Optimizing Strategy for the New

Realities of Hospital Surgical Services

Becker’s Hospital Review Seventh Annual Meeting

April 28, 2016

About ECG

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ECG partners with providers to create the strategies and solutions that

are transforming healthcare delivery. With more than 40 years of

service to the healthcare industry, we can help organizations thrive in a

value-based world.

Last year, ECG and Eveia Health joined forces to create a firm with

unparalleled domain expertise in ambulatory surgery in addition to our

skills in strategy, finance, operations, and technology.

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Northwest Healthcare and Ambulatory Surgery Practice Leadership

Kevin Kennedy

A 25-year consulting career has given Kevin a unique

understanding of shifting trends in the healthcare industry.

A member of ECG's Board of Directors and head of the

firm's Northwest Healthcare practice, Kevin has guided

hospital executives and physician leaders through periods

of dramatic change, and he is highly regarded for his

informed perspective on the industry's changing conditions,

new models of care, and the business arrangements

required to achieve clinical integration.

P R I N C I P A L

Naya Kehayes

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P R I N C I P A L

With 18 years of experience in consulting and more than 25

years of experience in the healthcare industry, Naya is the

Ambulatory Surgery practice leader and the founder of Eveia

Health, a division of ECG. She has effectively directed projects

and served as a strategic adviser to clients in ASC operations,

surgery reimbursement, business analysis, and contract

negotiations. She has a proven track record of success and has

provided direction on engagements resulting in financial

performance improvements, including the generation of millions

of dollars in revenue for multiple clients.

Agenda

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Introduction

Current Environment

Migration of Surgery

Strategic Considerations

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Introduction

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Observations on Recent Hospital Behavior

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» Sutter Health owns six ASCs in

Southern California, which are

hundreds of miles from its hospitals in

Northern California.

» Tenet Healthcare invested in a JV with

USPI to create “the leading U.S. short-

stay surgery platform.”

» A health system located on the East

Coast is in negotiations to buy at least

16 ASCs (confidential).

» A large urban health system has a

business plan to develop 20 ASCs

over the next 4 years (confidential).

» A multihospital health system seeks in-

house ASC development and

management capability, with a goal of

building 20 ASCs in the next 4 years

(confidential). So why the sudden interest?

Value-Based Enterprises

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As payment reform and other pressures continue the push toward a value-based

industry, organizations need to develop the right framework to operate as successful

value-based enterprises (VBEs).

Value-Based Enterprises Becoming an Effective VBE

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To become an effective VBE, an organization needs to establish a strong foundation

and drive improvement across four key functional areas. Care delivery changes are

a particularly difficult part of this process, but the increasing importance of ASCs

will help drive meaningful change.

Organizational Foundation ORGANIZATIONAL FOUNDATION

VBE

CARE

DELIVERY

TRANS-

FORMATION

PAYMENT

MODELS

CLINICAL AND

BUSINESS

INFORMATICS

PROVIDER

NETWORK

» Medicare Shared Savings

» Medicare Advantage

» Commercial ACOs

» Employer Direct Contracting

» State Employee Direct Contracting

» Pay-for-Performance

» Bundled Payments (including

CCJR)

» MACRA P

AY

ME

NT

MO

DE

LS

» The ORs are the most profitable part of the hospital.

» Most hospital strategies and tactics are geared

toward increasing the volume of highly profitable

surgical cases.

» The ORs are the most expensive part of the hospital.

» Many of the strategies used to fill ORs are at odds

with becoming a VBE.

New Hospital Priorities

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In progressive organizations that are serious about population health, the dialogue

around surgical services has changed dramatically.

OLD

PARADIGM

NEW

PARADIGM (we’re not there yet)

E V O L U T I O N : Health Systems Thinking About Surgery

New Hospital Priorities (continued)

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Several pressures are changing the way hospitals think about surgery.

All of these issues

support a greater

investment in ASCs

by health systems.

Risk-based payments will

make it profitable to deliver

care in lower-cost settings.

PRIORITIES

COST

SERVICE

AND

CUSTOMER

EXPERIENCE

COMPETITION

CLINICAL

DELIVERY

ALIGNMENT

Partnership

opportunities exist

with key physicians.

There is a longer

list of eligible

services every

year. Total joint

replacements are

becoming more

common.

The happiest

patient may be one

who never sets foot

in your hospital.

If you can’t beat ‘em…

Things to Consider

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CURRENT

ENVIRONMENT

» ASC case mix and

ownership

» Value of

hospital-ASC JVs

STRATEGIC

CONSIDERATIONS

» Operations and CMS

changes

» Surgery pricing and

transparency

» Market dynamics and

physician relationships

» Financial

considerations and

managed care

MIGRATION OF

SURGERY

» CMS-approved ASC

list growth

» Medicare versus

commercial payors

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Current Environment

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ASC Case Mix and Ownership

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Medicare Case Volume by Specialty ASC Ownership

Dermatology 4% Orthopedics

8%

Gastroenterology 31%

Ophthalmology 28%

Other 7%

Pain Management

22%

Physician 65%

Hospital 2%

Corporation-Physician

8%

Corporation 6%

Corporation- Hospital- Physician

6%

Hospital- Physician 17%

Source: www.ascassociation.org/advancingsurgicalcare/aboutascs/industryoverview/apositivetrendinhealthcare.

NOTE: Figures may not be exact due to rounding.

Value of Hospital-ASC JVs

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» Is there potential for increased

reimbursement?

» Hospital JVs may or may not

result in a favorable impact to

reimbursement.

» Physicians want to maintain their

independence.

» Hospital JVs can enhance

physician relationships.

» There is an increased demand for

ambulatory care networks.

» Transparency is becoming more

important.

» Value-based pricing opportunities

are emerging.

» There are increased operating

margins for select services.

» The gap is closing on

reimbursement for HOPDs versus

ASCs.

ASC POSITION HOSPITAL POSITION

PHYSICIAN EQUITY >50%

» The ASC is responsible for

managed care contracting.

» The hospital may or may not provide

services via service agreements.

» Physicians and/or a third party hold

the management agreement.

› Cost containment.

› Labor unions are not applicable.

HOSPITAL EQUITY >50%

» The hospital can retain control of

managed care contracting with

specified operating agreement

provisions.

» The hospital may or may not provide

services via service agreements.

» Managed care contract affiliate

language may be an opportunity for

rate increases.

» Physicians and/or a third party hold

the management agreement.

› Cost containment.

› Labor unions may be applicable.

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Key Factors That Affect

Hospital-Physician ASC JV Structures

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Migration of Surgery

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Migration of Surgery

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I N PAT I E N T H O P D A S C

Advancing clinical technologies that allow smaller incisions and shorter stays

Medicare and commercial payor cost pressures

Physician motivation—financial and efficiency

K E Y D R I V E R S :

Payor Implications for Ambulatory Surgery

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M E D I C A R E

» Inpatient-to-HOPD code approval

» HOPD-to-ASC code approval

» OPPS for HOPDs and ASCs

» Closure of gap on reimbursement methods and rates

» Device-intensive codes

» Bundling logic

C O M M E R C I A L

PAY O R S

» CMS approvals to HOPD validate medical director

approvals for ASC lists

» Expansion of commercial payor ASC-approved lists is growing

beyond CMS-approved list

» Inpatient-to-outpatient cost-saving opportunities with outcomes

data validate medical director approvals

» Alignment of commercial payors with ASCs to move volume

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Strategic Considerations

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Why Is There an Increased

Demand for Hospital-ASC JVs?

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» Efficiency equals reduced cost.

» Physician access to incremental income.

» Physician management control.

» No labor unions.

» ASCs must know their cost!

» Payors see the opportunity for savings.

» Increased commercial payor acceptance

of approval of codes beyond the

Medicare list.

» CMS closure of the gap on HOPD- and

ASC-approved CPTs on APC list.

» APC bundling logic and device-intensive

procedures.

» ASCs typically represent 30% or more in

savings to payors.

» ASC pricing can be 50% less than a

hospital.

» Charge transparency trending toward

mandatory.

» Payor, employer, and consumer

perspective on pricing competition for

outpatient surgery.

» Value-based pricing/gain-sharing

arrangements.

» Bundled payments in ASCs?

OPERATIONS AND

CMS CHANGES

SURGERY PRICING AND

TRANSPARENCY

Factors That Affect the

Success of a Hospital-ASC JV

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» Hospital equity position

» Asset versus stock purchase

» CON implications

» Market competition

› ASCs

› Hospitals

› Payors

» Physician relationships

› Hospitals retain physician alignment

with ASCs.

› Hospitals recruit new physicians via

ASC partnerships.

» Economic implications of moving surgery

› Excess capacity

› Demonstrating winners and losers

› Partnership distributions

» Case mix

» Payor methodologies and cost

» Affiliate language

» Payor contracting considerations

› HOPD versus ASC rates

› Historical focus on inpatient rates

› Shift in SOS

› Impact on rate negotiations

MARKET DYNAMICS AND

PHYSICIAN ALIGNMENT

FINANCIAL CONSIDERATIONS

AND MANAGED CARE

» A major national payor is launching

a plan to contact patients before

authorizing a surgery to educate

them on the benefits of ASCs and

inform them about out-of-pocket

differentials.

» A major national payor is re-

directing outpatient surgery to

ASCs; HOPDs will not be paid

without prior authorization.

Key Anecdotes We Expect to Become Trends

» In a Western market, a health plan

has agreed to pay an orthopedic

group double-digit rate increases

for several years, contingent upon

the group moving total joint

replacements out of the hospital

and into its ASC.

» The hospital is not aware of this

agreement.

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» ASC expansion

in the market is

inevitable—

driven by payors

and providers

seeking a lower

cost setting.

» Health system

can commit to an

ASC strategy

that mitigates

volume losses to

competitors.

» Partnering in an

ASC directly

supports the

cost efficiency

goals/objectives

of the ACO.

» Presents

opportunity for

gain sharing and

bundled

payments.

» Physician

alignment and

retention is

retained and

enhanced.

» Independents

will be attracted

to the efficiency

and aesthetics of

the ASC.

» Health system

captures or

retains a portion

of this revenue

stream.

» Short-term

EBITDA

reduction in the

HOPD is

recoverable with

a unified ASC

strategy.

» CMS and

commercial

payors re-

directing volume

out of HOPDs.

» Collaboration

allows for the

most seamless

patient access

model.

» Health system

maintains access

to patients.

» Patient

satisfaction

increases with the

ASC option.

The community wins in all scenarios of an ASC

partnership between a health system and surgeons.

Hospital-ASC JV:

Why Does it Make Sense?

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Opportunity to Be First Movers

Synchronicity With the ACO

Strategy

Independent Physician

Access Financial Feasibility Patient Access

So What Should You Do? A Six-Step Program

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Be aware of what

commercial payors are

doing in your market. In

most areas, they are

more aggressive than

Medicare.

Be Aware of

Payor Market

How will these trends

impact your other plans

around value-based care,

new payment models,

physician alignment, and

clinical integration?

Create Internal

Alignment 3 1 ASCs are different than

hospital ORs. Have a

plan.

Fill Gaps in

Expertise 5

A meaningful portion of

your inpatient surgery

cases will transition to

ASCs in the coming

years. Do the math.

Understand the

Implications

Can you ride it out? Can

you develop your own

ASCs or enter into JVs?

Explore ways to mitigate

the financial hit while

positioning for the future.

Develop a

Strategy 4 2 Execute!

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Questions & Discussion

Kevin Kennedy

KKennedy@ecgmc.com

Naya Kehayes

NKehayes@ecgmc.com

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206-689-2200 206-689-2200