From the CEO

Five Trends in the Evolution of Healthcare and ASCs

Prior to 2009, the industry was already facing many changes and challenges. Now that we have a new Democratic president, Democratically-controlled Congress and an economy seemingly spiraling out of control, the situation is even more complicated and filled with more changes. This article looks at five trends impacting healthcare today.

Consumer Trends
Now more than ever, the consumer is impacting the evolution of healthcare. Consumers today are much more informed and more likely to shop around to find a better deal with better care, particularly those enrolled in consumer driven health plans. They no longer take a physician's advice without question. They will ask for infection rates, request generic drugs to save on costs, and drive farther for a facility that meets their needs and wallet.

Consumers are also impacting the design and services offered at facilities. Patients are the heart of healthcare, and today's healthcare consumers place a high priority on accessibility, quality and personalization. Consumers no longer want to have to go to a large facility serving multiple health issues and have to park at a distance. They want easy access to convenient services that address their specific health issue.

The changes impacting healthcare by consumers are positive ones. Physician-owned facilities are well-positioned to meet consumer demands because they provide services in a convenient, efficient and cost-effective manner.

Economic and Financing Trends
The economy and access to capital is another factor affecting the development of new physician-owned facilities. Many experts point to the healthcare real estate sector as one which, while not gleaming, might be considered "bright" because healthcare needs are largely impervious to economic conditions. Regardless of the current state of the economy, people continue to become ill and require medical care, which necessarily requires a place in which to provide such care. In addition, there is a need to renovate existing facilities, since many were built years ago and do not meet the expectations of today's physicians and patients.

Credit for healthcare development projects remains available, but it is taking longer to structure the financing packages and the resulting loans are coming with more conditions. Lenders are deploying more stringent underwriting standards associated with increased equity requirements, investor loan guarantees, heightened pre-leasing requirements, tenant lease guarantees and other loan covenants.

Nueterra has found success in locating credit through regional banks rather than larger national lending institutions because regionals look at healthcare real estate investments favorably. Sale prices for healthcare properties have declined as a result of capital constraints and the overall condition of the economy. Fewer qualified buyers are competing for property acquisitions. Adequate credit appears available but transactions are challenged by the more in-depth underwriting requirements.

Short-term returns may be disappointing, vacancies will likely take longer to fill and market uncertainty will continue. While market conditions may be more difficult to navigate than in the recent past, viable healthcare real estate transactions are still being done.

Physician Trends
Perhaps the most significant trend affecting the future of healthcare is the issue of physician shortages. According to the Association of American Medical Colleges, one-third of active physicians are more than 55 years old and likely to retire by 2020. The percentages are even larger for specialties typically seen in ASCs: gastroenterology, 39 percent; orthopedic surgery, 46 percent; and, ophthalmology, 41 percent. The shortage continues to grow as the population increases, a static number of people become physicians and more physicians practice medicine part-time.

Adding to the issue of physician shortages is the problem of younger doctors not wanting to work as many hours as older physicians in order to have life balance. Items most important to physicians now are balance for time for family/personal life, flexible scheduling, none or limited on call requirements, minimal practice management responsibilities, career/income, practice income, long term income potential and the opportunity to advance professionally.

Physician-owned facilities are ideally suited to address many of these goals. Generally arrangements where a management company and physicians share in the equity and/or management of an ambulatory surgical center create attractive practice options for physicians. These models are usually equity-based, with the management company and selected physicians sharing the capitalization of the venture.

Physician equity partners often have significant control of day-to-day operations and, as co-investors, earn a return on their investment. Under a management service agreement, the center contracts administrative responsibilities with the management company who, as their equity partner, has aligned clinical and financial interests. Potential advantages to physicians include increased operating efficiencies and physician satisfaction, usually higher returns on investments, flexibility for both personal and professional interests, greater patient satisfaction levels, and shared control and management responsibilities.

Political Trends
Overall, ASCs are viewed positively by Congress. They do not suffer from some of the perceptions that weigh on physician-owned hospitals or have as many controversial issues associated with them. ASCs also support the government's focus on controlling healthcare costs, since they are reimbursed at a 35 percent discount to hospitals.

However, there are other significant issues affecting the future of ASCs and healthcare in general. The new administration and Congress have many ambitious goals, including increasing the number of Americans who have health insurance and mandating coverage for all children. One strategy they will likely use to achieve this goal is to require all employers to either provide health care insurance to their employees or to contribute toward the cost of coverage for employees.

These reform efforts will be challenged by the continuing increase in costs. According to the Centers for Medicare and Medicaid Services annual report, in 2007:

The bottom line is that cost pressures will continue to drive the government's healthcare decisions, so there has never been a better time for physicians to offer a cost-effective alternative for providing healthcare services through physician-owned facilities. In addition to the 23 states that allow physician-owned ASCs, several CON states are experimenting with pilots or short-term windows to allow for the development of new physician-owned facilities. That reinforces the fact that savvy government officials recognize the value physician ownership creates for payors.

Management Company Trends
Although ASC industry growth remains strong at 4 percent, most likely the number of companies in the industry will be reduced in coming years. As a result, there will be more acquisition opportunities. Acquisitions and the potential for restructuring or resyndication are strong, and the demand for outpatient services continues to grow. From a development standpoint, consolidation will occur through attrition in the market. Successful centers will be able to acquire physicians and partners from facilities closing.

Increasing numbers of physicians are seizing opportunities for more control over patient care, revenue and flexibility while still obtaining management help by partnering in a physician-owned facility. For them, partnering is a great option for reducing risk, achieving a better work-life balance and controlling expenses. These physicians have key requirements of management companies. It will be imperative for management companies to engage physicians in strategic decision making. Physicians will also look to hospitals with which they're affiliated to develop, communicate and implement a long-term vision for the collaboration.

Management companies now more than ever are important to the business model. The economy is affecting the opportunities for physicians to own. A management company can help recruit physicians and provide oversight, management, and working capital. Physicians want help dealing with the challenges of managed care, changing practice patterns, increasing regulation and paperwork, reconfiguring healthcare delivery, and improving quality and efficiency. If physicians choose the right management/development company, they can help with the challenges and help make it happen for the physician.

Written by John Schario, CEO, Nueterra Healthcare