New Research: How Surgery and Recovery Centers Can Save Patients, Employers, and Taxpayers Billions

A new report out today by FGA Senior Fellow Josh Archambault highlights the numerous benefits of adding more competition into the health care marketplace by better utilizing Ambulatory surgical centers.

You can read the full report here and download a copy of the report below.

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EXECUTIVE SUMMARY

For too long much of the attention related to health policy has been focused on Washington, D.C. and the details of ObamaCare. This focus is largely misplaced; state policymakers can often play a more immediate role in lowering costs for patients by promoting competition and transparency among health care providers. One place to start is to allow for greater flexibility for patients needing elective surgery.

Ambulatory surgical centers (ASC) and recovery care centers (RCC) have proven to be lower-cost, high-quality care for patients and their employers. According to the U.S. Inspector General at the Department of Health and Human Services, taxpayers would save $15 billion and patients would save $3 billion, for those enrolled on Medicare, if surgeries were paid for at ASC rates, with no impact on quality. We estimate that in the private marketplace, the average family of four would save $525-$874 a year if all outpatient surgeries was paid for at ASC rates.

In addition, research has shown that the care at ASCs, on average, result in faster recovery times, more patient-friendly attention, with many doctors preferring them to an outpatient surgery department at a hospital. Yet, numerous hospitals have engaged in targeted campaigns against ambulatory surgery centers and single-specialty hospitals lobbying for stronger, more restrictive Certificate-of-Need statutes.

Legislators should ignore these efforts, and instead modernize their states’ regulatory framework to reflect the advances in surgery care, and promote a more patient-centered health system. They should exempt ASCs and RCCs from CON, if they are currently restrained, and set up licenses that allow for freestanding and affiliated RCCs if they do not exist. Any new regulations should narrowly address patient safety and protection, and allow for competition to flourish.

INTRODUCTION

Over the last four years much of the attention related to health policy has been focused on Washington, D.C. and the details of ObamaCare. This focus is largely misplaced; state policymakers can often play a more immediate role in lowering costs for patients by promoting competition and transparency among health care providers. Specifically, they can revisit the role of care settings such as ambulatory surgical and recovery care centers to unlock lower-cost, high-quality care for patients and employers.

The federal government’s long history of meddling in health policy has created a hodgepodge system that often rewards inefficient and ineffective care. As a result, state lawmakers find it increasingly difficult to address all of the distortions currently present in the market, but there are “low-hanging fruit” reforms proven to help local employers and patients better afford their health care. Put simply, governors and state legislators do have powerful tools to unleash a more affordable and patient-friendly health care system.

To accomplish this, state leaders must review the antiquated, restrictive regulations that fail to reflect current medical technology or appreciate the needs of patients. These regulations are insidious; while often justified as necessary for “patient-protection,” they primarily serve instead as barriers that protect incumbent players and block new and innovative provider options from entering the market. In many cases, these regulations have not only protected patients, then have done the opposite, resulting in worse health outcomes and further straining patients’ finances.

HOW GOVERNMENT POLICY PREVENTS LOW-COST, HIGH-QUALITY CARE

ObamaCare regulations are beginning to drive up premiums for millions of Americans, but health care costs have experienced inflationary growth for decades. This is largely due to the onerous regulations that are preventing the next “Southwest Airlines of health care” to emerge.(1) Yet there is hope—a handful of areas within the field of medicine (i.e. LASIK eye and plastic surgery) have experienced the “holy grail” of lower costs and better quality.(2)

For too long, “consumer protection” regulations have been used as a form of protectionism to keep innovative, lower-cost options out of the health care marketplace for patients. By contrast, in LASIK eye and plastic surgery, areas in which government regulations have simply focused on consumer safety, federal Medicare or Medicaid reimbursement policy has not been distortive. As a result, the quality of care throughout these procedures has increased while costs have dropped. This narrow focus is needed in many other areas of medicine.

State policymakers must continue to think outside the box to make health care as affordable and flexible as possible, particularly for patients enrolled in private plans. This involves continuous and comprehensive examinations of state regulatory environments, including Certificate of Need (CON) regulations. A successful effort to unravel these regulations allows for a more consumer-oriented health care system that will drive patient costs down.

Certificate of need

 

CON LAWS DRIVE COSTS HIGHER

Between the 1950s and the 1970s, policymakers faced the same issue we face today: health care costs rapidly growing, outpacing inflation by a wide margin.(3-4) Some policymakers believed back then that limiting the capital expenditures of health care providers would allow states to control these costs more effectively.(5)

In 1964, New York enacted the first Certificate of Need law.(6) This new law granted state bureaucrats the authority to determine whether new medical facilities, such as hospitals and nursing homes, were needed.(7) If the government did not believe the facilities were needed, it would not grant those facilities approval for construction.(8)

Not long thereafter, the American Hospital Association (AHA) began lobbying state and federal lawmakers to adopt CON laws.9 The AHA was lobbying for a regulation that kept new competitors from entering the markets of their members under the guise of “protecting patients” from rising health care costs. Although the current hospitals could raise their prices at will with no competitive pressure from new hospitals. In 1974, Congress enacted the National Health Planning and Resources Development Act.(10) The new law mandated that states either operate CON programs or lose federal funding for state and local health programs.(11) By 1980, every state except Louisiana had created a CON program.(12)

But, unsurprisingly, CON laws failed to deliver on their promise of controlling health care costs. Instead, evidence suggests that CON programs actually increase prices by reducing competition within the marketplace.(13-15)This is no surprise, as CON laws essentially create government-protected monopolies and oligopolies. To fully appreciate the detrimental impact of CON regulations, one must understand their technical nature.

OVER TIME CON WEAKENED IN SOME STATES, BUT NOT KILLED

After it became clear that CON laws were driving up the cost of care, the federal government repealed its CON mandate in 1986.(16) Since then, 15 states repealed their laws altogether.(17) Yet many states have continued to operate CON programs, albeit with less regulation than in the 1970s.(18)

In 2008, the Federal Trade Commission (FTC) testified before the Florida Senate about the state’s Certificate of Need laws.(19) The FTC noted that Florida had one of the most restrictive and wide-ranging CON laws in the nation.(20) For example, Florida is one of just 13 states that regulate sub-acute care and one of just 18 states that regulate hospice through CON rules in 2011.(21)

In its testimony, the FTC noted that Certificate of Need laws can create barriers for new health care competitors to enter the market.(22) The FTC concluded that these laws “are not successful in containing health care costs,” but rather “pose serious anticompetitive risks” detrimental to health care consumers.(23)

CON LAWS HARM PATIENTS

Recent academic literature has shown the direct impact of CON laws on patients’ health. Nationally-recognized CON expert Vivian Ho, of Rice University, for example, has found that eliminating CON regulations can actually reduce mortality rates for certain procedures like CABG (coronary artery bypass grafting) for heart surgery.(24) This makes sense. CON restricts new players that have incentives to increase quality and lower costs in order to attract patients away from established hospitals. Established hospitals with CON face no such quality and cost pressure.

REPEALING CON CAN REDUCE COSTS

Professor Ho also found that CON regulations appear to raise the volume of procedures and the average cost for specific services like cardiac and cancer care.(25) She and others have noted that states without CON regulations have experienced lower patient-care costs.(26) After dropping CON regulations for open-heart surgery, for example, costs for bypass surgery patients fell 4 percent in those states.(27) Competition fuels quality and cost control. CON eliminates competition giving patients little choice but to continue going to established hospitals that may be too costly or face no competitive consequence of performing unnecessary procedures.

CON REDUCES PATIENT CHOICE

There are many examples of how CON laws reduce competition, thereby increasing taxpayer and consumer costs. In 2005, for example, the U.S. Department of Justice (DOJ) discovered that two Vermont home health agencies had parlayed the federal CON law to enter into an agreement giving each other exclusive geographic markets.(28) As a result, Vermont consumers were paying prices that were much higher than those paid in states where home health agencies faced competition.(29) In 2006, the DOJ found that a hospital in West Virginia threatened a competitor with an objection during the CON process in order to force it to abandon its application for permission to build an open-heart surgery program.(30)

CON laws not only increase prices, they reduce quality and innovation. CON laws create barriers for new competitors who could provide better services than current market players.(31) Without competition, providers have few incentives to improve quality, operate efficiently, and innovate. With competition, providers must improve services in order to satisfy patients’ individual needs and preferences.

Both the FTC and the DOJ recommend that states with CON programs critically reconsider whether their programs are actually serving the needs of patients and citizens. One place to start with changing the overall system is to allow for greater flexibility for patients needing elective surgery. A less restrictive CON program opens doors for innovative and entrepreneurial companies to emerge, such as the Surgery Center of Oklahoma and the Valley Ambulatory Surgery Center & Valley Medical Inn in St Charles, Illinois. (More on these companies later.)

AMBULATORY SURGICAL CENTERS AND RECOVERY CARE CENTERS: THE EVOLUTION OF SURGERY

Innovations in medicine during the last 25 years have changed the face of surgical care. These advances, in both technique and the use and quality of anesthesia, have resulted in roughly 60 percent of all surgeries being performed in outpatient settings.(32-33) For historical context, 63 percent of all surgeries natioWhat is an ASCnally in 2005 did not require an inpatient overnight stay at a hospital, compared to 51 percent in 1990 and 16 percent in 1980.(34) Paired with changes in reimbursement policy, the number of outpatient surgery care visits has grown from 3.5 million in 1981 up to 17 million in 2010.(35) Major players driving this progress have been ambulatory surgical centers.

 

Outpatient surgery

In 2011, there were approximately 5,344 Medicare-certified ASCs in the United States.(36) California, Florida and Texas have the highest concentration of ASCs in aggregate terms. ASC growth has continued but has been significantly impacted, both positively and negatively, by changing Medicare reimbursement policy over the years.(37) Medicare changes reverberate into the private insurance market, as many private insurers index their reimbursements to Medicare payment levels.

Despite all these changes, a recent report from the U.S. Office of the Inspector General calculates that taxpayers will reap the benefit of lower costs for outpatient surgeries performed at ASCs:

taxpayer savings asc

The IG also noted that beneficiaries save additional out-of-pocket expenses due to lower cost-sharing:

“Beneficiaries saved approximately $2 billion during CYs 2007 through 2011 and could potentially save an additional $3 billion for the next 6 years because the ASC rates are frequently lower than outpatient department rates. In addition, beneficiaries[TB2] could potentially save as much as $2 billion to $4 billion more during the 6 years through CY 2017 if CMS reduces outpatient department payment rates for ASC approved procedures to ASC payment levels.”

This record of success has led the U.S. Office of the Inspector General, as far back as 1999, to endorse “greater utilization of ASCs because of the substantial cost savings to Federal health care programs when procedures are performed in ASCs rather than in more costly hospital inpatient or outpatient facilities.”(39)

The potential savings for the private marketplace could be even greater if all outpatient surgeries, regardless of where they were performed, were paid for at a similar rate as those performed at ASCs. Conservatively assuming savings of 30-50 percent at ASCs, we estimate that the average family of four would save $525-$874 a year if all outpatient surgeries was paid for at ASC rates. family savings

PATIENTS AND TAXPAYERS BOTH WINNING WITH ASCs

Research has started to validate the many benefits that ASCs are associated with for patients and doctors. They include:

  • Less Costly Care
    ASCs receive lower reimbursements than hospitals; therefore outpatient surgery is less costly in ASCs for those who are insured. They are also often significantly less expensive for the uninsured. (See Oklahoma Surgery Center case study.) This increased affordability is remarkable given that many ASCs often have the most cutting-edge technological advances, provide highly-personalized care and boast higher nurse-to-patient ratios.
  • Better Health Outcomes
    Economists Elizabeth Munrich at the University of Louisville and Stephan Parente at the Carlson School of Management found in a recent study of ASCs that,
    …treatment in an ASC is associated with better health outcomes, holding patient risk constant; in fact, high-risk patients treated in an ASC are less likely to be admitted to a hospital within 7 days of an outpatient surgery, and less likely to visit an ER on the same day as an outpatient surgery.”(41)
    Other scholars have noted that improved outcomes may be the result of specialization and repetition at ASCs. For this reason, some have referred to ASCs as a “focused factory.”(42)
  • Faster Recovery Times
    Munrich and Parente also find that, “After controlling for patient characteristics, patients spend nearly 26 percent less time in ASCs than in hospitals for outpatient procedures.”(43)
  • More Patient Friendly
    A 2009 MedPAC report noted that ASCs may also be gaining in popularity as they often “offer more convenient locations, shorter waiting times, and easier scheduling for patients”.(44)
  • Doctor Friendly
    ASCs offer predictability and efficiency in scheduling that outpatient departments at hospitals rarely do. Doctors say they are often frustrated that scheduled surgeries are delayed or moved due to an emergency department intake in a hospital setting. In addition, doctors express gratitude for the short turnaround time and specialized focus among nurses and other support staff at ASCs.

Yet politics have often played a role in reimbursement policy for ASCs. Munrich and Parente highlight that, “In response to arguments that ASCs face lower costs than hospital outpatient departments, the Centers for Medicare and Medicaid Services (CMS) froze ASC payment rates in 2003 and has steadily reduced ASC payments, while increasing payments to hospital outpatient departments, since 2008.” The result of this change, along with increased provider consolidation in the health care marketplace, has stunted the growth of ASCs compared to just a few years ago.(45) In addition, incumbent hospital players have been aggressive in lobbying to protect the status quo, and their place in it, as the financial stakes are very high

For those with private insurance, the growth of hospital services has become a leading cost driver. While hospital services paid by private insurance were less than $37 billion in 1980, by 2012 these hospital costs had skyrocketed eightfold to $321 billion.(46) Revenue lost to ASCs and doctors’

As a result, numerous hospitals have engaged in targeted campaigns against ambulatory surgery centers and single-specialty hospitals lobbying for stronger, more restrictive Certificate-of-Need statutes. Some have characterized actions by the American Hospital Association (AHA) as, “a full scale attack on niche providers” primarily through direct lobbying of elected policymakers and regulatory bodies.”(47) The result in many states has been regulations that deter new entrants and limit competitor organizations from investing in infrastructure and/or broadening the range of services offered at their facility. This outcome denies patients positive health and cost benefits explained above.offices are seen as a direct threat to hospitals.

CON laws

Differing state regulatory requirements have led to varying penetration of ASCs in the states. ASCs are more prevalent in states lacking CON requirements. In 2009, there were 27 states with CON laws that covered freestanding ASCs; 10 with CON laws that do not include ASCs; and 14 with no CON laws. In Florida, there are currently 633 ASCs, with two-thirds being freestanding entities.

Read the full report here, including all referenced research and notations.