Unfazed by competition? Consider NY’s challenge

State loosens CON limits on ASCs

Same-day surgery providers in New York state are expecting an onslaught of new operating rooms — as many as 100 due this year — thanks to a new state mandate designed to boost competition and improve patient access. Same-day surgery managers in other states are watching how similar trends in their own regions will affect providers.

The growth in new surgery centers in New York will exact a heavy price on new and existing facilities, industry insiders say. Reimbursement rates from commercial payers are likely to drop, and independent providers could be shunted out of business as payers become more selective about contracting.

Number of ASCs to double

As many as 26 new ambulatory surgery centers (ASCs) are expected to open for business in New York this year, virtually doubling the present number. Several more are being discussed in 1999, according to the New York State Association of Ambulatory Surgery Centers in Rochester. With reimbursement rates already down statewide and operating margins shrinking, facility administrators are bracing for difficult times.

"It’s an object lesson on survival," observes John Goehle, CPA, administrator of Lattimore Community Surgicenter in Rochester. Lattimore Community is one of about two dozen freestanding ASCs that will be hit by competition under a liberalized regulatory environment that is part of the new state mandate. Some facilities will be hit harder than others, depending on their position in local markets, Goehle says.

Providers in other states such as Pennsylvania and Maryland, where outpatient surgery cases are growing, may glean valuable lessons from New York, says Phyllis A. Sanford, president of P.A. Sanford and Associates, an ambulatory surgery consulting firm in Cockeysville, MD.

Providers need to worry about the consequences of sudden, unparalleled growth, Sanford warns. (For tips on how to survive the competition and data on recent growth trends, see story, above, and charts, p. 44.)

According to Sanford and others, what administrators in New York fear most has already happened in places such as California and Florida where ASCs have proliferated and competition has become keen under intense managed care penetration. Providers fear the following:

1. tougher competition from deep-pocketed local hospitals entering the market with their own well-capitalized ASCs or moving existing facilities to more favorable areas;

2. a concurrent invasion by large national ambulatory surgery chains such as HealthSouth Rehab Corp. based in Birmingham, AL, and hospital systems such as Columbia/HCA Health-care Corp. in Nashville, TN;

3. falling managed care payment rates as health maintenance organizations (HMOs) and other payers seize opportunities arising from a glut of operating rooms;

4. a disproportionate number of single and two-physician office practices calling themselves ASCs while undercutting licensed facilities in rates and raising concerns about clinical quality standards;

5. the virtual disappearance of independent "mom-and-pop" ASCs, which will be pushed out of the market as HMOs pursue contracts with larger, well-capitalized entities such as hospitals and chain clinics. "It’ll be the bigger fish eating the little fish," Sanford says. ASCs will inevitably have to affiliate with larger entities, or die, she adds.

New York state officials had other goals in mind last September when they lifted a seven-year-old moratorium on freestanding ASCs.

"The change was intended more for regulatory relief and reform, not deregulation," says Charles Murphy, director of the division of health facility planning for the New York State Department of Health in Albany.

State changed the game plan

But in lifting the moratorium, the agency also redefined the state’s regulatory standards for meeting certificate of need (CON) requirements. The old standard was population-based. It limited communities to one ASC for every 500,000 residents.

The new standard requires convincing evidence that a proposed facility will be financially feasible, will enhance patient access, provide charity care, meet state quality and safety regulations, and be cost-effective to HMO enrollees.

It also loosens the definition of a hospital-based ASC and permits hospitals to operate off-campus outpatient surgery departments (OPDs) in direct competition with licensed freestanding facilities.

The new provisions "fly in the face of the old CON standard by using financial feasibility as a test of unmet need," argues Margaret Alteri, RN, MPA, administrator of Harrison Center for Outpatient Surgery in Syracuse. Alteri is also the state’s surgery association president.

She worries that physicians will respond in droves to the relaxed restrictions, opening small single and multispecialty ASCs that will be little more than glorified office-based surgery practices. Many are likely to be financially backed by local hospitals as a way to draw business from outlying areas, she adds.

Whether hospitals directly enter the burgeoning ASC market remains an open question. Alteri says most will shun sole ownership because they already operate in-house OPDs. Furthermore, under a state law enacted last year, hospitals are required to negotiate all contracts with private payers, which likely will increase their financial risk and make new business ventures unlikely, she says.

But Goehle says the attraction for hospitals, especially those in poorer urban areas, to gain new business in prosperous suburbs, will be hard to resist. "It’s all about [making more] money."

Meanwhile, hospitals have hesitated to comment on the matter. According to state officials, St. Joseph’s Hospital in Syracuse plans to open a new freestanding ASC this year. It already operates a same-day surgery program that competes with Alteri’s Harrison Center.

Goehle and other ASC industry professionals worry that under relaxed restrictions, quality standards may suffer.

"The big attraction for physicians is that they’ll now have more control over their surgical practices. But whether they can ensure high quality is the question," he says.

Look to California

The state of California, which saw explosive growth in ASCs in the early 1990s, may offer some answers. Under growing managed care, physicians there rushed to build clinics and office-based practices. But many of them went under after trying to compete with national chains such as HealthSouth, which moved aggressively into the state, explains Terry Hawes, RN, president of the 150-member California Ambulatory Surgery Association in Sacramento and a facility administrator at HealthSouth.

In fact, the growth of all ASCs in California has slowed considerably, Hawes says. ASCs are fighting hospitals for business, while payers are ratcheting down rates for everyone. And many facilities that opened with great fanfare a few years ago have closed. Managed care has been a great equalizer, she says.

"They’ve made life tough," she adds.