The shift of procedures from the hospital to outpatient settings has gained momentum in recent years as commercial insurers boosted coverage and surgeons warmed to the idea of treating patients in ambulatory surgery centers.
Now that Medicare is catching up to this trend, experts expect the outpatient procedure migration to speed up with medical device companies like Stryker and Zimmer Biomet looking to capitalize on this shift, particularly in the orthopaedic space.
Bain & Company in a 2019 report, projected the percentage of hip procedures in ASCs to grow from just over 9% to 25% by the mid-2020s and knee procedures to grow from 10% to 30%.
While hospitals have opposed the moves, in part citing safety risks, Medicare seems to agree.
CMS recently finalized a Medicare rule that moved 11 services onto the ASC covered procedures list, including total hip replacements. The agency also finalized new criteria for the covered procedures list, which will cover about 267 musculoskeletal-related services when conducted in outpatient settings. In addition, CMS finalized a three-year phase-out plan of the inpatient only list.
Stryker has been looking to capitalize on the movement of surgeries as it has been accelerating over the last decade or so.
"This is definitely the continuation of a trend that started long ago, and we anticipate will continue well into the future," said Nate Miersma, Styker's senior director of ASC.
All of these moves continue CMS' embrace of outpatient care, which the agency says can help lower overall healthcare costs while maintaining the same level of safety as an inpatient setting.
Analysts with Moody's Investors Service wrote in a recent report that the final rule will ultimately "drive more highly profitable orthopedic procedures out of hospital inpatient settings."
Miersma would not project exact figures for the anticipated growth of total hip procedures in ASCs, but said that Stryker expects the volume of purchases to increase due to CMS' rule, much like what happened when the agency made the same coverage change for total knee replacements.
Stryker now expects spine procedures to follow total hip replacements, Miersma added.
Even without Medicare coverage, the percentage of spine procedures conducted in ASCs is projected to grow from 7% in 2015 to about 30% by the mid-2020's, according to the Bain report.
Warming up to ASCs
Bill Prentice, CEO of the trade group Ambulatory Surgery Center Association, said that procedures like total knee and hip replacements have been covered by commercial insurers for several years, but CMS has dragged its feet in embracing ASCs.
Prentice was a bit warier of a boom in procedures due to CMS opening up coverage policies, but he did predict a "steady progression" of procedures moving from inpatient to outpatient settings due to the agency's changes.
Stryker CEO Kevin Lobo once spoke of ASCs as a risky area, according to Miersma. However, he added that Lobo now sees ASCs as a "great opportunity."
Lobo said during a third-quarter earnings call that ASC procedures are still a small portion of the company's overall volumes, with about 10% of large joint and spine procedures happening in the centers. But the CEO expects ASCs to be an important part of strategy going forward and said that the the speed at which surgeries are moving to ASCs will only accelerate.
Part of Stryker’s focus has required a change in approach. For example, while hospitals can handle one representative assigned to each different department in a facility, that approach does not work with ASCs because they are smaller organizations.
"The way that a hospital operates is very different than in the surgery center setting, where a small group of surgeons [are] equity owners in a surgery center and they make all of the purchasing decisions together on behalf of the entire surgery center," Miersma said. "So, their money is the surgery center's money; they're interchangeable."
To adjust to smaller business structures that can vary widely between different ASCs, Stryker has one representative for an entire enterprise.
The recent warming-up to the ASC market — which both Prentice and Miersma said has also been fueled by hospitals shutting down elective care due to the effects of the coronavirus pandemic — has also spurred M&A activity within the medtech and hospital industries.
Zimmer Biomet CEO Bryan Hanson said during a November earnings call that two recent acquisitions — Relign Corp. and Incisive LLC — will drive revenue growth as early as next year and "immediately give us traction to be able to go out and hunt in the ASC marketplace."
Last week, the hospital company Tenet Healthcare bought up 45 surgery centers from SurgCenter Development in a $1.1 billion cash deal.
William Blair analysts said that diversifying away from the hospital business to ambulatory settings is good in the long term, particularly due to to 80% of SurgCenter Development's business coming in the "fast-growing, high acuity" musculoskeletal market, which includes orthopaedic and spine procedures.
Reimbursement challenges, pricing pressure
While Medicare further covers outpatient procedures, Prentice said that reimbursement challenges remain as the reimbursement rate for ASCs is about 50% less than the rate for hospital outpatient departments.
"That, obviously, provides extremely tight margins for ASCs to provide care to Medicare beneficiaries," Prentice said.
More equitable reimbursement could incentivize providers to move procedures to ASCs, thereby cutting overall healthcare costs and potentially increasing volumes because of it, according to Prentice.
The attractiveness of ASCs, and one of the main reasons continually given by CMS for its policy changes, is cutting costs, leaving questions about how to make the space profitable when shifting out of the costly hospital setting.
"That shift will increase price pressure on medical devices and products because ASCs have lower reimbursement rates and ASC-based physicians are more price sensitive than their hospital-based peers are," the Bain report stated. "Selling to ASCs, which are smaller, lower volume and more geographically dispersed, drives up the costs of sales and distribution and adds complexity to medtech companies' business models."
Miersma declined to comment on how Stryker can remain profitable in an environment based on cutting costs. However, he said that the company works with nearly every surgeon in a surgery center setting and Stryker can "maximize the amount of products and services that a surgery center is purchasing."