Public option impact on ASCs.
By
David M. Thoene
Ambulatory surgery center partners and operators are concerned that the “public option” component of healthcare reform will negatively affect ASCs. They are worried for two reasons: First, the public option will drive down reimbursement rates. And second, declining reimbursements will drive down profitability and enterprise value.
How will the public option affect your surgery center? Here’s a quick way to assess the damage.
Let’s begin by computing the weighted average Medicare reimbursement for surgeries performed in your center. Let’s say that Medicare paid $1 million for services you provided on behalf of 1,200 Medicare beneficiaries over the past year. This equates to an average Medicare reimbursement per case of $833.
Now, let’s compute the weighted average reimbursement received for commercially-insured (i.e., non-governmental) patients. Let’s say commercial insurance companies paid $2 million for services you provided on behalf of 2,000 insured patients. This equates to an average commercial reimbursement per case of $1,000 – or, about 1.2 times Medicare.
Many recent estimates put the proposed public option ASC reimbursement rate at 1.05 times Medicare. The concern of many people is that commercial payors will gravitate to the public option reimbursement rate. Why will this occur? Because commercial payors will be forced to reduce the premiums they charge in order to prevent a mass migration of members to the public option plan.
How does this affect your ambulatory surgery center? If the payments you receive for commercial patients are reduced to 1.05 times Medicare, then your reimbursement per case will drop from $1,000 to $875. Spread over 2,000 insured patients per year, that is a reduction of $250,000 per year in net revenue – and since the reduction occurs without offsetting your operating cost, the result will be a $250,000 per year drop in net income (profit).
One more thought: If your surgery center’s annual earnings before interest, taxes, depreciation and amortization (EBITDA) is reduced by $250,000, the enterprise value of your business will drop $1.5 million (based on an EBITDA multiple of six). Healthcare reform does not reward investment risk.
If the public option succeeds in driving ASC reimbursement rates to an equilibrium price of 1.05 times Medicare, the impact on outpatient surgery centers will be profound. Fortunately for surgery centers, the plan is scheduled to be phased in over a number of years. ASC partners and operators have proven themselves facile when faced with past challenges; they will need to begin planning today to overcome the potential impact of reduced reimbursement. Key strategies are new service line development, caseload growth, and expense control.
