The Biden Administration’s American Rescue Plan Act of 2021 (H.R. 1319) (the “Act”) could present an opportunity for the growth of utilization of ambulatory surgery centers (“ASCs”), continuing the trend of migration of inpatient procedures to the outpatient setting. This shift toward the outpatient setting initially began prior to the COVID-19 public health emergency, but was accelerated by the pandemic’s effect on hospitals, likely continuing the substantial increase in investment in the ASC marketplace.
A Growing Shift Toward Outpatient/ASC Settings
As discussed in a May 11, 2020 blog post, in recent years and prior to COVID-19, there has been a shift of inpatient procedures to outpatient or ambulatory settings. Market research suggests that the ASC market is “projected to grow at a compound annual growth rate of 6% between 2018 and 2023—reaching about $36 billion by 2023.”
Certain fundamental and interrelated market changes have created this recent institutional trend. First, innovation and technology, such as new developments in anesthesia, pain control, and minimally invasive surgical procedures, have enabled greater use of ASCs over the more traditional hospital setting.
Second, ASCs are appealing from a cost-saving perspective from the consumer, payor, and owner vantage points. Studies show that ASCs offer consistently lower costs than hospitals, providing strong incentives for patients to shift their site of care.
Further, the growth of at-risk contracts and value-based care has created new incentives for payers and providers to find the lowest-cost sites of care. Procedures for surgical services provided at an ASC are reimbursed at a much lower rate. Based upon differences in the Medicare conversion factor as applied to the Medicare reimbursement rates for hospital outpatient departments an ASCs, in 2019, Medicare paid ASCs 59% of the rate it would have paid to a hospital outpatient department for many of the same procedures. Private payors negotiate their own reimbursement rates, but ASCs still often end up with lower reimbursement rates. This is likely, at least in part, because ASCs, which are generally smaller-scale physician-owned enterprises, tend to have less leverage in negotiating rates than hospital outpatient departments, which are connected to a whole system of healthcare providers that the payor may be interested in adding to its network. Finally, as potential equity holders in ASCs, physicians have both the incentive and opportunity to channel their patients to procedures outside of the hospital.
In an analysis of 2014 commercial medical-claims data conducted by Ambulatory Surgery Center Association, Healthcare Bluebook and HealthSmart, found that healthcare costs in the United States have been reduced by $38 billion per year due to outpatient procedures being performed at ASCs as opposed to hospitals. An estimated $55 billion could be saved annually by redirecting additional procedures from hospital outpatient departments to ASCs. Given the potential savings, while only 48% of common ASC procedures are currently performed at ASCs as opposed to hospital outpatient departments, by the mid-2020s, ASCs are expected to perform 68% of orthopedic surgeries.
COVID-19’s Acceleration Effect on the Shift Toward Utilization of ASCs
Although ASCs suffered during the COVID-19 crisis, the pandemic also set ASCs up for significant expansion in a post-pandemic world. During the initial months of COVID-19, 100% of ASCs stopped performing all elective surgeries, 73% stopped performing semi-elective surgeries, and 33% stopped performing non-elective surgeries. However, after the initial freeze of ASC operations, several factors related to the COVID-19 crisis accelerated the shift from inpatient to outpatient care settings, and it could be argued, elevated the future financial fortunes of ASCs.
First, the outbreak of the virus required hospitals to focus and allocate resources to treating COVID-19 patients and to simultaneously reduce services and staff in other non-essential areas to prevent the spread of the disease. However, after the initial lockdown, hospitals sought greater alignment with ASCs, as hospitals sought to lower operating costs and to relieve pressure on their facilities. Hospital alignment with ASCs created a win-win opportunity for managed care plans since ASCs (i) protect patients from exposure to more severe cases that are present in the hospital setting, (ii) present lower risks of surgical site infections and lower likelihood of remission post-surgery for additional care, (iii) utilize software to reduce the elective surgery backlog that resulted from the pandemic; and (iv) were better equipped to inventory, manage and prepare for the correct and compliant usage of personal protective equipment.
Second, as discussed in our April 6, 2020 blog post, in March 2020, the Centers for Medicare and Medicaid (“CMS”), through its blanket 1135-waiver authority, implemented a “hospital without walls” policy that allowed hospitals to provide and bill for hospital services in other healthcare facilities and sites, such as ASCs. While this move ensured local hospitals and health systems had the capacity to handle the surge of COVID-19 patients, it simultaneously benefitted ASCs, which were able to expand their networks, receive temporary billing privileges, and obtain coverage for some of their monthly fixed costs during the pandemic.
In addition, as discussed in our May 11, 2020 blog post, the steady expansion of Medicare’s list of covered ASC services facilitated the ability of ASCs to effectively partner with hospitals. In 2018, CMS added 17 cardiac catheterization-related procedures to the 2019 list of Medicare-covered ASC procedures. In 2019, CMS issued a final rule authorizing the provision of percutaneous coronary interventions in the ASC setting by approving the addition of 6 CPT codes to the ASC-covered procedures list for 2020. While the ability for ASCs to establish cardiovascular programs is highly state specific, contingent upon a state’s operation and co-location requirements of ASCs, there is some evidence states are following the federal trend towards expansion of ASCs. For example, on February 21, 2020, Assembly Bill No. 3080 (“AB 3080”) was introduced in the California Assembly to allow Medicare-certified ASCs in California to perform cardiac catheterization services. Although AB 3080 died in committee in November 2020, we anticipate future efforts in California to expand the scope of services that can be provided in an ASC.
Finally, as discussed in our December 14, 2020 blog post, the ASC industry received a further push from CMS’s decision, as part of the December 2020 Outpatient PPS Rule for 2021, to gradually eliminate the Inpatient Only List (“IOL”) of services that could only be covered when provided on an inpatient basis. CMS recently added 11 procedures to the ASC covered procedures list, and in 2020, it removed 266 orthopedic procedures from the inpatient-only list. Pursuant to a March 12, 2021 report in the American Journal of Managed Care, the removal of services from the IOL can have a significant impact on the shift from inpatient to outpatient settings. For example, the removal of total knee arthroplasty (“TKA”) from the IOL in 2018 resulted in a significant shift of TKA procedures for Medicare patients to ASCs, and even resulted in a shift of commercial patients requiring TKA to outpatient settings generally.
The Resulting Increased Investment in the ASC Marketplace
As a result of the shift towards utilization of ASCs, along with other events and factors, there is evidence of increased investment in the ASC marketplace.
Tenet Healthcare, one of the largest owners of acute-care hospitals in the country, paid $1.1 billion to SurgCenter Development to acquire up to 45 ASCs in 9 states, and one month later, vowed to add 40 more ASCs in 2021. After the deal, Tenet’s Surgical Partners will operate upwards of 310 ASCs across more than 33 states. Of note, Tenet conterminously decreased its hospital portfolio, including exiting the Memphis Tennessee marketplace, ceasing its operations in the U.K. and 8 hospitals in the U.S., and selling 87 of its urgent care centers.
Similarly, Ascension, another large health system, recently promised to expand ASC operations, stating it would double its ASC portfolio from the 61 ASCs it currently operates. Finally, a survey from Avanza Healthcare Strategies, a consulting firm, reported that 76% of larger hospitals and health systems report increasing their investments in ASCs.
Biden’s American Rescue Plan Continued Expansion of ASCs
The Act, signed into law in March, presents another opportunity for the growth of ASCs. As we discussed in a March 26, 2021 blog post, the Act is a $1.9 trillion COVID-19 economic relief package that expands the Patient Protection and Affordable Care Act (“ACA”) by increasing eligibility for tax credit premium subsidies and lowering premium costs for individuals purchasing health insurance on the ACA exchanges for the 2021 and 2022 calendar years.
Healthcare executives and pundits have noted that the sudden qualification of nearly 7 million uninsured Americans for free health insurance under the Act provides an opportunity for the continued trend toward utilization of ASCs discussed above. Certain stakeholders believe that the increase in coverage will also result in an increase in the number of patients seeking elective surgeries and receiving needed care at ASCs. In particular, private payor subsidies may benefit ASCs since private payors, particularly those engaged in cost-sharing arrangements, will be incentivized to send patients to ASCs as an alternative to hospitals since hospitals are reimbursed at a higher rate than ASCs.
The Act potentially creates a new pool of individuals who may only have access to insurance coverage for a limited two-year window. To the extent that these individuals do need elective procedures, this would be their only opportunity to get the procedure while insured. Consequently, there likely will be a rise in demand for medical services in general, including surgical services, during the two-year window of expanded access. Even though temporary, the rise in demand for surgical procedures could catalyze a more general shift to transition more surgical procedures from the hospital setting to the outpatient setting that extends past the two-year ACA expansion.
Factors That May Impede ASC Growth
While the future looks bright for ASCs, there are critical factors which might impede ASC growth. In particular, several regulatory issues present challenges for ASC growth.
First, states have shown hesitation to allow ASCs to perform services that have historically occurred within a hospital. As discussed in our previously cited May 11, 2020 article, the ability of ASCs to establish certain programs, such as cardiovascular programs, is highly state specific. Some states do not allow certain types of cardiovascular procedures to occur in the ASC setting. Some states cannot operate an ASC “hybrid” model, whereby an office-based laboratory (“OBL”) and an ASC are permitted to operate and co-locate. Further, other states allow the hybrid model, but enforce additional requirements such as a separate entrance and exit, separate scheduling, and separate payor contracts for ASCs and OBLs. In addition, most states have an application process for an ASC to add a new service line and/or expand a service line, which can take six months to one year in non-Certificate of Need (“CON”) states, and even longer in CON states, since the applicant has to obtain the approval from the state’s CON board or department of planning, which takes 6 to 12 months on average.
Second, although CMS’ hospitals-without-walls waiver and elimination of the IOL of services expanded the capability of ASCs to perform services, a general plateau in the number of inpatient services that can be further shifted from the inpatient setting to the outpatient setting exists based on ASC’s capability and regulatory requirements, such as a maximum 24-hour care requirement.
Finally, some of catalysts for ASC expansion are time limited. The various COVID waivers and expanded billing privileges will only stay in place until the end of the COVID-19 pandemic. Similarly, the Act’s potential effect on increased utilization of ASCs could be limited to the two-year ACA expansion.
Overall, the trend towards the provision of outpatient surgical services in the ASC setting will certainly continue as healthcare innovation makes it possible to provide more and more procedures in a non-hospital setting in a safe and cost-effective way. In turn, the trend of increasing investment in the ASC marketplace will also continue. Although regulatory limitations may impede growth for a time, the ability of ASCs to provide a widening range of healthcare procedures with equal or better quality than is found in hospital settings will undoubtedly spur State governments to expand the scope of services that an ASC can provide to its patients. Certainly, the need to expand healthcare access to a growing population of individuals with healthcare coverage will encourage regulators to take action in order to continue the trends described above by taking action.
We will continue to provide updates regarding changes and growth in the ASC marketplace.
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 Under Section 1135 of the Social Security Act, the Secretary of the U.S. Department of Health and Human Services may temporarily waive or modify certain Medicare, Medicaid, and Children’s Health Insurance Program (CHIP) requirements to ensure that sufficient health care items and services are available to meet the needs of individuals enrolled in Social Security Act programs in the emergency area and time periods and that providers who provide such services in good faith can be reimbursed and exempted from sanctions (absent any determination of fraud or abuse).
 Richards, M., Seward, J., & Whaley, C., “Removing Medicare’s Outpatient Ban and Medicare and Private Surgical Trends,” The American Journal of Managed Care, Volume 27, Issue 3, March 2021.
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