In health care’s ongoing, uphill march from a fee-for-service revenue model to a value-based care model, outpatient surgery is a stellar performer.
In the last five years, more than 100 million Americans have had successful operations in ambulatory surgical centers (ASCs), which generally perform the procedures in the morning and release patients in the afternoon.
Historically, and still today, many kinds of surgeries that could be performed at ASCs are still often done in hospitals, despite costs that are typically much higher. These include cataract and other eye surgeries, gastrointestinal procedures such as colonoscopies, hip and knee replacements, various spinal surgeries, gynecological procedures, and cardiac surgeries such as pacemaker and battery replacements.
Surgical Care Affiliates (SCA), a $2.5 billion revenue company that has joint venture partnerships with 215 licensed and accredited ASCs, is trying to do its part to change that mix. It’s increasingly emphasizing value-based care (VBC), in which medical providers’ reimbursements are based on cost and quality outcomes rather than the volume of tests and procedures they perform.
While ASCs have an inherent cost advantage over hospitals, bringing VBC into the mix can reduce costs still further, as the surgical centers have monetary incentives to create efficiencies.
“The rate of health care cost growth in America — it’s now 18% of GDP — is unsustainable,” says Caitlin Zulla, finance chief at SCA. “So value-based care is one of our primary growth strategies.”
On behalf of the joint ventures, SCA negotiates value-based contracts with health care payers — insurance companies and Medicare. (It’s not yet looking to contract directly with large companies that self-fund their medical claims.) Currently, 62% of the joint ventures have a least one such contract in place.
Under the deals, which typically have terms of three to five years, the joint ventures agree to hit certain cost and quality targets. The latter may include infection rates, rates of patient transfer to hospitals, and the timing of antibiotic treatments. If SCA falls short, the payers get to claw back a portion of the reimbursements.
Zulla jokingly refers to the deals as “snowflakes,” because they’re highly customized. A key variable is the parties’ respective risk tolerances. SCA manages risks related to its supply chain and payments to ancillary providers, among others, that vary from one joint venture to another.
“The payers aren’t created equal,” Zulla says. “They all have different objectives and different viewpoints on outpatient vs. in-patient surgery.”
She adds, “A lot of my time is spent on thinking through our revenue rivers, creating tracking mechanisms to ensure we know where our risks are and where we’re performing, and addressing issues with our operations team.”
Naturally, such activities require a sophisticated FP&A operation, as does the company’s revenue recognition process.
To optimize revenue for a particular episode of care, the team needs to understand the care that’s to be given, size that up against payer contracts, calculate the expected reimbursement, bill it correctly, and collect it correctly.
That last piece becomes more complicated as patients take on an ever-increasing portion of financial responsibility for their care. Currently, about 20% of the company’s net revenue comes from patients.
“Our revenue recognition process is complex to begin with from an FP&A standpoint — we have to forecast what the procedures are going to be, who the payers will be, and what bad debt there could be,” Zulla says.
“Then when we layer in value-based care, we need to think through what reserves we need to cover clawbacks and when those might happen, and forecast that for 215 partnerships that are all very different. It’s complex.”
SCA is a former publicly held company that was acquired in 2017 by United Health Group, parent of the largest U.S. health insurer. SCA is part of Optum, UHG’s health services business, which comprises about a third of the parent’s revenue.
However, that doesn’t mean United Health Care is the preferred payer for SCA’s surgical centers. All of the insurers have reimbursement-rate structures that vary from market to market, and SCA seeks the best risk-adjusted rates in every market.
As the payers tend to also have market-specific leadership, forming relationships with those leaders around the country is an important aspect of doing business.
The process of contracting with the payers never winds down. Not only do the contracts top out at five-year terms, SCA is continually growing. The company expects to add about 20 new surgical centers to its stable this year. Earnings have averaged a 15% compound annual growth rate over the past seven years, according to Zulla.
When SCA forms a new joint venture partnership, it buys a share of the business — often 51% — from the surgeons that founded and own it. The surgeons thus get an initial liquidity event, plus access to market reimbursement rates, as well as a boost in business volume based on referrals from Optum’s primary care physicians and SCA’s relationships with payers.
SCA also provides the centers with volume-based discounts through its supply chain on surgical and medical supplies; billing and collection services; tax planning; and cybersecurity support.
Meanwhile, although SCA doesn’t negotiate directly with employers, Zulla stresses that all CFOs should have value-based health care on their radar.
Of course, even those that self-fund their medical claims contract with insurers to gain access to their provider networks. SCA, which self-funds, is based in suburban Chicago and has such a deal with Blue Cross Blue Shield of Illinois.
“Every self-funded employer is managing its own health care cost,” says Zulla. “As a CFO I’d much rather my teammate who needs an ACL repair to go to a surgery center in the network than go to a hospital where I’m going to end up paying twice as much for that claim.”