Long‐run growth of ambulatory surgery centers 1990–2015 and Medicare payment policy

Abstract

Objective

To examine long‐run growth in the ambulatory surgery center (ASC) industry and potential factors influencing its trajectory.

Data sources

National data for all Medicare‐certified ASCs (1990–2015) and outpatient discharge records from the state of Florida in 2007.

Study Design

We documented the number of ASCs in the United States over time and decomposed the trend into underlying ASC market entry and exit behavior. We then examined the plausibility of 2008 Medicare payment reforms to influence the trend changes.

Data Extraction Methods

Data on ASC openings and closures are obtained from the Centers for Medicare and Medicaid Services Provider of Service files. Secondary data on ASC volume in Florida are obtained from the Florida Agency for Health Care Administration.

Principal Findings

The number of ASCs in the United States grew 5%–10% annually between 1990 and 2007 but by 1% or less beginning in 2008. This change coincided with substantive reductions in Medicare payments for key ASC services. The annual number of new ASCs was as much as 50% lower following the payment change.

Conclusions

ASCs are an important competitor for outpatient services, but growth has slowed dramatically. Sharp changes in new ASC entry align with less generous Medicare fees.

What is known on this Topic

• Most surgical procedures in the United States are performed in outpatient settings.

• Ambulatory surgery centers provide outpatient services at lower costs than hospital outpatient departments.

• The number of ASCs has grown considerably since the 1970s.

What this study adds

• The supply of ASCs has been increasing over time; however, growth has slowed dramatically during the past decade.

• Medicare's overhaul of the ASC facility fee schedule starting in 2008 seems to mark a key turning point in ASC entry trends.

• Negative price changes for key ASC services are plausible reasons for the pronounced changes in the supply of ASCs.

1. INTRODUCTION

The majority of surgical procedures now occur within outpatient settings, as patients and payers seek greater convenience and lower prices. ¹ , ² , ³ There are two distinct settings, which compete in outpatient surgery markets: ambulatory surgery centers (ASCs) and hospital outpatient departments (HOPDs). The former facility type (i.e., ASCs) performs approximately 23 million procedures annually, comprising over half of the outpatient surgery market. The ASC market is also valued at $36 billion, and Medicare alone spends nearly $5 billion on facility payments to ASCs per year. ⁴ , ⁵ Although HOPDs have been negatively impacted by ASC competition, ⁶ , ⁷ , ⁸ , ⁹ , ¹⁰ many hospitals have invested in ASCs as part of their evolving business strategies. ⁴ , ¹¹ For these and related reasons, an impression of unrelenting ASC expansion is sometimes conveyed by industry and policy experts. ⁴ , ¹¹ Yet, pronounced changes in ASC growth may have been largely overlooked. Given the evidence for ASC safety and lower costs ¹ , ¹² , ¹³ , ¹⁴ as well as downward pressure on HOPD prices, ² , ¹⁵ , ¹⁶ changes to the ASC supply trajectory could have a variety of important market and consumer welfare implications.

Viewing the national ASC industry growth with a sufficiently wide historical lens can also help illuminate potential reasons for any abrupt change in trend over time. For example, in response to rapid ASC growth and federal concerns over the ASC fee schedule, the Medicare Modernization Act of 2003 froze ASC payment updates and directed the Government Accountability Office to examine the relative costs of procedures performed in ASCs and HOPDs in order to debut a new fee schedule by January 1, 2008. ¹⁷ Between 2008 and 2011, Medicare overhauled the system for ASC payments by linking their reimbursements to those of HOPDs for the first time. Specifically, the ASC facility fee for any procedure would be capped at 59% of the facility fee paid to a HOPD for the same procedure. Any ASC fee adjustments required to comply with this new payment ceiling were phased in 25% per year and completed by January 2011. ¹⁸

The 2008 Medicare payment reforms were arguably one of the most significant changes to ASC reimbursements since Medicare began paying for services delivered to beneficiaries in ASCs almost 30 years prior. In the lone published study of this specific policy, Munnich and Parente ¹³ show that HOPDs' share of Medicare outpatient procedures grew with greater ASC‐HOPD payment disparity during the first two fee reform years. However, it remains an open question as to whether the 2008 change in reimbursement generosity from a dominant payor ¹⁹ ultimately reshaped ASC business opportunities and industry strategy. We consequently explored trends in ASC supply before and after the 2008 Medicare policy event to see if ASC growth adjusts in the policy aftermath and, hence, if the potential financial impact of imposing a Medicare payment ceiling on ASCs could influence the industry going forward.

2. STUDY DATA AND METHODS

Our first data asset comes from the Centers for Medicare and Medicaid Services Provider of Service files. These data provide regularly updated facility‐level information for all firms across the United States with administrative approval to bill for services delivered to Medicare beneficiaries. ASCs are included and explicitly identified within the Provider of Services data, along with their original date of Medicare certification. ²⁰ These data allow us to track the supply of ASCs over time and then decompose the changes in supply into the underlying trends for ASC market entry and exit behavior.

Next, we conducted a supplementary exercise that explores the potential impact of the payment reforms on the ASC industry's overall financial position with respect to Medicare. We did so using information on 2007 procedure‐level Medicare ASC volume to evaluate the distribution of facility fee changes between 2007 and 2011 (when the payment reforms were complete). We used this same information to create a counterfactual ASC Medicare revenue measure for the ASC industry by applying 2011 fees to 2007 procedure volumes.

To recover a measure of ASC volumes, we used the 2007 universe of outpatient (ambulatory) discharge records from the state of Florida, obtained from the Florida Agency for Health Care Administration (AHCA). Although the data are from a single state, their comprehensive nature allows us to observe outpatient procedure activity by all ASCs serving traditional Medicare patients within the state. We also noted that Florida is home to a large share of the nation's Medicare population—second only to California in terms of size. ²¹ We then calculated the full 2007–2011 fee adjustment by mapping each procedure to its corresponding (and publicly available) 2007 and 2011 ASC facility payment levels. We weighed each procedure‐specific price change by its corresponding volume of Medicare cases in 2007 to measure the effective industry‐wide price change faced by ASCs.

3. STUDY RESULTS

Figure 1 displays the total number of Medicare‐certified ASCs across the United States from 1990 through 2015. While positive growth has continued in the 2010s, it is markedly more subdued than the previous two decades. Moreover, there is a clear plateauing of ASC supply immediately following the fee schedule transition in 2008. The previous 18 years (1990–2007) are home to robust growth in ASCs—often by 5%–10% per year—and have an approximately linear upward trajectory. However, there is a noticeable flattening in the trend soon after the fee transitions begin, with the subsequent 8 years typically witnessing increases of 1% or less in the aggregate number of ASCs. In fact, there is only 1.9% growth over the final 5‐year interval between 2011 and 2015, which contrasts to the 5‐year period immediately preceding the Medicare policy rollout whereby the national supply of ASCs increased to 21.5% from 2003 to 2007. Appendix Figure 1 shows that this change in the number of facilities is also reflected in a flattening in the growth rate of the share of total outpatient procedures in Florida that were performed in ASCs.

FIGURE 1.

Total Medicare‐certified ambulatory surgery centers nationally, 1990–2015. Source: Medicare Provider of Services Files. A t‐test ( Appendix Table 1 ) of the difference in the rate of increase in the number of ambulatory surgery centers (ASCs) before (1990–2007) and after (2008–2015) the Medicare payment change was fully implemented indicate that the slopes are highly statistically different (p‐value = 0) [Color figure can be viewed at wileyonlinelibrary.com]

To add further context, we decomposed the supply trend from Figure 1 into annual entry and exit behavior by ASCs in Figure 2. A more dramatic change in firm behavior is evident for market entry decisions (Figure 2). In the years leading up to the Medicare fee change (2001–2007), more than 300 new ASCs are Medicare‐certified each year, with peak entry activity of approximately 370 new firms annually just prior to the implementation of the new fee schedule. However, the annual tally falls by more than 40% once the negative price changes are fully implemented (i.e., in 2011) and is roughly 55% lower during the post‐fee‐reform entry nadir. Importantly, for the first time in a quarter of a century, ASC entry barely outpaces ASC closures across the United States.

FIGURE 2.

Amount of entry and exit of Medicare‐certified ambulatory surgery centers, 1990–2015. Source: Medicare provider of service files [Color figure can be viewed at wileyonlinelibrary.com]

It is also noteworthy that the drop in ASC entry—and related erosion of ASC growth—does not reverse many years out, including when the broader US economy was in a period of robust expansion. The lack of recovery for ASC industry growth during later years challenges an interpretation that the Great Recession of 2008–2009 hindered ASC business opportunities. While the business cycle could have some influence on ASC industry activity, it is difficult to reconcile a persistent change in industry behavior with a temporary financial shock to the broader economy.

To further explore the potential role of the 2008 Medicare fee reforms, we examined the range of procedure‐specific price changes between 2007 and 2011 using our supplementary Florida data (Figure 3). The unweighted distribution in Figure 3 suggests a broadly positive business climate for ASCs in the aftermath of the fee reforms. Only 13% of the principal procedures identified in the Florida encounter data received a negative price adjustment from the 2007 level (data not shown). Yet, the unweighted pattern masks the importance of specialization within the ASC industry. Once we weighed the data by prereform (2007) procedure volumes, the median price change is negative (approximately −$40 in nominal terms) with most of the interquartile range falling at or below a $0 adjustment from 2007 to 2011.

FIGURE 3.

Distribution of Medicare ASC facility fee changes due to policy reforms unweighted and weighted by 2007 Medicare procedure‐level case volume. Source: Analytic data display the range of ambulatory surgery center (ASC) facility fee changes between 2007 and 2011 for principal procedures occurring in ASCs for Medicare beneficiaries identified in the Florida AHCA ambulatory database. The second box plot weights the range of price changes by the 2007 procedure volume. Both box plots exclude outside values for ease of viewing [Color figure can be viewed at wileyonlinelibrary.com]

We examined this further by considering the expected changes in prices from the perspective of ASC owners. First, we noted that according to Bureau of Labor Statistics public data, from 2000 through 2007, the health care sector experienced 4% or greater annual inflation (data not shown). If Medicare fees had been updated to keep pace with medical inflation between 2007 and 2011, and ASCs had maintained a constant level of Medicare procedure output during this period, ASCs would have received roughly a 14% increase in Medicare revenue. However, when applying the reformed 2011 Medicare prices to the 2007 procedure quantities in Florida, the industry's aggregate annual Medicare revenue would have increased by only 5.5% ( Appendix Figure 2 ).

Under the assumption that medical inflation at least partly reflects cost growth for health care suppliers, it is plausible that ASCs anticipated thinner Medicare profit margins by the time of full fee reform implementation while still facing the fixed costs of market entry. In this way, just as the persistence of positive profit margins would encourage greater ASC entry, a policy‐induced erosion of profit margins could have led to weaker entry—consistent with the sharp and permanently curtailed ASC entry observed in Figure 2.

4. DISCUSSION

While ASC growth has continued, it has done so with far less vigor in recent years, with a clear turning point occurring around 2008 (Figure 1). As far as we are aware, these striking trend changes have gone largely unnoticed across the research, industry, and policy making communities. We are limited in our ability to point to a causal factor or factors that underlie these industry‐wide shifts. We also acknowledged that the Medicare fee reform implementation coincided with the arrival of the Great Recession, which could have influenced ASC expansion through tighter liquidity constraints for investments and/or less financially attractive shifts in payer mix. However, as previously noted, there is no rebound in ASC supply evident during the economic recovery. The United States was in the mid of a historic economic expansion by 2015, and outpatient surgery volume grew steadily over this period. ²² Yet, ASC growth largely stagnated.

As an alternative, though not necessarily exclusive, driver of the observed pronounced trend changes, the empirical exercises in Figure 3 and Appendix Figure 2 suggest that ASCs could have expected markedly thinner Medicare margins for key procedures where the negative price changes predominantly localized. Although a wide variety of services witnessed positive Medicare price adjustments, individual firms and the broader ASC industry typically demonstrate a high degree of service‐line specialization. ⁴ For these reasons, the sharp change in ASC entry patterns seems more consistent with the Medicare fee schedule reforms beginning in 2008 and persisting since then, as opposed to short‐lived macroeconomic volatility.

If the timing of these events is not coincidental, then Medicare reimbursement policy may have farther reaching implications than previously appreciated, which aligns with recent work on a Medicare bundle payment initiative. ²³ Restraining ASC entry could partly shield hospitals from further case volume and revenue erosion in contested markets, which can financially benefit the hospital industry overall. However, permanently tilting the outpatient procedure market in favor of HOPDs at the expense of ASCs may also have long‐run implications for medical spending and care delivery efficiency across a variety of insurer and consumer types—that is, not just Medicare beneficiaries. Restricted entry of new facilities can contribute to increasingly concentrated outpatient surgery markets and undermine the benefits of competition for consumer and payers. ² Given the large difference in Medicare payment rates for services performed in ASCs and HOPDs, this also leads to higher spending on cases that might otherwise have been performed in ASCs. Moreover, the time period of our analysis also coincides with a period of rapid vertical integration between hospitals and physician practices, which seems to strongly influence physicians' outpatient surgery site of care decisions. ²⁴ This trend suggests another contemporary factor that can disadvantage an ASC industry that is already growing at a much slower pace. Taken together, there appears to be a variety of potentially important ramifications from weakening competition (intentionally or inadvertently) through Medicare payment policy.

Supporting information

Appendix S1 Supporting information

Munnich EL, Richards MR. Long‐run growth of ambulatory surgery centers 1990–2015 and Medicare payment policy. Health Serv Res. 2022;57(1):66‐71. 10.1111/1475-6773.13707