After decades as a hospital operator, Tenet shifts its focus to surgery centers

The company’s surgery centers far outnumber its hospital portfolio, and its ambulatory earnings will account for nearly half of overall earnings next year.

Tenet Health got its start as a major hospital operator in the U.S. and can trace its hospital business roots as far back as 1969. But it may be time to think of the Dallas-based company as an ambulatory surgery center operator, first, and a hospital chain, second.

Following its latest acquisition, Tenet’s ASC footprint will be nearly five times larger by the number of facilities than its hospital portfolio, and its ambulatory earnings will account for nearly half of the company’s overall earnings next year, executives recently said. That’s a significant leap from about six years ago when ambulatory represented just 4% of the company’s earnings.

“From a stock perspective, I think they’re going to get more credit now for that ownership of the surgery center business than ever just because of the size contribution,” Brian Tanquilut, an analyst with Jefferies, said.

Still he noted they will likely retain their image as a hospital provider first given that half its business (and earnings) are subject to the dynamics of the hospital space.

Tenet will now operate up to 310 ASCs in 33 states following its $1.1 billion cash deal to buy up to 45 centers from SurgCenter Development.

Tenet has billed its purchase from SurgCenter Development as a transformative deal, crowning itself the leading musculoskeletal surgical platform.

SurgCenter Development is one of the larger ASC operators in the country. The Towson, Maryland-based firm has developed more than 200 centers since the company was officially established in 2002. SCD’s business model calls for its physician partners to maintain majority ownership while SCD provides consulting and capital.

In fact, Tenet will pull ahead of the pack and will operate the most ASCs compared to its competitors, according to various public data.

Amsurg, an ASC operator under private equity-owned Envision, controls more than 250 surgery centers, according to its website, followed by Optum’s 230 centers under its Surgical Care Affiliates brand.

OwnerNumber of ASCs (fully or partially owned)
Tenet Health310
Amsurg (Envision) 250
Surgical Care Affiliates (Optum) 230
SurgCenter Development122
HCA121
Surgery Partners111
Total Medicare-certified ASCs in U.S.5,700

Still, those large players only control a sliver of the overall market. There are more than 5,700 Medicare-certified ASCs operating in the U.S., according to MedPac’s latest March report.

The market is so fragmented because, historically, a handful of doctors could come together and open up a small surgery center with a few operating rooms, Todd Johnson, a partner at Bain and Company, said. Johnson noted there are not that many deals like this out there, which is why it’s significant that Tenet was able to gobble up 45 centers in one swoop.

“We’re a long way from this being a market where any individual operator’s got 30% of market share. There’s just so many of these out there,” Johnson said.

What’s so attractive?

Regulatory and reimbursement changes and patient preference continues to fuel certain procedure migration away from hospitals.

“For payers, typically, the surgery rates are 30 to 40% less than the same procedure that’s done in a hospital outpatient department. So, payers certainly value the economic value proposition of ASCs,” Johnson said.

Just recently, regulators cleared the way for more procedures to be done in ASCs. CMS is eliminating the list of procedures that must be performed in a hospital, drawing ire from the hospital lobby. The inpatient-only list will be completely phased out by 2024, creating even more growth potential for surgery centers. Come Jan. 1, total hip replacements will be covered if performed in an ASC, a huge win for ASC operators.

It’s why hospital operators like Tenet have been keen to expand their surgery center footprint. The centers attract relatively healthy patients for quick procedures — eating into hospitals’ revenue and margin.

“This further move only solidifies the fact that they are trying to diversify their revenue streams, and, frankly move into a more attractive economic profile of procedure types — not trauma and COVID but rather scheduled surgeries they can run in and out like a factory but with really good clinical outcomes,” Johnson said.

To this point, Tenet leaders said the new SurgCenter Development centers generate higher margins and have minimal debt.

Patients also tend to prefer ASCs, Johnson said. Plus, as a lower cost option it can be persuasive for patients, especially those with high-deductible health plans.

Long-term strategy

Tenet has continued to bet on the shift from inpatient to outpatient services following its purchase of USPI in 2015.

The purchase set Tenet up to be a serious competitor in the space, establishing a portfolio of 244 surgery centers when the deal was announced. It illustrated Tenet’s intent to build a broader portfolio.

At the same time, it has whittled down its hospital portfolio, divesting in markets where it isn’t the No. 1 or No. 2 player as it seeks to hone its most competitive segments and markets.

Just last year, it announced plans to largely exit the Memphis, Tennessee, market with the sale of a number of assets including two hospitals, urgent care centers and the associated physician practices.

In 2018, Tenet shed all of its operations in the U.K. and eight hospitals across the U.S. 

That long-term strategy was made clearer last week when Tenet announced its sale of its urgent care business to FastMed. By selling off its 87 CareSpot and MedPost centers, Tenet said it will allow the company to further focus on its surgery center business.

Tenet has been keen to tout its position of musculosketel procedures — a high growth area compared to other procedure types such as gastroenterology. A 2019 report from Bain and Company expects that orthopaedic and spine procedure volumes will increase the fastest over the next few years.

With the SCD centers in the mix, CEO Ron Rittenmeyer said, “this transaction ensures Tenet will essentially double down and further deepen our concentration in these high growth areas of the future.”

Moody’s: Hospital financial outlook worse as COVID-19 relief funds start to dwindle

https://www.fiercehealthcare.com/hospitals/moody-s-hospital-financial-outlook-worse-as-covid-19-relief-funds-start-to-dwindle?mkt_tok=eyJpIjoiWTJZek56Z3lNV1E0TW1NMyIsInQiOiJKdUtkZE5DVGphdkNFanpjMHlSMzR4dEE4M29tZ24zek5lM3k3amtUYSt3VTBoMmtMUnpIblRuS2lYUWozZk11UE5cL25sQ1RzbFpzdExcL3JvalBod3Z6U3BZK3FBNjZ1Rk1LQ2pvT3A5Witkc0FmVkJocnVRM0dPbFJHZTlnRGJUIn0%3D&mrkid=959610

For-profit hospitals are expected to see a financial decline over the next 12 to 18 months as federal relief funds that shored up revenue losses due to COVID-19 start to wane, a recent analysis from Moody’s said.

The analysis, released Monday, finds that cost management is going to be challenging for hospital systems as more surgical procedures are expected to migrate away from the hospital and people lose higher-paying commercial plans and go to lower-paying government programs such as Medicaid.

“The number of surgical procedures done outside of the hospital setting will continue to increase, which will weaken hospital earnings, particularly for companies that lack sizeable outpatient service lines (including ambulatory surgery centers),” the analysis said.

A $175 billion provider relief fund passed by Congress as part of the CARES Act helped keep hospital systems afloat in March and April as volumes plummeted due to the cancellation of elective procedures and reticence among patients to go to the hospitals.

Some for-profit systems such as HCA and Tenet pointed to relief funding to help generate profits in the second quarter of the year. The benefits are likely to dwindle as Congress has stalled over talks on replenishing the fund.

“Hospitals will continue to recognize grant aid as earnings in Q3 2020, but this tailwind will significantly moderate after that,” Moody’s said.

Cost cutting challenges

Compounding problems for hospitals is how to handle major costs.

Some hospital systems cut some costs such as staff thanks to furloughs and other measures.

“Some hospitals have said that for every lost dollar of revenue, they were able to cut about 50 cents in costs,” the analysis said. “However, we believe that these levels of cost cuts are not sustainable.”

Hospitals can’t cut costs indefinitely, but the costs for handling the pandemic (more money for personal protective equipment and safety measures) are going to continue for some time, Moody’s added.

“As a result, hospitals will operate less efficiently in the wake of the pandemic, although their early experiences in treating COVID-19 patients will enable them to provide care more efficiently than in the early days of the pandemic,” the analysis found. “This will help hospitals free up bed capacity more rapidly and avoid the need for widespread shutdowns of elective surgeries.”

But will that capacity be put to use?

The number of surgical procedures done outside of the hospital is likely to increase and will further weaken earnings, Moody’s said.

“Outpatient procedures typically result in lower costs for both consumers and payers and will likely be preferred by more patients who are reluctant to check-in to a hospital due to COVID-19,” the analysis said.

The payer mix will also shift, and not in hospitals’ favor. Mounting job losses due to the pandemic will force more patients with commercial plans toward programs such as Medicaid.

“This will hinder hospitals’ earnings growth over the next 12-18 months,” Moody’s said. “Employer-provided health insurance pays significantly higher reimbursement rates than government-based programs.”

Bright spots

There are some bright spots for hospitals, including that not all of the $175 billion has been dispersed yet. The CARES Act continues to provide hospitals with a 20% add-on payment for treating Medicare patients that have COVID-19, and it suspends a 2% payment cut for Medicare payments that was installed as part of sequestration.

The Centers for Medicare & Medicaid Services also proposed increasing outpatient payment rates for the 2021 fiscal year by 2.6% and in-patient rates by 2.9%. The fiscal year is set to start next month.

Patient volumes could also return to normal in 2021. Moody’s expects that patient volumes will return to about 90% of pre-pandemic levels on average in the fourth quarter of the year.

“The remaining 10% is likely to come back more slowly in 2021, but faster if a vaccine becomes widely available,” the analysis found.

 

 

 

 

MedPAC’s report to Congress: 7 takeaways

https://www.beckershospitalreview.com/finance/medpac-s-report-to-congress-7-takeaways.html?utm_medium=email

Image result for MedPAC

The Medicare Payment Advisory Commission released its March 2020 report on Medicare payment policy to Congress, which includes a chapter analyzing the effects of hospital and physician consolidation in the healthcare sector.

Here are seven takeaways:

1. Medicare’s Insurance Trust Fund is likely to run out without changes. Trustees from Medicare estimate that the program’s Hospital Insurance Trust Fund, mostly funded through a payroll tax, will be depleted by 2026. To keep the fund solvent for the next 25 years, Medicare trustees advise that the payroll tax immediately be raised from 2.9 percent to 3.7 percent, or Part A spending to be reduced by 18 percent.

2. MedPAC recommends boosting payment rate for three sectors:

  • Hospitals. MedPAC recommended a 3.3 percent raise in Medicare payments for hospitals next year. The commission said it wants to give hospitals a 2 percent boost overall and tie the other 1.3 percent to quality metrics to motivate hospitals to reduce mortality and improve patient satisfaction. Currently, CMS has scheduled a 2.8 percent increase in 2021 Medicare payments.
  • Outpatient dialysis services. MedPAC recommended that the End Stage Renal Disease Prospective Payment System base payment rate is raised by the amount determined under current law. This is projected to be a boost of 2 percent
  • Long-term care hospitals. The commission recommended a 2 percent increase in the payment rates for long-term care hospitals in 2021.

3. MedPAC recommends unchanged payment rates for four sectors:

  • Physicians: Under current law, there is no update to the 2021 Medicare fee schedule base payment rate for physicians who treat Medicare patients. MedPAC is recommending that CMS keeps the physician rate the same as it is this year.
  • Surgery centers. MedPAC recommended eliminating an expected 2.8 percent payment rate bump for surgery centers next year. It said its decision was due to not having enough cost data from surgery centers.
  • Skilled nursing. MedPAC is recommending skilled nursing facilities receive no change to their base rate next year to better align payments with costs while exerting pressure on providers to keep their cost growth low.
  • Hospice. MedPAC recommends that the hospice payment rates in 2021 be held at their 2020 levels

4. MedPAC recommends payment rate reductions for two sectors: 

  • Home health. The commission recommended a 7 percent reduction in home health payment rates for 2021.
  • Inpatient rehabilitation hospitals. MedPAC is recommending that CMS reduce the payment rate to inpatient rehabilitation facilities by 5 percent for fiscal year 2021.

5. MedPAC builds on its recommendation to revamp quality programs. MedPAC is furthering its recommendation to replace Medicare’s four current hospital quality programs with a single hospital value incentive program. MedPAC said it believes that this recommendation would provide hospitals  higher aggregate payments than they would get under current law.

6. MedPAC’s findings on hospital and physician consolidation. MedPAC said that consolidation gives providers greater market power, which has a statistically significant association with higher profit margins for treating non-Medicare patients. Higher non-Medicare margins also are associated with higher standardized costs per discharge. But the direct association between market power and standardized costs per discharge is statistically insignificant, the commission found.

“The effect of consolidation on hospitals’ costs is not clear in theory or from our current analysis. From a theoretical standpoint, the merger of two hospitals could initially create some efficiencies and bargaining power with suppliers. But over time, higher prices from commercial payers could loosen hospitals’ budget constraints and lead to higher cost growth, thus offsetting any efficiency gains,” MedPAC’s report states.

7. MedPAC’s findings on the 340B Drug Discount Program. MedPAC was asked to analyze whether the availability of 340B drug discounts creates incentives for hospitals to choose more expensive products than they would without the program. MedPAC studied the effect of 340B market share on higher drug spending on cancer treatments between 2009 and 2017. The commission found that for two of the five cancer types studied, 340B participation boosted prices by about $300 per patient per month. However, the boost in spending attributed to 340B was much smaller than the general increase in oncology spending, which includes rising prices and the launch of new products with high drug prices. For example, cancer drug spending grew by more than $2,000 per patient month for patients with breast cancer, lung cancer, and leukemia/lymphoma.

“The MedPAC report released today uses rigorous analysis and finds little evidence 340B participation influences cancer drug spending. Modest differences may be attributable to the types of patients treated in 340B facilities. The safety-net hospitals that participate in the 340B drug-pricing program are essential providers of cancer care in this nation, especially to patients who are living with low incomes, those living with disabilities, and patients requiring more complex oncology care,” said Maureen Testoni, president and CEO of 340B Health, an association that represents more than 1,400 hospitals participating in the 340B program.

Access MedPAC’s full report here.