC surgeries are ophthalmology surgeries, 15 percent are orthopedic surgeries, 14 percent are gastroenterology surgeries and about 10 percent are pain management surgeries. (Read more: "Top 5 Highest-Volume Specialties for Ambulatory Surgery Centers")

The strength of surgery centers and their ability to thrive depends largely on these four specialties and other specialties remaining relatively independent. For example, once a physician becomes employed by the hospital, he or she often loses his or her ability to own interests in the surgery center.

2. Growth of spine care in surgery centers. There has been significant growth in spine care in surgery centers, as advancements in technology and technique make the cases more appropriate for outpatient settings. This has created another opportunity for surgery centers, and some of the surgery center chains have done very well with spine procedures. However, Medicare provides limited reimbursement for spine procedures, and many payers do not contract with surgery centers for spine procedures. There are currently several clear-cut outpatient spine procedures that could be performed in the ASC, but Medicare and some insurance companies won't pay for them unless they are performed in the hospital. (Read more: "6 Burning Questions About Future Feasibility")  

3. Key legal issues. There are several critical legal issues facing surgery centers. One issue pertains to share sales, which can include selling shares at below fair market value to obtain or bring in cases, as well as offering physicians more or fewer shares based on the volume or value of their cases. Minimum case numbers also pose a legal risk. There remains risk that minimum caseloads for ownership will not be enforceable and/or that this might be viewed as inappropriately conditioning ownership or referrals. Surgery centers have some risk of being faced with qui tam or false claim cases brought by employees or competitors based on a number of different issues.

Another issue is whether surgery centers or other non-anesthesia providers can profit from anesthesia services. Last year, the Office of Inspector General issued an advisory opinion that refused to endorse a situation where a psychiatrist would pay an anesthesia group a per diem rate for coverage, and the anesthesia group would then assign their right to bill for the services to the anesthesia provider. The OIG articulated that no safe harbor would protect the per diem amount and no safe harbor would protect the reassignment of billings. The anesthesia community has become unusually adept at utilizing the advisory opinion process to influence market activity.    

Another interesting legal issue pertains to surgery centers redeeming physicians who are not safe harbor compliant. In many situations, the parties may offer noncompliant physicians full value for the shares, even if such full value is not required under the surgery center's operating agreement. The parties may also give such non-compliant physicians a long notice period in which the noncompliant physician may come into compliance with the safe harbor. It is critical that redemption be truly based on safe harbor compliance. When not used for the right purposes, there is a risk in redeeming physicians.

These issues are probably the most legally challenging in surgery centers, and there are several different positions on each issue as to what is appropriate and what is not. (Read more: "Ambulatory Surgery Centers — 11 Key Areas of Legal Risk")

4. High-deductible plans and healthcare exchanges. The growth of high-deductible plans and healthcare exchanges has created volume challenges for many types of elective procedures, including those performed in surgery centers. Assuming health insurance exchanges continue to become a bigger factor in the payer market, providers are examining the advantages and disadvantages to participating in exchange plans. Advantages include greater patient volume and less bad debt, as patients who previously didn't have insurance will now have at least that portion of their procedure covered. Disadvantages include lower reimbursement rates, risk of nonpayment during grace periods and higher deductibles.

Furthermore, related to the higher deductibles, surgery centers may face the repercussion of increased price sensitivity among patients. As patients become responsible for a greater part of their own care, they are more prone to delay procedures that are not absolutely necessary at the present moment. Eventually, as pricing information becomes more available, patients may more aggressively price shop. This may be helpful to surgery centers but has not yet evolved in a significant manner. At some point, this may help surgery centers — as opposed to hospitals — given their respective prices and costs. (Read more: "Health Insurance Exchanges Gaining Steam: Great or Terrible for ASCs?")

5. Hospital joint ventures. There are approximately 5,500 to 5,600 Medicare-certified surgery centers in the country. Of these, approximately 1,400 to 1,700 have a hospital partner. The hospital partner may help with managed care contracting, physician recruitment and the overall maintenance of a positive environment for the surgery center in the community.  

At the same time, these benefits vary from market to market. The ability for the hospital to help with managed care contracting depends on (1) whether the hospital has sufficient control over the surgery center to make the argument that there is not price fixing amongst competitors and (2) whether the hospital is willing to use its own political capital and clout with payers to help the surgery center. At one time, the addition of a hospital partner was an absolute unmitigated benefit for surgery centers in terms of managed care contracting. Now, it is less certain that the hospital system will have the power with payers or utilize the power with payers to help the surgery center improve its managed care contracts.

6. Hospital outpatient department rates. HOPD rates for surgery center procedures remain almost twice as high as surgery center rates for Medicare patients, despite evidence that surgery centers are generally less expensive. Surgery center reimbursement as a percentage of HOPD reimbursement has been steadily declining. In 2003, ASCs were reimbursed at 87 percent of what HOPDs received, and by 2011 ASCs received 56 percent of what HOPDs were reimbursed, according to VMG Health's ASC Intellimaker Survey 2011. This means there is still a huge advantage to a hospital providing outpatient surgery versus doing so in a joint venture surgery center.  

For a hospital to bill HOPD rates for Medicare, for all practical purposes, the hospital must own 100 percent of the surgery center. However, the OIG recently recommended that HOPD rates are reduced to equal ASC rates for certain low risk procedures. (Read more: "4 Findings on ASC vs. HOPD Payments")

7. Per click lithotripsy deals. Per click lithotripsy deals are still prevalent. The core method by which lithotripsy is provided at surgery centers typically revolves around an urologist-owned truck or mobile lithotripsy that rents itself — both equipment and personnel — to a surgery center, and the urologist refers the patients to the surgery center. Then the surgery center bills for the lithotripsy procedures and pays the lithotripsy company or mobile truck company on a per procedure basis.  

Stark Law prohibits physicians from ordering designated health services from entities with which the physician has a financial relationship, but lithotripsy services are not considered DHS. There have been evolving issues with respect to lithotripsy deals and how the payment varies for different types of payers. These can be argued to be in exchange for business development as opposed to actually being for the best distributor or renter. There have been some OIG investigations regarding per click lithotripsy agreements. Here, it is critical that the payment amount not be intended to induce referrals but truly be fair market value for the services provided.

8. Co-management. Many hospital-owned surgery centers or joint venture surgery centers utilize a co-management agreement with a group of physicians. Co-management agreements are pay-for-performance-based arrangements in which physician groups contract with hospitals to manage a service line. Physicians oversee and manage the service line, such as orthopedics, oncology or cardiology, and ensure it runs effectively and at a high quality. The hospital continues to oversee administrative duties, such as budgets, marketing and personnel issues. Co-management allows for hospital-physician integration without requiring physicians to become hospital employees.

Organizations should take time to ensure their fees and services are of fair market value to avoid legal complications. Many organizations refer to the HHS Office of Inspector General's Advisory Opinion No. 12-22 as a template for developing a legally compliant agreement. Further, agreements should have a set time limit. Benchmarks and quality goals continuously change, so there is less room for improvement if such measures are not regularly revisited. Additionally, part of the OIG's opinion on the legal compliance of that co-management agreement cited the finite time parameters of the agreement as a positive factor in its review of the legal compliance. (Read more: "5 Things to Know About Co-Management Agreements")

9. Hospital-employed physicians investing in surgery centers. In some markets, a hospital allows its employed physicians to invest in a joint venture surgery center. Generally, there are strong arguments that this is acceptable as long as the hospital is not requiring or encouraging the physicians to do so. Physicians should receive the same terms of investment (with respect to purchase price and amount of ownership each physician may purchase), and the hospital should not provide physicians with financing for their investment or guarantee any loans for their investment.   Further, the physicians should invest on the same terms as all other physicians. (Read more: "Incentives and Ownership for Hospital-Employed Physicians and for Primary Care Physicians")

10. Safe harbor compliance for surgery centers. The ASC safe harbors include both qualitative and quantitative tests. Some qualitative tests include requiring that physicians who invest in an ASC are not given more or less shares in the ASC based on the volume or value of referrals they provide to the center. Additionally, safe harbor qualitative tests require that physician investors disclose their investment interest to patients. In addition to the qualitative tests, there are also two quantitative safe harbor tests that apply to ASCs. These include the two one-third tests. First, a physician must generate one-third of his medical practice income from the performance of procedures of the type performed at an ASC (the "one-third income test").  

Second, for a physician investing in a multispecialty ASC, at least one-third of the procedures the physician performs must be performed at the ASC in which the physician has an investment interest (the "one-third procedure test").

The safe harbor provisions, on one hand, were intended to ensure surgery centers did not allow physicians to invest as a method to capture "indirect" referrals. On the other hand, they are often used by surgery centers as a means to force redemption of physicians who do not comply with the safe harbors. For example, if two physicians fail to meet the safe harbor requirements, it will be problematic if the ASC chooses to redeem the physician who contributes fewer cases to the center and chooses not to redeem the physician who also failed to meet the safe harbor requirements but nonetheless refers more cases (and value) to the center.

As more centers utilize these provisions and more centers themselves are not fully safe harbor compliant, there is an increasing amount of discussion about the issues related to redemption of such physicians. When a center is redeeming a physician, it is important that the center generally treats all non-compliant physicians in the same manner. The center should not selectively choose which physician to redeem. (Read more: "22 Advisory Opinions Issues by the Office of Inspector General – 6 of Interest; Anesthesia ASC Arrangements – 7 Key Concepts; and ASC Anti-Kickback Safe Harbor Issues — 9 Key Concepts for 2013")

11. Changes in qui tam laws. Traditionally, a qui tam case had to be based on the actual billing of claims. For example, a procedure was up-coded or procedure was billed for that wasn't actually performed. With the advent of the PPACA, a Stark violation or kickback violation now can be a precedent for a false claim case. This has led to broad expansion of the number of false claims cases brought. There were 62 healthcare qui tam cases recorded from 1987 to 1992. In 2011 alone, there were 417. Another 412 were recorded in 2012, according to a study from Washington, D.C.-based Taxpayers Against Fraud. Liability under the False Claims Act is extensive, with penalties ranging from $5,500 to $11,000 per claim, along with treble damages for all amounts falsely submitted. Rigorous FCA enforcement is becoming more common as healthcare fraud continues to receive more attention and funding.   

Surgery centers are not immune to false claims liability, as qui tam cases may be brought around a host of issues. Qui tam provisions allow private citizens to file lawsuits alleging false claims on behalf of the government. If the government prevails in the case, the relator or private citizen who filed suit receives up to 30 percent of the recovery. It is in surgery centers' best interest to follow and enforce an effective compliance plan and consistently monitor compliance efforts.  (Read more: "The Growth of Healthcare Fraud Qui Tam Lawsuits")


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