Trends: Hospital-Based ASC Ownership

Consumer-driven trends, value-based strategies and better physician relationships encourage transition to ASCs.


October 2022 – The Journal of Healthcare Contracting


By Daniel Beaird

The healthcare sector has significantly consolidated in recent years. Large health systems have acquired smaller hospitals and the remaining hospitals have amassed existing outpatient facilities like urgent care, imaging locations and independent physician practices as outpatient care has become more popular. This has limited inpatient days and lowered hospital revenues, all while the healthcare sector tackles higher overhead and labor costs.

The preference for outpatient care is set to continue. Healthcare staffs are encouraged to expand their abilities for a variety of alternative care sites and reimbursement models are being restructured to meet the shift toward outpatient services.

Site-neutral payments

CMS implemented the Outpatient Prospective Patient System (OPPS) rule in 2019, extending a site-neutral payment policy to off-campus provider-based departments (PBDs). It reduced off-campus PBD payments to 70% of the full OPPS rate.

The OPPS rule was ruled to be invalid by a federal judge that same year, but the U.S. District Court of Appeals for the D.C. Circuit overturned the court’s ruling in 2020. The American Hospital Association (AHA) and the Association of American Medical Colleges (AAMC) are opponents of the site-neutral payment policy, but the U.S. Supreme Court declined to hear AHA’s appeal of the U.S. District Court of Appeals decision in 2021.

Melinda Hatton, general counsel for the AHA, said in a statement at the time, “America’s hospitals and health systems are disappointed in this decision because it will cause serious harm to their ability to provide care for patients. It fails to account for the fundamental differences between hospital outpatient departments and other sites of care. Hospitals are open 24/7, held to higher regulatory standards and are often the only point of access for patients with the most severe chronic conditions, all of whom receive treatment regardless of ability to pay.”

But the Medicare Payment Advisory Commission (MedPAC) said the biggest driver for physician and hospital consolidation was that Medicare paid hospital-based clinics a higher price for the same services than it did physicians’ offices, and if CMS adopted site-neutral payments between hospital and physician offices, it would reduce the incentive for those mergers.

CMS has stated that it would have saved an estimated $800 million in payments to outpatient departments during 2020 under the 2019 rule. The rule aims to remove payment disparities between clinics affiliated with hospitals that receive more Medicare reimbursement than physicians’ offices providing the same services. CMS began reprocessing claims for outpatient clinic visit services at excepted off-campus PBDs in 2021 so that they were paid the same rate as non-excepted off-campus PBDs for those services under the physician fee schedule. It affected certain claims with dates of service between Jan. 1-Dec. 31, 2019.1

In American Hospital Association v. Becerra (2022), the AHA and several hospital associations and hospitals sued HHS, alleging that it exceeded its statutory authority in the rule reducing reimbursement rates for certain hospitals, specifically 340B hospitals and Medicare Part B insured patients. In June 2022, the U.S. Supreme Court unanimously ruled that the statute does not give HHS the authority or the discretion to vary the reimbursement rates for 340B hospitals.  

ASCs become must-haves for hospitals

The movement toward value-based care, growing competition for physicians and surgical cases, and the ongoing shift of non-urgent surgical procedures into the outpatient setting have all had an effect on hospitals investing in ASCs. According to a national survey conducted by Avanza Healthcare Strategies of senior executives and clinical leaders at hospitals and health systems across the country, more than six in 10 hospitals and health systems intend to increase their investments in ASCs.

Hospitals are becoming less reliant on third-party management vendors for their ASCs and more willing to partner and share ownership with physicians in joint venture ASCs. Half of the respondents in Avanza’s survey indicated current ownership of multiple ASCs in their portfolios.

“It comes as no surprise to see that hospital systems are pursuing a variety of ASC initiatives, often in partnership with physicians, that will allow them to broaden their surgery center and outpatient portfolios,” said Joan Dentler, founder and president of Avanza. “As surgical care continues its migration out of the inpatient setting, hospital systems are recognizing the need for at least one ASC, and increasingly multiple centers, in their portfolios.”

The maturity of the ASC industry is cited as a reason for more growth in the category. Dentler says that management services were often a necessity to running a viable surgery center in the early days of ASCs. But the proliferation of support services and technologies for the industry and the growth of professionals with ASC experience has neutralized the need to give up valuable equity and enter expensive management agreements for ASC success.

More than 80% of hospital systems surveyed by Avanza have one or more of their ASCs as joint ventures with physicians, and more than half are allowing employed physicians to invest in their ASCs. Third-party management and partnerships continue to decline.3

Not only have consumer-driven and payer-driven trends from the past several years solidified the need for ASCs, but the COVID-19 pandemic also stiffened the competitive positions of ASCs as the preferred setting for high-quality, low-cost surgical care.

Hospitals more likely to share ownership in ASCs

According to the Avanza survey, from 2020 to 2021, the percentage of ASCs with 100% hospital and health system ownership declined from 25% to 12%. Yet majority ownership by hospitals and health systems in ASCs increased from 54% to 58% during that same period.

The takeaways included hospitals and health systems potentially being more amenable to sharing ownership with physicians since physician financial investment in the ASC may serve to motivate physicians to be more cost-conscious, helping drive profitability. Also, physicians are interested in joint ventures as minority owners due to contracts that can be leveraged with payers and GPOs that are accessible only if the hospital is the majority owner.

Hospitals, on the other hand, are owning or affiliating with ASCs due to four primary reasons:

  • Responding to consumer-driven trends.
  • Preventing physicians from taking cases outside the hospital and health system.
  • Supporting a value-based strategy.
  • Enhancing physician relationships.

And 63% of hospitals surveyed planned to increase ASC investments or affiliations. At the same time, third-party management is declining. In 2019, 23% of hospitals and health systems with ASCs had a third-party manager. That declined to 15% in 2021. The survey also found the percentage of hospitals and health systems with ASCs that permit third-party equity partners has declined from 44% in 2018 to 27% in 2021.

HOPDs converting to ASCs

One of the fastest growing areas of freestanding ASC development is hospital-based outpatient departments (HOPDs) conversions. These departments acted like freestanding ASCs but operated as arms of the hospital, collecting hospital reimbursement.

Medicare per-payment procedures were significantly higher for HOPDs than payments to ASCs,4 and the reduction in revenue for hospitals when converting HOPDs to ASCs has come with consternation, but it’s a step toward value-based care. According to Avanza, in 2021, 53% of hospitals and health systems with HOPDs that mimic ASCs were considering converting one or more of their HOPDs to ASCs.

Shifting outpatient procedures to ASCs reduces spending for commercially insured individuals by almost 60% and saves consumers close to $700 per procedure.5 Over 6 million routine outpatient procedures are performed in HOPDs, but only 10% of those procedures are for complex patients like those with morbid obesity or those suffering from end stage renal disease, and 35% of those procedures are for patients who do not have an ASC close to their residences. 

The ASC market size in the U.S. is estimated to reach almost $60 billion by 2028,6 up from $34 billion in 2020 and $36 billion in 2021.

1 CMS: Outpatient Clinic Visit Services at Excepted Off-Campus Provider-Based Departments: Payment Update

2 American Hospital Association v. Becerra (2022)

3 Avanza Intelligence: 2021-2022 Hospital Leadership – ASC Survey

4 RAND Corp.: Prices Paid to Hospitals by Private Health Plans

5 UnitedHealth Group: Shifting Common Outpatient Procedures to ASCs Can Save Consumers More than $680 per Procedure

6 Fortune Business Insights: US Ambulatory Surgical Centers Market Size [2022-2028]