Massachusetts Report Finds Hospitals’ Negotiating Clout With Insurers Drives Up Costs

Massachusetts hospitals and physician groups with market clout negotiate rates that are twice as high as for other hospitals, and such clout is the main cause of healthcare inflation in the state, according to a release by State Attorney General Martha Coakley.

Ms. Coakley’s office based the findings on a year-long study of the Massachusetts market, finding that about 10 hospitals enjoy reimbursements 10-100 percent higher, for similar work, than reimbursements for the other 55 hospitals in the state.

The office’s report says the 10 favored hospitals had brand-name recognition or few competitors in their markets, but it did not name any provider or insurer, saying its aim was to identify systemic problems and not blame individual organizations.

Based on its findings, the report recommended against establishing global payments covering a patient’s entire medical care for an illness, an approach recommended by a state commission.

The study concluded that higher healthcare costs are basically caused by rising prices, not increased demand for new services. One major insurer reported provider price increases accounted for 80 percent of the growth of medical expenses from 2006-2009.

The report called on the state to:

• Discourage or prohibit contract provisions that perpetuate market disparities;
• Increase transparency and standardization in payment and quality;
• Reform payments to account for market distortions; and
• Encourage development of a “value-based” healthcare market.

Read the Massachusetts Attorney General’s release on health insurance reimbursements.

6 Best Practices for Negotiating Managed Care Contracts for ASC Pain Management

Amy Mowles, president and CEO of Mowles Medical Practice Management in Edgewater, Md., offers the following advice on negotiating reimbursements with commercial payors for pain management for ASCs.

1. Getting started. When you receive the payor’s proposed contract, including the entire proposed fee schedule, be aware that just about everything in there is negotiable.

• You can start by requesting an increase in all fees.
• The vast majority of pain management procedures fall into one to three categories. If the payor is objecting to the entire increase, try to focus on a few specific issues, such as two or three group rates that are significantly low and are your most frequently billed codes.
• Using objective data to back up your points will always give you a stronger case.Data sources may include:
  • Your practice’s accountant or reports you run on average billed procedures and average number of procedures per patient encounter.
  • AMA Annual Socioeconomic Survey
  • MGMA publications
  • Medical Economics Survey
  • Department of Commerce Web site

• Be sure to identify all payor policies that could undermine your practice. Watch for requirements that do not agree with requirements of other payors. Multiple or conflicting rules will wear down your billing staff. A contract is going to create more work if it requires invoices while other contracts do not, or if it reimburses for multiple procedures at 100/50/50 when others reimburse at 100/50/25.

• Consider using a “requesting a standard” addendum for all your contracts. This addendum typically lists the fee schedule, and how multiple procedures, implants and supplies will be paid. Identifying these items in the contract will help you build leverage, create a good political base and record successful agreements.

2. Negotiating grouper payments. Many payors still base ASC reimbursements on the old “grouper” methodology, which Medicare phased out in calendar year 2008.

• Payors that use the old groupers often add a tenth grouper, Group 0, which typically includes minor, office-based procedures such as trigger point injections and non-fluoroscopic guided procedures (nerve blocks) and sometimes even off-list procedures that are not in the payor’s regular list, such as discography. Carefully check rates for this added group because they may include procedures you perform (or plan to) and could be undervalued.
• Add-on codes such as those for each additional level (facets joint injections, transforaminal epidural injections and neurolytics) should all have the same “mapping” — assigning them to the same group — as in other contracts. Otherwise, you will find discrepancies when you perform a cost-to-reimbursement analysis. Moreover, some payments may turn out to be below Medicare rates, which is hardly a good idea.
• Find out the payment methodology for off-list procedures. These are referred to as “no Medicare value” or “non-grouped procedures.” This is vitally important for both the old groupers system as well as the new APCs. The old grouper payment system had a significant number of procedures that were off-list, many of which were typically office-based procedures without fluoroscopy guidance. However, discography (CPT 62290 and 62291), a popular diagnostic pain management procedure, was and still is off-list.
• It is critical to ascertain the payment amount and methodology. You may find that requesting mapping to a specific payment group is better than a percentage of billed charges. Payment arrangements based on a percentage of billed charges typically carries a default amount, called a ceiling, which may not be cost effective.
• Find out how implantable devices are handled. Devices such as spinal cord electrodes and stimulators and drug infusion pumps may be carved out and billed separately, or the price of the implanted device may be added to the group. If devices are carved out, make sure the margin is above the current Medicare rate.
• Placing electrode arrays for a spinal cord stimulator trial (CPT 63650) is a popular procedure and Medicare’s current reimbursement is actually quite good. Remember that Medicare’s payment indicator of H8 means the procedure is not subject to multiple-procedure discounting. Since many pain management physicians place two-electrode arrays, make sure the payor won’t reduce the payment of the second placement, whether or not the device is included in the reimbursement.

3. Dealing with plans using the new APC methodology. Commercial payors are increasingly transitioning from groupers to the new ambulatory payment methodology system developed for Medicare.

• For APCs, ask whether the payor’s mapping is precisely the same as Medicare’s. If it is different, your procedures may turn out to pay less than you expected.
• How are off-list procedures such as discography paid? These should be defined with a default rate at a percentage of billed charges, with or without a ceiling. If there is a ceiling, make certain your fee is high enough for the discount. The other option would be to suggest the payor add these off-list procedures to a particular group.
• Ask about additional carve-outs for drugs, supplies or fluoroscopy you would like to have. It doesn’t hurt to ask how these will be reimbursed rather than if they will be.
• With APCs, it’s better to negotiate the all-inclusive rate or negotiate an amount for the device plus a reasonable handling fee. You do not want to have a contract that forces you to send a paper claim with an invoice.

4. If the payor offers both methodologies. Determine your top 15 most frequently billed codes. You may actually be better off with the calendar year 2007rates and groupers, especially if you have a lot of minor procedures and the default rate for off-list procedures is favorable.

5. Negotiating any kind of contract. Here are some basic tips that will apply to any kind of payment system you negotiate.

• For procedures requiring a costly one-time use device, such as a spinal wand for percutaneous discectomy (62287), which costs about $1,000 per case, ask if its pass-through code (C2614) would be carved out. This is important because the payor may have grouped this with a rate that does not cover the costs of the one-time use device.
• Inquire about the new CPT codes for facet joint injections. Prior to 2010, these injections were billed with two CPT codes, one code for the first level and another for each additional level. But under the new 2010 codes, these injections are billed as three codes: single, second and third, plus each additional injection. If the reimbursement is the same as last year, try to make sure facet injections for the third and additional levels (64492 & 64495) get a higher fee.
• Ask for the payment policies and rates for multiple procedures during the same patient encounter. If you don’t settle this, you could end up with a contract that pays below Medicare rates. You should get 100 percent of the fee schedule for the first procedure and then 50 percent for each additional procedure. You do not want to let it go down to 25 percent for any further additional procedures after the second. Ask if there is a maximum number of procedures allowed per patient encounter. This is not the same as medical necessity precedence.
• Agreeing to an all-inclusive case rate is not a good idea for most pain management procedures, unless the rate is high enough to cover multiple pain procedures involving bilateral and/or additional levels injections. Make sure this does not somehow include the professional component of a fluoroscopy.
• Ask for additional payment for the technical component of the use of the C-arm for fluoroscopy guidance and interpretive reports. The most frequently billed codes as follows:
  • 77002-tc Fluoroscopic guidance for needle placement for spinal injection procedures
  • 77003-tc Fluoroscopic guidance for needle placement for nerve blocks
  • 72275-tc (Epidurogram (with dictation) w/o use 76005)
  • 72285-tc (Radiological interpretation, cervical)
  • 72295-tc (Radiological interpretation, lumbar)

6. Final tips. Remember to read the entire contract and assess all the ways it could impact you now and in the future before you sign.

• If you can’t reach a reasonable agreement, ask yourself: Would losing this contract benefit or hurt my practice? How much of a market presence does this payor have? And do we see a significant amount of this payor’s enrollees?
• It’s essential that the contract is a friendly, mutually beneficial agreement. You have a lot of mutual interests. For example, what benefits the plan’s enrollees benefits your patients. And if the contract is cumbersome for you to administer, it will probably be cumbersome for the payor as well. Remember to work closely with your payor representative. People respond positively to people they know and respect.

8 Top Hospital and Health System Trends of the Past Decade

1. Loosened cost controls. HMOs in the late 1990s had successfully slowed growth in healthcare spending, but by the end of that decade they had come to be regarded as heartless conservators of the bottom line. Managed care’s tight controls began to loosen and “the negotiating power slipped back into the hands of the providers,” says Dick Clarke, president of the Healthcare Financial Management Association. Healthcare costs again began increasing faster than the general rate of inflation. “It’s not clear yet how much of that will change if providers come under more pressure to contain prices,” he says. 

2. Healthcare IT. Healthcare information technology, still rough around the edges in 2000, became a major force in hospital operations by the end of the decade, says Michael Rowan, COO and executive vice president of Catholic Health Initiatives in Denver. Innovations like computerized physician order entry and electronic medical records have been shown to improve safety as well as efficiency. Now, thanks to billions of dollars in incentives in the 2009 HITECH legislation, healthcare IT holds the promise of becoming virtually universal in the next few years. But Mr. Rowan reports that HITECH funds will pay for only about a quarter of the cost of the new technology. 

3. Patient safety movement. At the start of the decade, hospitals were just beginning to hear word of one of the most influential reports in the history of U.S. healthcare: “To Err Is Human: Building a Safer Health System,” published in Nov. 1999 by the Institute of Medicine. It concluded that from 44,000- 98,000 people die annually — the equivalent of 10 fully loaded 757 commercial airliners crashing each week, the report stated — due to errors in inpatient hospital treatment.

As a result, “hospitals started to get much more serious about quality and safety,” says Mr. Clarke at HFMA. The industry embraced continuous quality improvement, adds Thomas Dolan, president and CEO of the American College of Healthcare Executives. “Everybody realized that we have to constantly improve quality and it actually lowers costs because it reduces waste,” he says.

4. Physician entrepreneurialism. Many physicians became entrepreneurs, investing in ASCs, imaging centers and specialty hospitals as a way to supplement declining income due to lack of increases in reimbursements and become more efficient. The trend, however, put physicians into conflict with hospitals, who were concerned about losing market share to the leaner, physician-run organizations. By the end of the decade, it seemed that hospitals and regulators had blunted the trend.

“The ban on physician-owned hospitals in the health reform legislation signals the decline of the entrepreneurial physician,” says Nicholas Wolter, MD, a former MedPAC commissioner and CEO of the Billings (Mont.) Clinic. However, ASCs seem to have become a permanent fixture in U.S. healthcare, offering discounts too big for payors to pass up. 

5. Healthcare consumerism. “The future of market-oriented health policy and practice lies in ‘managed consumerism,’ a blend of the patient-centric focus of consumer-driven healthcare and the provider-centric focus of managed competition,” declared Jamie Robinson, a professor of health economics at the University of California, Berkeley, School of Public Health, in 2005 in the journal Health Affairs.

With the decline of HMOs, consumer-driven healthcare became a new way to contain costs. High deductible plans, with or without tax-free health savings accounts, would make patients cost-conscious consumers. Ratings of doctors and hospitals, from HealthGrades to CMS’ Hospital Compare site, would aid patients in choosing the best providers. Retail clinics opened to serve these new consumers. Hospitals developed a new fascination with patient satisfaction surveys. Brand-new hospitals lavished spending on patient-friendly design features, such as single rooms, sunlit atriums and concierge services, and these features seemed to shift market share. 

6. Shortages of healthcare personnel. In July 2007, the American Hospital Association reported 116,000 open positions for registered nurses in hospitals, and the existing RN workforce was aging. Mr. Rowan at Catholic Health Initiatives observes that the recession has erased the shortage for now, at least, as RNs were forced back into the workforce or into full-time work as family income fell.

Physician shortages also emerged. In a dramatic about-face at the beginning of the decade, the federal Council on Graduate Medical Education abandoned its long-held forecast of a physician surplus and predicted a shortage of 85,000 physicians by 2020. Since then, medical schools have been substantially increasing class sizes, but Congress has not removed a cap on the number of Medicare-funded graduate medical education positions for physicians that has been in place since 1997.

“Current evidence suggests that the United States is headed toward an aggregate shortage of physicians,” the Association of American Medical Colleges declared in 2009. “Given the extended time required to increase U.S. medical school capacity, and to educate and train physicians, the nation must begin now to increase medical school and GME capacity to meet the needs of the nation in 2015 and beyond.”

7. Accountable health organizations. While entrepreneurial physicians continued to spin off from hospitals throughout the decade, Dr. Wolter, the former MedPAC commissioner, says an opposing trend also emerged. Many young physicians were eagerly becoming employees. Accountable health organizations such as Mayo Clinic, the Cleveland Clinic and Geisinger Health System thrived by closely aligning hospitals and doctors to make care more efficient and effective.

Mr. Rowan at Catholic Health Initiatives says accountable health organizations seemed to be taking a lesson from the ASC playbook. Incentivizing physicians can make healthcare more efficient. But he adds that the trend is not easy for hospitals. “Many hospitals have no expertise in running practices,” Mr. Rowan says. “We’re hospital people, not group management people.” Hospitals used to hire doctors merely to generate business. Now, he says, “hospitals want doctors to take financial responsibility for outcomes.”

8. Recession. “The decade will be known for the financial turmoil that came at the end,” says Mr. Clarke of HFMA. In March 2009, Thomson Reuters reported that the median profit margin of U.S. hospitals has fallen to zero percent. Hospitals tightened their belts and many of them ended the decade solidly in the black. But the numbers of non-paying patients are still high and many leaders like Clarke believe we are entering an era of having to do more with less.

Industry shoots holes in Senate reform legislation

After months of collaboration and cooperation, health insurers launched an assault last month on the health reform legislation moving through Congress. Just as the Senate Finance Committee geared up for a final vote on a 10-year, $829 billion bill, insurers charged that the legislation would increase premiums, encourage cost-shifting and do little to control health care spending.

Industry’s main complaint is that a feeble individual coverage mandate will encourage healthier individuals to forgo coverage, jacking up the cost of insurance for everyone else. The bill is projected to expand coverage to 94% of the public, and the penalty for not obtaining insurance is seen as too low to compel the “young invincibles” to sign up.

The analysis by PricewaterhouseCoopers for America’s Health Insurance Plans (AHIP) predicts that the cost of coverage will rise by an extra $4,000 for families in 10 years due to the soft coverage mandate, an excise tax on high cost “Cadillac” plans, additional taxes on insurers and providers, and cuts in Medicare provider rates that will aggravate cost shifting to the private sector.

Similarly, a report from Oliver Wyman for the Blue Cross and Blue Shield Assn. predicts that without a strong individual mandate, medical claims in the reformed individual market will be 50% higher in five years. Curbs on age rating will boost premiums on the young, while minimum benefit levels will increase costs by at least 10%. Although tax credits and subsidies will help lower income individuals and families purchase coverage, these won’t be enough to offset higher premiums.

AHIP president Karen Ignagni said at a press briefing that coverage in the “high 90s” is needed to establish a sufficiently broad pool to spread financial and medical risks. Ignagni argued the proposed legislation does too little to bend the cost curve and implied that hospitals and doctors need to absorb a bigger hit in order to reduce healthcare spending.

MORE TO THE STORY

Congressional leaders fired back at the insurer’s claims. Some threatened to revoke the industry’s long-held anti-trust exemption, which permits state, but not federal, regulation of insurance business.

Senate Finance Committee staffers attacked the studies for failing to consider other reform provisions that might actually lower premiums and costs, noting that reinsurance could spread risk and that catastrophic plans may attract more young healthy individuals. Tax credits and cost-sharing assistance, moreover, can lower the cost of insurance and existing plans will be grandfathered and won’t have to offer more costly benefits.

The cost-shift claim, according to Senate analysts, is particularly “specious” because it assumes that hospitals will shift the full amount of Medicare and Medicaid savings onto private insurance, a claim not supported by economic theory or by the Medicare Payment Advisory Commission. On the contrary, say reform advocates, the opportunity to cover more lives will boost future earnings for insurers, who thus will be able to absorb additional fees.

The complaints from insurers did not block the committee from approving its massive reform bill October 13. But industry sent a signal to those negotiating a final bill that they need to do more to cut spending, to broaden the risk pool and to compel all parties to contribute.

Jill Wechsler, a veteran reporter, has been covering Capitol Hill since 1994.

Secure membership in changing times

MANAGED CARE’S COMPETITIVE landscape has become rough terrain with no clear paths to follow. With enrollment falling and potentially detrimental health reforms hanging overhead, plans are looking to realize gains in emerging markets and retain current members through improved service.

“Service is an important competitive battlefield in the health-service business,” says Joseph Mondy, CIGNA company spokesperson.

CIGNA recently extended the hours of its service call center to 24 hours, seven days a week, to answer questions about claims, benefits and eligibility and to assist in locating network providers. Mondy says CIGNA is the first health plan to offer this service 24/7 to members and providers.

“We see the competitive field broadening,” he says. “Other non-traditional players are getting into health services, and we have to be able to compete with them, not just our traditional competitors.”

By rebalancing the workloads of the call center staff, CIGNA was able to extend the hours without incurring additional administrative costs, Mondy says. Select representatives are also proactively reading Twitter tweets to reach out to members who might benefit from their assistance through social media contact.

Job losses caused by the recession and the cost of insurance coverage are the two main factors causing health plans to lose enrollees. Large national insurers are reporting overall membership losses of 5% or more. Humana, for example, saw its fully funded group lives fall nearly 8% in the second quarter of 2009.

TAPPING INDIVIDUAL POTENTIAL

However, many speculate that the individual market has potential now, particularly with Congress still in the process of hashing out legislation to increase coverage in the near future and employer-sponsored coverage on a downward trend.

For Humana, membership grew 17% in the second quarter in HumanaOne, the company’s individual business unit. It began writing single policies in 2002 and now has 350,000 enrollees.

“We built the business unit from scratch in a three- to four-year period,” says Doug Bennett, Humana director of corporate communications.

Bennett recommends that plans maximize their Internet presence to connect with individuals seeking coverage. For example, he says, writing online content in plain language can make a site more search-engine-friendly.

Tami Quiram, HumanaOne director, says the individual market has been somewhat untapped because employees losing their group coverage tend to consider COBRA as their only alternative. Direct marketing and live call center assistance is the best way to reach that segment, she says.

“It’s really a retail business with people making independent decisions,” she says. “There’s nothing more consumer-centric than an individual making decisions about the tradeoff between premium and benefit.”

According to David G. Knott, senior vice president and global practice leader, Booz & Company, insurance exchanges—heavily advocated by health reform thought leaders—will offer plans opportunity in the individual and small-group market.

“That’s going to be an important change because it forms exchanges around purchasers who did not have much negotiating clout when they were buying benefits in the past,” he says.

Plans will need to improve their marketing, segmenting and selling in the individual market, even though most plans have largely focused on business-to-business relationships in the past. Building a brand with marketable products and offering post-enrollment service to individual buyers who don’t have a human-resources advocate will help differentiate plans in an exchange. Competitive exchanges could also drive prices down, however.

“For plans already serving those markets and relying on those segments for some of their profit margin, they also need to think through how they keep their profit picture in tact,” Knott says.

In addition to targeting the individual market for future enrollment growth, plans also have an opportunity to address underserved racial or ethnic segments. These groups are less likely to have health coverage and less likely to have a regular healthcare provider.

Regence BlueCross BlueShield in Seattle recently won a national award for its Conserjero program to help Spanish-speaking members navigate the healthcare system. It is the initial segment Regence has identified as an emerging market with growth potential. And it’s no wonder, considering Latinos are expected to comprise 30% of the U.S. population by 2050.

“For Latinos, it’s about family and community,” says Francisco Garbayo, assistant director of emerging markets. “We are great consumers, and we buy things for different reasons than the general population might. If you understand the culture cues of that market, you can build a campaign that addresses those cues.”

The Regence campaign reaches the Latino market through community avenues and involves the family instead of the typical individualistic marketing strategy, Garbayo says. For example, health fairs and community events offer opportunities to provide education about how the U.S. healthcare system works and to promote the company’s toll-free number for Spanish-speaking consumers.

According to Garbayo, the program has helped influence new business. In fact, employers with significant Latino populations have increased that group’s health plan enrollment to as much as 95% with the help of Conserjeroeducation tools.

“It’s a pretty healthy, young population,” he says. “One of the things you look for when you market is return on investment, and that comes in many forms. Brand loyalty, for example, is a huge advantage in marketing to a Latino population.”

IDENTIFY HEALTH DISPARITIES

Rhonda Moore Johnson, MD, medical director for Highmark Inc., anticipates more diversity in employer groups in the coming decades and believes member-centric service needs to address health disparities. There is an opportunity to identify and correct disparities, which begins with collecting racial and ethnic data from members, she says.

A policy brief from Mathematica Policy Research published last month found that employers lack awareness of healthcare disparities and are uncertain of the legal implications of sharing race data. Highmark asks for race data directly, but emphasizes that the information is optional and is only used for quality improvement.

“The business case is that all this information [about health disparities] is available,” Dr. Johnson says. “We know the trends in this country in terms of higher rates of chronic disease. We know the rates of care for minorities lag behind non-minorities for some chronic conditions.”

In 2009, Highmark saw an increase of 27% in Hispanic/Latino commercial PPO members who underwent colorectal cancer screening after receiving personalized education about the importance of colorectal cancer screening. According to Dr. Johnson, improvements in prevention like this wouldn’t be possible without the collection of the members’ data and the match up against clinical performance.

The New World of Joint Ventures

More than ever, we are seeing the need for ambulatory surgery center (ASC) companies wanting to partner with physicians to initiate honest dialogue early on in the process of structuring a private placement offering. Such dialogue includes discussions about the goals and objectives of the offering, as well as the specific challenges. Many physicians have experienced personal financial loss and they are sensitive to the current economic state of affairs. The good news is that ASC partnership opportunities often outperform more “traditional” forms of investing and this reality is not lost on the physician community. Along with the possibility of higher than average returns in ASC deals comes the challenge of increasing thresholds of guarantees for all parties involved, covering a broader landscape of the debt service.

In years past, it was much easier to secure financing for the line of credit, equipment and lease guarantees to develop a surgery center joint venture. The financial institutions are now taking a much harder look at the ASC management companies, the management teams and their management history when negotiating financial terms. In many cases, lenders are requiring recourse loans to protect themselves; whereas, in the past there have been more opportunities for non-recourse loans to finance these projects. The reason this change in lending policy presents a challenge to management companies whose model is based on a joint venture structure, is that now the physicians partners are being asked to personally guarantee their pro rata portion of the front end debt required to get these projects off the ground.

In the marketplace, we see this trend preventing some physicians from participating in a joint venture because in some cases they are required to personally guarantee 200 percent to 300 percent more than their initial cash investment. We are finding many physicians are not as comfortable signing on for additional debt beyond their initial cash outlay without an intimate knowledge of the mechanics of the deal and a significant level of trust with the ASC company and/or hospital/ASC joint venture partner.

Some of the terms of the debt service require patience and diligence on the part of the ASC representative negotiating on behalf of the entity. Yet, we are still seeing an active deal market with a successful level of participation from the physician investors. To overcome the recourse debt hurdle, ASC management companies are getting creative. One solution for a credit-worthy ASC manager is to guarantee the start up debt and charge a surety fee to the partnership. The surety fee, which is charged back to the partnership, is established at a fair market value and is similar to an insurance policy for the physician members. This arrangement can eliminate the need for the physician investors to personally guarantee additional debt, which makes these investments more attractive.

Securing the “right mix” of specialists as owners is also a strong selling point to potential buyers of the current center as this bolsters the physician’s commitment to perform procedures at the center. Having a restrictive covenant in place also enhances the outlook to potential buyers for future success.

Another trend we are seeing being discussed much more frequently by both hospitals and ASC companies who recognize the benefits of partnering with their medical community is the notion of investing in the real estate component of medical facilities and not simply in the operations. With the threat of legislation being passed that might preclude prospective physician ownership in designated medical facilities, conversations are being discussed with prospective physician partners about the unwind provisions of the private offering memorandum. I was recently at a hospital meeting where this exact discussion was being had among 20 current physician partners and an executive vice president of a large hospital system. One of the physicians offered the idea of swapping current shares in the whole hospital for newly created shares in a new medical office building adjacent to the new hospital should an unwind actually occur. The majority of the physicians in the room liked this idea and it was noted for further consideration.

For many of us in the ASC industry, we have thought that ASC partnerships would be immune from this type of legislative threat. An Office of the Inspector General-published Advisory Opinion 08-08 seemed to substantiate this position by indicating an interest in promoting, rather than restricting, the development of physician-hospital ASCs, so long as appropriate measures to protest against fraud and abuse are included. The OIG approved an ASC joint venture owned by a nonprofit hospital and a group of surgeons, even though the joint venture did not satisfy any applicable anti-kickback safe harbor guidelines for the ASC. Yet, the June 2008 MedPAC Report to Congress titled, “Reforming the Delivery System” stated that, “physicians who invest in facilities have a financial incentive to refer patients for additional admission or procedures….” The key here is the inclusion of the term “procedures” and not just admissions. While many feel this threat is unlikely in the short-term, ASC companies and outpatient hospital partners are encouraged to lobby at both the local and state level. As ASC Association president Kathy Bryant has advocated, members of Congress need to understand the benefits of ASCs: cost-effectiveness, high quality care and community benefits. The association also offers “tool kits” on their Web site at www.ascassociation.org/openhouse for the industry to utilize as a guide in developing their own events.

Having completed over 200 healthcare-related syndications, we at The Securities Group feel that these types of investments remain strong as viable alternatives or supplements to a diversified portfolio for physician investors. Successful deals we see created are approached with a few factors: the ability to be flexible and open to alternative scenarios to the “traditional model” of private offerings; to consider expanding the partners involved to include hospitals and/or real estate developers especially if real estate is included beyond the typical operations investment; initiating and maintaining clear, honest dialogue among prospective investors as a deal is being structured and soliciting their feedback throughout the development process; targeting and securing the right mix of physician partners; being both patient and creative with financial institutions as financing is being discussed and secured; and being active among local and state legislators about the benefits of ASCs for the community and the healthcare system as a whole.

Michelle Trammell is president and Chase Neal is vice president of The Securities Group, a privately-held broker/dealer firm specializing in healthcare partnerships with physicians.

Weight-Loss Drug Shows Promise and Other Health News

Experimental Weight-Loss Drug Successful in Clinical Trials

Contrave, an experimental weight-loss drug developed by Orexigen Therapeutics Inc., has been shown to significantly aid weight loss in three late-stage clinical trials, the Associated Press reports. Findings from two trials showed that patients lost on average 17.6 pounds and 17.5 pounds, respectively. A third trial involved people with type 2 diabetes and showed that patients lost on average 13.5 pounds, according to the AP. The three trials each lasted 56 weeks and about 3,800 patients in total participated. Orexigen announced that it plans to seek approval from the Food and Drug Administration for Contrave in 2010. Common side effects of the drug included nausea and constipation. A few patients experienced more serious complications, including gallbladder infection and seizure.

Read about weight-loss ingredients the FDA says may endanger your health, along with 28 weight-loss products that contain them.

10 Salt Shockers That Could Make Hypertension Worse

Does too much salt cause high blood pressure, or doesn’t it? Two new studies out yesterday in the journal Hypertension tip the scales in favor of reducing sodium, particularly for those Americans—1 in 4—who have high blood pressure, U.S. News’s Deborah Kotz reports. One study found that reducing salt intake from 9,700 milligrams a day to 6,500 milligrams decreased blood pressure significantly in blacks, Asians, and whites who had untreated mild hypertension. Another study found that switching to a reduced-salt diet helped lower blood pressure in folks with treatment-resistant hypertension. Cutting sodium intake, though, involves a lot more than setting aside the salt shaker. Kotz lists 10 foods high in sodium that could make hypertension worse. The culprits include cottage cheese, which may pack more than 900 mg of sodium into a 1-cup serving, and dill pickles—one of which typically contains 830 mg of sodium, Kotz writes.

Find out whether drinking alcoholic beverages can spoil your plan to lose weight. In June, U.S. News dished about the high-calorie offerings of popular restaurant chains. And consider why you should avoid dining out: Researchers have found that restaurants are full of environmental cues—from plate size to bread condiments—that encourage us to eat more.

Is a Cash-Only or Direct-Pay Medical Practice Right for You?

With the unemployment rate above 9 percent and some 46 million Americans lacking insurance, the market for affordable healthcare is ripe. There’s a growing movement toward cash-only medical practices, which do away with third-party billing and waiting for reimbursement and put responsibility for payment squarely on the patient. Cash-only, or direct-pay, medical practices cater to the uninsured or those with high-deductible health plans that kick in only for major expenditures. Across the country, there are now 500 to 1,000 family medicine practices operating on a cash-only model, according to one experts estimate. The cash-only model is based on the idea that rather than charging higher, so-called retail rates for uninsured patients while negotiating discounted rates with insurance companies for covered patients, it’s fairer—and possible—to offer flat and reasonable rates to all, U.S. News’s January Payne reports.

Here are some tips on getting affordable health insurance for young adults, along with a quick guide to health insurance lingo. Consider 7 ways laid-off baby boomers can find health insurance.

Selecting a GPO

The average supply and equipment spent for a surgery center could be hundreds of thousands of dollars per operating room per year. When supplies and equipment comprise the majority of your surgery center’s budget, it makes sense to focus on cost management. One way to effectively accomplish this is through a group purchasing organization (GPO) that best meets your needs. If you’re unfamiliar with GPOs, you should know that they are a key way to aggregate purchasing volumes to deliver the best pricing on supplies and equipment.

If you’re somewhat unfamiliar with your supply chain, here are some things that might surprise you:

• Operating an underproductive supply chain results in overspending.
• When your facility or system purchases supplies and equipment from a GPO, you pay a contracted, discounted price because the purchasing power is aggregated among thousands of surgery centers, physician offices, hospitals and IDNs.
• Spending months researching big-ticket pieces of equipment and then negotiating the price only to receive retail pricing results in overspend. A GPO can ensure your receive the best value that considers the total cost of ownership — pricing, technology warranty, service and upgrades.
• Receiving quotes from vendors on capital equipment without verifying accuracy is dangerous. At Broadlane, we have found vendor quotes are wrong nearly 60 percent of the time.

If you are wondering what you can do to improve your supply chain, selecting a GPO is probably the most effective and efficient method. I encourage you to examine all GPOs and supply chain alternatives to help deliver the best results for you. Some things to consider when making your selection include:

• How can you make sure the contracted supplies, equipment and services take ambulatory surgery center needs into account? Investigate whether your GPO has an advisory committee that includes ambulatory clients.
• Does the GPO determine contract pricing through volume commitment tiers? If the GPO requires the surgery center to achieve a certain volume of pricing to achieve lower prices, this can be a disadvantage, since large IDNs and hospitals obviously purchase a higher volume to achieve a lower contract unit price.
• How will you navigate purchasing through the GPO? Some GPOs offer dedicated account service for ambulatory clients. This helps when setting up the contract portfolio and learning about other special savings and services.
• Will you have access to special bulk or group buy opportunities with other GPO clients to achieve special pricing when purchasing large quantities? Many GPOs offer these opportunities to help lower supply and equipment prices even further.
• Can you buy capital medical equipment at a discounted price? Purchasing expensive equipment through your GPO oftentimes can present huge savings — the same savings a large IDN would receive.
• Will your GPO help you standardize and maximize discounts? Using different vendors for commodity items like alcohol preps, exam gloves and wound care is not efficient. Maximizing your discounts by standardization can deliver immediate, sustainable savings.

One final thought to leave you with is the change in procedure reimbursements and the rising costs of healthcare and supplies. To ensure the supplies and equipment you’re purchasing fit within new reimbursement guidelines, it is important to work closely with your GPO and their knowledge regarding purchasing and reimbursement.

David Ricker is president and CEO of Broadlane.

5 Challenges Currently Facing Orthopedic and Spine Practices

The current struggling economy has impacted many industries, including orthopedic and spine practices. As a result, many practices are facing challenges to remain profitable and efficient. Here are five major challenges identified by industry experts that orthopedic and spine practices may face in this economy.

1. Increase in high-deductible healthcare plans, low reimbursement rates and uninsured patients. As the economy continues to struggle, copays and deductibles on many patients’ healthcare plans also continue to rise. Alan Davidson, executive director of the Orthopedic Institute of Pennsylvania in Camp Hill, says that this trend can lead to many patients not paying their copays at the time of their procedures.

Don Love, administrator of an orthopedic practice in Roanoke, Va., mentions several ways in which practices can help collect payments from patients, including pre-screening each patient’s insurance benefits prior to the office visit to determine coverage eligibility and collecting copays at the time service is rendered. “It is important to help patients understand and be aware of what their copays and deductibles will be,” he says.

Mr. Davidson agrees that increased attention to the workings of the revenue cycle will help combat this problem. “Staff must be trained to collect these payments at the time of service,” he says. “Some insurance contracts provide obstacles to timely collection, and these clauses must be negotiated out of payer contracts.”

Ken Austin, MD, an orthopedic surgeon in Airmont, N.Y., also notes that insurance companies can “place obstacles in the way of healthcare for both the patient and the practitioner.” These obstacles include underpayments for procedures and excessive paperwork.

In addition, Dr. Austin notes that many patients have employers who constantly switch healthcare providers, and oftentimes the patients are not aware of what their requirements are as they change from plan to plan. “Insurers make it as difficult as possible for patients to understand,” he says.

As the unemployment rate increases, practices will see the number of uninsured patients rise as well. Mr. Love says that his practice saw uncompensated procedures increase significantly from 2007 to 2008. According to him, it is important for physician practices to evaluate the amount of uncompensated care they can provide without creating a strain on the financial condition of the practice.

2. Hospital lobbyists and potential new legislation. One challenge orthopedic and spine practices may face in this economy is the work of lobbyists in the federal government. “This economy strengthens the resolve of the American Hospital Association to lobby hard to remove physician free-enterprise rights, dubbed by the AHA as ’self-referral,’” says Mr. Davidson.

According to Mr. Davidson, recent media coverage (such as this N.Y. Times article “Good or Useless, Medical Scans Cost the Same,” published March 1) has included statistics provided by lobbyists to make the case that orthopedic imaging procedures are “high cost, high volume and clinically unnecessary.” 

In addition, he notes that there is a real concern about ancillaries and short-stay hospitals, and even ASCs have been attacked in the press. “There are studies that have shown that specialist physicians tend to order appropriate images and consequently fewer repeated images,” he says. “Additionally, a Blue Cross Association study showed that competition among imaging centers tends to lower pricing (Blue Cross plans negotiate lower payments to providers), and this negates any effect of increased imaging volumes. These studies and accurate factual information need to be disseminated to the public.”

Mr. Davidson also says that studies show that physician-owned hospitals provide cost-effective, high-quality services. These studies need to be pushed to the forefront to counter the information that has been manufactured to support anticompetitive positions. 

“Physicians who have exercised free-enterprise rights and who have invested in hospitals and equipment stand to lose those investments and their free-enterprise rights with the strokes of legislative pens,” says Mr. Davidson. “Patients stand to receive lower quality and, in many cases, higher costs with decreased access consequent to the eradication of these well-organized and focused orthopedic services.”

In order protect their free-enterprise rights, Mr. Davidson encourages orthopedists to become more active in politics and to improve their own lobbying efforts. “Physicians need to reeducate legislators concerning the central role of the physician in healthcare,” he says. “They need to dispel the notions that have been fostered by lobbyists and are imbedded in some politicians that physicians are untrustworthy because they wish to foster competition in healthcare.”

Dr. Austin agrees that there is a trend in politics today for the government to take more control over healthcare. “Some politicians tend to think, ‘we’re the government; we know better,’” he says. “However, that can be the quickest way to create problems.”

3. Demonstrating quality care. As patients become more cautious with their money, they will put higher stake into finding the best quality of care. Web sites, such as HealthGrades.com, make it easy for patients to find reporting of a physician or hospital’s quality of care. Mr. Love suggests that practices should take a proactive approach to collect their data to demonstrate quality, efficiency and level of patient satisfaction.  

4. Retaining staff. A struggling economy may cause orthopedic and spine practices to closely monitor their staffing expenses, which may lead to salary cuts and layoffs. In addition, many practices may be faced with choosing savings over the quality of their staff.

Mr. Love says that “highly motivated and competent staff are one of the keys to a practice’s survival.”

Dr. Austin agrees.

“It can be an ongoing challenge to maintain high-quality staff in a time of diminishing reimbursement,” he says. He says that administrators and surgeons should stay in touch with their staff and handle any issues as they arise.

5. Managed care contracting. The state of the economy may make negotiating managed care contracts more difficult for orthopedic and spine practices. According to Mr. Love, health insurance payors who have more than 25-30 percent of a given market will make it increasingly difficult for practitioners and physicians to negotiate those contracts. “Those payors will have a take it or leave it attitude with physicians.”

Mr. Love sees no easy solution to this problem, but it is important for practices to be aware of what this challenge will mean in terms of cost and revenue.

This article originally published @ Beckers ASC Review

Should You Sell Your ASC: Assessing Your Value and the Pros and Cons

Thinking of selling a piece of your ASC? There are certainly a number of advantages to aligning with a corporate partner: professional management, access to capital, greater focus on growth and realizing a return on your investment. If these benefits pique your interest, the first step is to assess the value of your ASC. This article explores the various stages in the life of an ASC, along with the pros and cons of selling equity shares to a management company or corporate partner during these various stages.ASC lifecycle
The lifecycle of an ASC includes periods of initial growth (start-up phase), sustained growth, slowing growth and a plateau to decline phase. The various stages of growth during the lifecycle generate differing amounts of profitability defined as earnings before interest, taxes, depreciation and amortization (EBITDA). Your ASC’s stage of growth will have a major impact on the price a buyer is willing to pay to invest in your center. 

Initial growth. The initial growth phase is normally short in duration but critical, as this phase lays the foundation for the business’s future growth. The physician-partners’ first impressions of operations will determine how aggressively they begin to shift cases to the ASC. 

Planning must be thorough during this phase as it determines important aspects about the future of the ASC. Here are critical things to consider when developing your business:

• Accurately assess the surgical cases and case mix
• Recruit strong physician partners
• Don’t overbuild the physical plant
• Raise enough working capital
• Determine what, how and when you get paid
• Don’t overstaff

EBITDA growth will lag volume growth due to fixed operating costs that must be covered during this time. The initial goal should be to break even as quickly as possible. The ASC should focus on receiving the surgical cases identified in the business plan and efficient operations and cost containment to achieve this goal. During this phase it will take between 6-12 months for the business to become cash flow positive. At 12-24 months, your center should begin to build cash flow.

Sustained growth. During the sustained growth phase, case volume and solid operations yield positive results. Operating performance is deemed effective, and physicians have gained confidence in the clinical and business staff. Cases continue to shift to the ASC as a result of their confidence. 

Fixed costs are now covered and profitability is increasing during this phase. Returns are being realized through distributions and EBITDA margins are expanding with incremental volume increases. Growth is driven by the core partners. This is an ideal time to sell an interest in your ASC to a corporate partner as the business exhibits an upward EBITDA growth trend, which may yield a higher valuation.

Slowing growth. A period of slowing growth is possible at any time during the lifecycle of your ASC, but it is likely to happen as the business captures the bulk of the initial physician partners’ surgical cases. Once this volume is captured, it is important to recruit new partners. The recruiting process is fraught with challenges including valuation of share price, partnership dynamics, dilution and personality considerations.

During this phase, some business aspects may be overlooked. For example, payor contracts may be out of date and in need of renegotiation; staffing levels have crept up and so have supply costs. Efforts to control costs may have been neglected. As a result, cash flow levels off and profit margins begin to suffer. Partner distribution versus partner contribution may also become an issue.

Although growth has slowed, this may be a good time to bring a corporate partner aboard — if cash flow is still relatively stable, recruiting prospects are good and out-of-network revenue is low.

Plateau to decline. At this point in the life of your ASC, growth has stalled. Business fundamentals begin to break down. The partnership begins to fracture. Older partners start to retire, and the partnership may be unable to repurchase shares without adequate protections in the operating agreement/governance structure. Ownership no longer reflects contribution, and apathy begins to set in.

Efforts to control costs in this stage may be ineffective because it is difficult to change the established operating cost levels experienced during its growth periods. The center often becomes overstaffed and capital expenditures increase. Unfortunately, the opportunity to capture the best value of the center has likely been missed. Your center may now be recognized as a turnaround opportunity for corporate partners or management companies.

Factors affecting valuation
So, what are the factors that most significantly affect the value of your ASC to an outside investor like a corporate partner or management company? 

First, EBITDA represents the cash flow that a business generates and is an important factor when figuring out the price of your ASC. The main concern of a potential buyer is the stability of that cash flow. The value of an ASC with a positive EBITDA can be determined using a formula. The time period used to determine the EBITDA is typically the trailing 12 months of financial data. The formula takes into account the EBITDA for the trailing 12 months times a multiple (current range is 5-7 times for a majority interest purchase) less partnership debt plus some level of working capital times the percentage a buyer is purchasing. 

An example of the formula and resulting purchase price: $2.0 million in EBITDA (trailing 12 months) times a 5 multiple equals $10 million enterprise value minus debt of $500,000 plus $100,000 cash/working capital equals a $9.6 million dollar equity value times a purchase of 55 percent equals a purchase price of $5.28 million dollars. 

The 2009 ASC Valuation Survey, conducted by HealthCare Appraisers, representing 18 buyers and 500 surgery centers, showed that 50 percent of buyers who purchased a controlling interest in an ASC reported multiples of 6.0-6.9 times EBITDA. An additional 38 percent reported multiples of 7.0 or higher. Forty-five percent of respondents perceived that valuation multiples stayed consistent with 2008, while 38 percent perceived that multiples decreased. 

4 main pricing criteria
A buyer must be critical of the stability of the center’s cash flow, the growth prospects of the center and its underlying operations. Valuation multiples are determined by the outlook for future performance and, therefore, are extremely sensitive to growth prospects and risk factors. There are four main pricing criteria that have either a negative or positive impact on price.

1. Competition/barriers to entry. The multiple will decrease if there are few barriers to entry for other ASCs in the area, if there are several competing partnerships within your center or if physicians have ownership in multiple facilities. If it’s unlikely that you’ll experience success recruiting new partners or users, the growth prospects are diminished, driving a discount in valuation of the business.

The multiple will increase if there are significant barriers to entry for other ASCs (such as requiring a certificate of need), if there are few competing partnerships or if physicians do not have investment interests outside of your ASC. These factors create multiple recruiting/growth opportunities for the partnership and receive credit in valuation.

2. Reimbursement risk. The multiple will decrease if your center has high out-of-network revenue, if it has a specialty concentration facing significant Medicare changes or if there is other exposure (such as workers’ compensation reform). Out-of-network payments can boost net collections, but centers with high levels of out-of-network payments are generating a level of cash that’s not sustainable in the future. The historical trends of the business are important, but what you are really buying into is the future cash flow. If you expect that to decline, you’re going to discount its value. 

The multiple will increase if your center has contracted with major payors, if your center’s specialty is in a “positive” Medicare concentration (such as ENT or orthopedics) or if there are no other exposures.

3. Partnership profile. The multiple will decrease if a significant number of your physician partners are nearing retirement and your center has no contingency plan to replace them. Another factor is partner concentration. Having too few partners sharing sale proceeds may create incentive for them to slow down or eliminate their surgical case production. Also, having a dominant partner creates risk that there is too much reliance on a single individual. 

4. Growth prospects. The multiple will decrease if there is limited growth opportunity from existing partners, if there are few recruiting prospects or if there are capacity concerns.

The multiple will increase if your center consists of partners with growing practices, if there are excellent recruiting prospects, capacity to grow and a diverse case mix.

Buyers consider two types of growth when making these determinations — organic and external. Organic growth depends upon the maturity of the individual partner’s practices. Each partner is interviewed individually to determine their objectives and ability to bring additional surgical cases to the ASC. External growth is analyzed based on the probability of recruiting new physicians to the partnership.

Determining when to sell your ASC
So, when should you sell your ASC? The answer is simple: sell when an outside investor can add the most value to your partnership. 

This can occur at different stages for different partnerships, and buyers exist at all stages. It is important to asses the current and future needs of the partnership and to create realistic valuation expectations. It is difficult to anticipate a future decline in business, so it is necessary to determine where the partnership is and where it is headed. Always remember that valuation is not solely determined by past results but by the expectations of future performances. 

Once an assessment is made, finding a corporate partner that can best meet your needs is critical. You should research companies to understand their track record in the industry, as well as get references to determine if they will be a good fit for your partnership. There should be chemistry between you and the potential corporate partner to ensure your goals are met. Price is likely the number one consideration when picking a corporate partner, but you should consider that it may be better to accept a slightly lower offer from a company that can create future value than a higher bid from one that cannot.

Valuations should fall in range, and you should be careful of wide variations in price. If it comes down to two possible partners and the money is equal or close, pick the best partner for your ASC. Remember not to burn bridges with those corporate partners you choose not to pick — you may not close the transaction the first time you are engaged in this process.

Consider that incremental value can be generated from a corporate partner focused upon growing and extending the life cycle of your business. The future value perspective of the buyer is focused upon maximizing existing partner volume, recruiting new partners in order to extend the growth of your business, renegotiating payor contracts and expense management in order to expand EBITDA margins.

In the end, choose the right corporate partner based upon what the needs of your business are and the benefits that the partner can offer to you.

Finally, it is wise to retain a single lawyer to represent the partnership, ideally a healthcare lawyer who understands how to structure these transactions and will ensure that the process goes smoothly.

Mr. Hancock ( khancock@meridiansurg.com) is the president and chief development officer oft Meridian Surgical Partners, a company that aligns with physicians in the acquisition, development and management of multi-specialty ambulatory surgery centers and surgical facilities. Learn more about Meridian atwww.meridiansurg.com.

This article originally published @ Beckers ASC Review

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