Date

Surgery Migration: Catching the ConfettiCase Studies and Implications for ASCs, Hospitals, and Payers

October 25, 2019

Becker’s ASC 26th Annual MeetingThe Business and Operations of ASCs

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Surgery Migration, Trends, and Payment Implications

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Surgery Migration Trends

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Site of service and surgery migration are key drivers to reducing the total cost of care.

Inpatient HOPD ASC

Surgeries that have moved to ASCs; continued growth presents opportunities for hospitals to capture new

volume from an ASC joint venture (JV)

Largest growth opportunities for ASCs and

risk for cannibalization from hospitals

» Total joints» Laminectomies» ACDFs» Lumbar fusions

» Endoscopy» ACLs » Shoulder repairs

» Sinus surgery » Retina » Lithotripsy

» Lap hernias » Lap cholecystectomies» Hysterectomies» Cochlear implants

Key DriversAdvancements in clinical technologies that allow smaller incisions and

shorter stays, enabling higher-acuity cases to be performed safely in the

ASC setting

Medicare and commercial payer cost pressures

Physician motivation(i.e., finances and

efficiency)

Procedures that present the largest opportunity for migration to ASCs represent a material risk

to hospitals.

CMS modified the definition of surgery, which expanded the ASC-approved list.

As a result of the rule change, the majority of cardiac cath lab procedures were added to the ASC-approved list.

CMS will provide separate payment for non-opioid pain management “drugs that function as a supply” when used in a surgical procedure performed in an ASC.

Currently, this applies to HCPCS code C2920, the drug EXPAREL®, and is approved for ASCs and not for HOPDs.

The device-intensive code offset percentage has been reduced from 40% to 30% for single-use devices that meet the device-offset threshold to be eligible as a device-intensive procedure.

Reducing the threshold has a favorable impact on reimbursement for eligible procedures.

CMS’s ASC rule replaced the CPI-U with the hospital market basket (HMB) as the annual update for the ASC conversion factor.

This sets ASCs and HOPDs on the same update factor, which is expected to have a favorable impact on ASCs.

2019 Medicare Rule Changes

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RateCalculation

Device-Intensive Codes

Payment for Non-Opioid Pain

ManagementDefinitionof Surgery

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2020 Proposed Medicare Rule Changes

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CMS is proposing to require prior authorization for certain procedures when performed in an HOPD due to increases in volume for several services. The most common service categories are:» Blepharoplasty.» Botulinum toxin

injections.» Panniculectomy.» Rhinoplasty.» Vein ablation.

» Concerning the ASC rate calculation, CMS proposed to continue updating the ASC conversion factor based on the HMB through 2023.

» The conversion factor for both ASCs and HOPDs is proposed at a 2.7% increase as a result of maintaining ASCs on the HMB.

» CMS has proposed to continue paying for non-opioid pain management drugs that function as a supply, with separate reimbursement in ASCs.

» EXPAREL®, HCPCS code C9290, continues to be the only drug that qualifies under this rule.

» CMS will not pay separately for EXPAREL® in HOPDs.

» CMS is proposing to add TKA, CPT code 27447, to the ASC-approved list.

» The proposed reimbursement rate for ASCs is $8,640.

» CMS is proposing to remove total hip arthroplasty, CPT code 27130, from the inpatient-only list and add it to the HOPD-approved list.

Total JointsPayment for Non-Opioid

Pain Management ASC Rate CalculationHOPD

Preauthorization

Source: CMS 2020 proposed rules.

$12,149 $12,330 $10,714

$11,960

$8,640

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

$14,000

IPPS Final2019 MS-DRG 470

Rate

IPPS Final2020 MS-DRG 470

Rate

OPPS Final2019 CPT

27447 Rate

OPPSProposed2020 CPT

27447 Rate

ASCProposed2020 CPT

27447 Rate

TKA Proposed Rule Changes Enable Access for Increased ASC Market Share

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» Medicare’s proposed 2020 ASC rate for TKA is $8,640. This represents an opportunity for ASCs to capture $450 million to$1.3 billion in incremental revenue, which corresponds to a projected contribution margin at 5% to 15% of $22 million to $202 million on Medicare business alone at a migration rate of 10% to 30%.

» At a 10% to 30% shift to ASCs, hospitals stand to lose $600 million to $1.8 billion in revenue from the potential shift of Medicare TKA patients.

CMS is proposing to add TKA (CPT code 27447) to the ASC-approved list in 2020, offering material opportunity for surgery migration to an outpatient setting.

Sources:» https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/Medicare-

Provider-Charge-Data/Inpatient.html.» https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/AcuteInpatientPPS/index.html.» https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/HospitalOutpatientPPS/index.html.» https://www.cms.gov/Medicare/Medicare-Fee-for-Service-Payment/ASCPayment/index.html.

Medicare 2016 MS-DRG 470 Discharge Volume: 502,566

The greatest risk for limiting migration to an ASC is the cost of the implant.

Medicare Hospital Inpatient, Hospital Outpatient, and ASC Rates for TKA

What Is the Value of TKA Migration?

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ASC TKA Analysis Surgery Migration Impact

Total Average Commercial Payer Net Revenue per Case

$15,000 to $23,000

ASC Total Commercial Net Revenue$4.5 Million to $6.9 Million+

Total Average Hospital Net Revenueper Case

$28,000 to $35,000

$1.5 Million to $6 MillionSavings to Payer

Payer Cost in Hospital$8.4 Million to $10.5 Million

Projected Patient Savings at 20% Coinsurance$300,000 to $1.2 Million

Adding TKA to the ASC Medicare-approved list enables ASCs to increase momentum for migration with access to government and

commercial payers.

The ASC adding 300 new TKA cases drives value and opportunity for savings to the payer and patient.

Payers and Employer Groups Direct Migration via Site-of-Service Policies for Surgery

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Self-insured employer groups and payers are developing benefit designs and implementing policies that drive surgery to ASCs to reduce the total cost of care and out-of-pocket spend.

Payers and employer groups are establishing benefit designs that eliminate copays and coinsurance when surgery is performed in an ASC.

In October 2015, UnitedHealthcare implemented a national policy requiring approval for surgery to be performed in a hospital when an ASC is available.

Effective August 2019, UnitedHealthcare implemented site-of-service medical-necessity review policies for certain musculoskeletal procedures.

Large employer groups are contracting directly with providers to develop bundled payments for the lowest-cost setting.

Payer Environment Impacting Hospitals

How do hospital JVs with ASCs

affect negotiations with payers?

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Health systems are focused on incorporating ASCs into their networks.

» Hospitals present a significant voice at the negotiating table that is favorable for the ASC.

» Hospital control of contracts is about the “sweet spot” to support migration.

» There are opportunities to enhance the value of alternative payment methods, such as bundled payments and shared savings, by incorporating the ASC into the contractual arrangement with the hospital.

Health Systems and ASCs

Important Facts» 41% of hospitals and health systems either own a freestanding ASC or are affiliated with one

and are seeking more, according to a HealthLeaders Media poll.» HealthLeaders Media surveyed 109 senior executives and clinical leaders at health systems

and hospitals across the US. › 48% of respondents plan to make additional ASC investments or affiliations in the coming

years.› Respondents indicated they believe ASC investments help increase market share, lower

costs, improve physician engagement, and enhance patient satisfaction.

How Does an ASC Strategy Impact Hospital Risk Resulting from Migration? » Accretive value may be realized for surgery volume that has already migrated.» Hospitals that are not aligned risk losing surgery value in its entirety.» Hospitals that support migration must have alternative strategies to backfill lost volume and

revenue.

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Source: Becker’s ASC Review article, citing HealthLeaders Media poll (September 2018).

The current environment and surgery migration trends are expected to have a meaningful impact on increased demand for a hospital ASC.

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Current Environment and Trends

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Changing Paradigms

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The advancement in clinical technologies allows for smaller incision sites and favorable outcomes, enabling surgery migration from inpatient to outpatient settings.

Inpatient HOPD ASC

Old Paradigm

New Paradigm

Payment Innovation

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ASCs present opportunities for increased incentives that support alignment with hospitals via alternative payment methods.

Risk Sharing

As cases migrate from the hospital to an ASC, hospitals will desire partners that can help

manage risk and expenses.

Bundled PaymentsCase Rates

States with CON Requirements for ASCs

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CONs influence the quantity and types of ASCs in the state.

Source: http://www.ncsl.org/research/health/con-certificate-of-need-state-laws.aspx.

CON requirements

are so strict that there is only

one ASC in the state.

CON is required only for ASCs with more than one OR. As such, the state is occupied by single-OR ASCs.

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Case Studies

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Surgery Migration

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ECG conducted a surgery migration analysis for a large, multihospital academic medical center (AMC) where over 97% of the inpatient and outpatient surgical volume could be performed in an ASC setting.

The AMC is moving forward with the rapid development of four ASCs as a result

of this analysis.

1 Trailing 12-month volumes have been rounded to protect client confidentiality.

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76,700 Analyzed

Cases

97.5%2.5%

SpecialtySurgical Volume1

Percentage of Total Volume That Payers

Would Allow to Migrate

General Surgery 10,900 98.8%Orthopedics 10,400 98.6%Joint Replacement 3,400 99.5%Spine 3,300 100.0%

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ECG recently completed a 5- and 10-year migration assessment for a multihospital healthcare organization that revealed almost 70% of the organization’s surgical volume is at risk of migrating to an ambulatory platform.

The system launched coordinated efforts to grow ambulatory surgery capacity and partner with surgeons to manage orthopedic services

system-wide.

1 Volumes have been rounded to protect client confidentiality.

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Orthopedic Services and Ambulatory Surgery Capacity

29,650 Surgical Cases

67%

10 Years

63%

5 Years

SpecialtySurgical Volume1

Potential 5-Year

Migration

Potential 10-Year

MigrationJoint Replacement 4,100 82.4% 87.0%Cardiology 3,300 53.9% 57.7%

Contract Rates Support Migration

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Projected Value Opportunity:

Health System at 70%

Projected Value Opportunity:

Physician Partners at 30%

$2,121,959 $909,711Total

Projected Distribution

Improvement

$3,032,370

New ASC contract value with affiliate language can help mitigate the losses expected by health systems by increasing margins to the ASC venture, which decreases financial risk realized with cannibalization.

Note: Figures may not be exact due to rounding.

How influential can a committed hospital partner be in negotiating contracts

for your ASC?

Capacity Optimization

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The current surgery center has three ORs. There are two available for multispecialty surgeries and unrestricted for use by any specialty. The GI service represents 950 cases and is performed in one designated GI OR.

Current OR Utilization Percentage Utilization at 100%

Capacity

44%

Utilization at 70% Capacity

63%

Total Surgical Cases:

2,774

Decanting the GI procedures to an office-based setting would enable the center to capture new volume and enable a more optimal case mix.

This increased capacity can be used to catch migrating TKAs and other procedures.

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What Does All of This Mean?

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Motivating Factors for Hospitals

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Health systems are seeking out partners in the ASC space. Why?

System-wide OR capacity

Pricing transparency

Physician alignment

Payer benefit designs

Surgery migration and cannibalization

Alternative payment methods

Geographic strategies: primary versus secondary markets

Equity structure and financial returns

Opportunities Related to Surgery Migration

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Facility Design

Patient Experience

Physician Alignment

Payment Innovation

The impending migration of surgical volumes from hospital to ambulatory-based space provides opportunities.

All of these opportunities are predicated on the

health system understanding how and when its surgeries will

migrate as well as developing and

implementing a plan to address the migration.

Medical Directorships

Practice Management

MSO

Full Employment

ComanagementCompany

Loosely Integrated

Degree of System/

Physician Integration

Tightly Integrated

PSA andMSA1

Spectrum of Hospital-Physician Alignment

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Multiple alignment options exist for a hospital to consider, depending on the level of integration it desires with its physician partners.

1 Professional services agreement and management services agreement.

Bundled Payment ASC JV

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Catching the Confetti

Biohazardous Safety/Waste

Biomedical Equipment

Medical Staff Credentialing

GroupPurchasing Agreements

Accounting/ Finance Support

IT Support

Laundryand Linen

HR

CapitalEquipment

Managed Care Contracting

Plant/Facilities Maintenance

A hospital can provide various services that can yield significant value to ASC owners while building a sustainable competitive advantage for all parties.

A hospital equity partner will:» Present an opportunity for orderly

surgery migration.» Deliver services that are often

subcontracted by ASCs at competitive rates.

» Provide a means for ASCs to lead payment innovation across a broader platform of services.

» Allow for continued expansion of services and capacity.

» Potentially open up the opportunity for continued physician alignment without employment.

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Naya Kehayesnkehayes@ecgmc.com

206-689-2200

Sean Hartzellshartzell@ecgmc.com

703-522-8450

Questions & Discussion