How has the ASC space been changing over the last decade?

SB(Seth):

For me, coming from 13 years of ASC experience, when I started, there wasn’t much consolidation. I was with USPI at 130 centers, and we were focused on building really multi-specialty centers there. The trend’s been a lot more focused on consolidation, especially recently there was a migration from some of the higher acuity cases, like total joint and spine, and more recently a real focus on cardiology. But I think we’re seeing a lot more consolidation and focused approach around ASC development.

So what are examples of some of this consolidation?

SB(Seth):

Different players, especially in the orthopedic space, there’s been a lot of focus on super groups and support around those ASC developments. With USPI, we had the first total strictly total joint centers. We’re seeing a big focus on strictly total joint centers, big focus on cardiology platforms and on from there, I think even urology and GI have been doing it. Ophthalmology have been doing it for a while, but the higher acuity players are really getting into it and creating environments for specialized care.

What about the nature of who’s actually building and managing and acquiring ASC’s? Has that been changing over the past 10 years? If so, how? Before, it was split between independent practices, health systems and ASC management companies. What does that mix look like today?

SB(Seth):

I think there’s still a lot of consolidation to be done in the ASC realm. The bigger players when I came into the industry were AmSurg, SCA, USPI. Since then, there’s been some consolidation. Optum bought SCA and has focused on really aligning and jumping into the ASC industry, aligning physicians, physician services, surgery partners has grown, and they’ve focused on the physician services side a lot. USPI was bought by Tenant Healthcare and has really consolidated ASC’s and moved away from the health system space and more into the ASC environment. But there’s still a lot of independent groups and I think as you say, private equity roll up independent practices. We’ve seen a big focus on all the ancillaries around those groups themselves. And then there’s still the one-off players with physicians independent groups establishing ASC’s. So I think there’s still, depending on the market, there’s a lot of three-way joint ventures with health systems, but there’s also a lot of independent physicians or groups that are formed under different MSO’s.

CF(Carl):

I think I’m going to take a step back and talk also a little bit about trends from my perspective, which is more client facing, provider facing experience, and I think from an ASC operations perspective, in terms of changes that I’ve seen in recent years, there’s a lot of pressure on margins, both obviously from the form of payer squeezing as well as new technologies and hair reimbursement not being aligned. New technologies are coming into the fold. I think of things a couple years ago like Aura coming in for ophthalmology and more recent experience, things like lithotripsy or urologic implants, and the technology is way ahead of payer reimbursement, and that creates a lot of margin pressure on the ASC. It also creates relationship pressure on the ASC. So you have providers who are wanting to bring procedures, but the insurance companies are not keeping up with them.

Another good example of that is mesh implants for general surgery in the form of some insurances pay for the mesh, some don’t. So there’s a lot of pressure on ASC managers to maintain profitability, maintain a good outwardly facing customer service presentation. The customer in the ASC is the surgeon, it is the patient, but it’s really the surgeon. So driving the relationship with the doctor is always under pressure, and I think that there’s been a lot of economic pressure that is creating pressure on relationship management in terms of the third party involvement in ASC’s in the form of partnerships via hospitals, I agree with Seth that there’s a lot more alignment between privately owned ASC’s and hospitals, which is also a defensive move from the perspective of getting access to contracts or reimbursement that they might not otherwise have in exchange for equity participation benefits.

The hospitals, because they’re moving low reimbursement, low profit cases out of the hospitals into these ASC’s, so it’s creating more capacity for them for higher acuity cases obviously. So there is that. I do see that as well in terms of equity backed or private equity backed or investor backed ASC movement, I see the interest there, but I don’t see a lot of active participation from the perspective of equity partners in solving the day-to-day problems that ASC’s face and creating additional pressure in relationship management between the owners of the ASC, the investors that may be coming in the form of a bank or a PE firm, and the kind of expectations management for outcomes.

In your experience, these ASC’s that fall within a hospital setting, ASC’s that fall within an MSO multi-site PPM setting, and these ASC’s that are independently owned by physician groups, do any of the above offer an easier way to actually solve for the rigidity of the ASC economic structure, that non-performance based component that physicians struggle with over time?

CF(Carl):

I think yes, and some of it is market dependent because in some markets you are almost required to have a hospital-based partner. New York is an obvious example where I live and an example of high rigidity as it relates to high barriers to entry. So having a hospital-based partner, is advantageous in certain situations like, access to the market, access to contracts, as well as to a certain extent, pricing as it relates to reimbursement and as well as leverage on expense management. I think though, with that kind of a partnership brings the issues inherent of working with a hospital. Heavy bureaucracy, slow to move, not as nimble when it comes to on the go decision making that can really be impactful to a business. Think of credentialing as being much slower in a hospital sponsored ASC.

The other end of the spectrum, the physician owned and run ASC’s, typically are a lot more efficient as it relates to business decision making and onboarding, but a lot more dependent on volume because of low relative margins for cases based on payer contracting and expense management. I think that the sponsor backed ones probably fall somewhere in the middle there, but I think a lot of that depends on the sponsor’s knowledge base of the space coming into it. So a more experienced sponsor may apply the right amount of pressure and the right amount of hands off as it relates to the day-to-day operations in an ASC.

Focusing on just the question of stability, which is a sensitive point for ASC’s because of their rigidity on compensation, non-performance based. I would imagine in a health system where physicians are employed, they don’t face that stability issue because performance is captured in the employment agreement and the ASC is a contributor to revenues generated by that employee, but not the primary determinant of compensation. Do you see a stark difference in the stability of an independently owned physician owned ASC versus the other alternatives?

CF(Carl):

The independents, which are physician run and owned, successful ones tend to get very good at understanding which procedures are successful from a profitability perspective and try to do as much volume therein as possible. So just again, by example, if a fusion biopsy is profitable at an ASC, the members and the owners are going to try to do as many as they possibly can to be as sufficient as possibly they can, because disproportionately that’s more valuable to them than some other procedure, which is almost, they lose money on it. And ASC’s often will discourage doctors from bringing breakeven plus, break even minus cases to the center because the likelihood of losing money on that case based on variables sometimes you can’t control. I think about in different specialties, ASC’s essentially telling doctors, please don’t bring X procedure here because we don’t want to do them.

And then that becomes a problem for, again, the relationship management of that ASC with that provider, whether or not they’re an equity holder, because then they’ve got some procedure they’ve got to find another home for. And so I think they’re constantly balancing, trying to constantly balance the economic drivers with the overall business strategy drivers of trying to grow their provider base in filling the time. And I agree, while hospitals are under less pressure from that perspective because they’re more variables that mitigate risk exposure, the flip side of that is often the hospital based ASC’s or hospital sponsored ASC’s are inherently less efficient.

Have either of you seen good examples of ASC’s integrated into a value-based care program? Can you name some?

SB(Seth):

Prior to joining Scale, I was with a company called Value Health, and it spent a lot of time on modeling and working and trend, really tracking clinical quality. I think that’s just one company. I think there’s a lot of companies that have taken a swing at that. And I think as there’s more ways to track clinical quality and clinical measures and outcomes, I think that those outcomes will translate to the payers and they will actually look at that as a mechanism to determine reimbursement and to drive those cases to the lower cost settings. So at the end of the day, I think we’re still at the tip of the spear, but I think that Covid has really kind of helped push some of it that way. And again, you’re seeing more and more of these different bundled agreements with the payers and conveners and different avenues to really bring and drive those shifts to the ASC setting.

So really the whole purpose at Value Health was to drive and track clinical quality and metrics – one of the things they were focused on was Stay Suites, an extended care in the ASC setting where you could essentially see some of the higher acuity patients that had higher comorbidities and shift those to a Stay Suite setting with the clinical support and the focus on producing those better clinical outcomes while driving those patients to the ASC setting. I think really with technology evolving through telemedicine and patient monitoring, there’s become less of a need for Stay Suites and extended care, for instance, Total Joints. The majority of patients for knees and hips can be released to the home care setting in the same day. So I think we might see more and more of that, and it’s starting to trend that way where there’s a shift of release to home care and monitoring those clinical outcomes at a home base setting and away from the ASC, but it’s still part of that value-based agreement or bundle.

Did Value Health actually design value-based contracts for providers?

SB(Seth):

Yes. Absolutely. That’s a big piece of what Value Health did was in different markets, really creating kind of a market dynamic of working in a market and a market strategy of providing those value-based agreements to the payers, but really to the employers themselves with a strategy of long-term success of that migration and that shift.

(Carl):

I think hospital sponsored ASC’s are better positioned to capitalize on value-based care now, versus other options just because they control typically more of the inputs that influence the outputs of value-based care. So obviously big verticals like Optum or Kaiser are in a much better position to benefit from that because they control the labor and they control, they have better control of cost management as it relates to moving dollars around to make things work better. However, I think that over time, physician run ASC’s can benefit from it because there are some obvious markers that are measurable that are valuable to value-based care. For example, admission, postoperative complications, admissions postoperatively. These are some obvious examples, but there are easy measuring sticks to measure quality. So I do think that that opportunity will get pushed down to ASC’s that are physician owned and run, or sponsor owned and run. But right now, I believe hospital sponsored ASC’s have more elements in place to be successful in the early days of VBC.