When Will ASC and HOPD Rates Converge?
The US Healthcare System creates its fair share of bizarre case studies. Its Unique employer-based insurance model, coupled with the absence of single-payor base care means that both pricing for healthcare services and quality of care can vary greatly. Advocates of the current system often point to the use of markets and competition - that an unregulated system will yield the best results. The problem is, that healthcare isn’t a normal market, and is subject to market failure: patients can’t be sure of the quality care they are receiving (which is one reason why doctors are required to be licensed and study for years and hence provide some protections against quackery) and the consumer / patient isn’t paying for most of their care - it is disintermediated from the patient and provider through the healthcare insurer.
All of which leads to absurd differences in pricing and care. In what other industry will someone provide the same service at the same location but be paid vastly different amounts?
Take a gastroenterologist who scopes two patients for screening colonoscopies at an ASC. The time taken will be the same (assume two cases per hour), the complexity will be the same, but in one of these cases the facility will receive $1,500 and in the other, around $550. Why? Because the patients have different insurance plans.
This disparity doesn’t exist in many other industries. Sure, lots of services differ in price for the same basic offering, but in these instances, the reasons are clear and based on market incentives. Take a hairdresser. Ritzy salons often charge over $200 for a basic men’s haircut, while the average Manhattan barber (at least in my experience) can still be found for around $30 bucks. You could argue that the quality of the basic service is similar, but the more expensive offering will likely provide a nicer environment, a focus on customer service, and if it’s somewhere like Frederic Fekkai, a ‘complimentary’ glass of champagne. But these two businesses are set up to target a different demographic, and will have very different price points and cost structures, and often, despite all the aesthetic differences and drastic variance in price, a similar profit margin. What you see less often is the same hairdresser, at the same location, charging wildly different amounts for the same service.
That’s not to say it doesn’t happen, and when vendors do price discriminate, they are really just pursuing the microeconomic theory ideal of ‘segmenting demand’. I have a friend who proudly flaunts her huge diamond ring, except for two situations when she turns it around so people can only see the band: when she’s on the subway, or when she’s dealing with contractors. She believes (and is likely correct) that if an electrician or carpenter is about to give a quote and then sees the huge ring, they will assume she has plenty of disposable income and will pad their quote, hoping the wealthy customer won’t notice or care.
But our colonoscopy example doesn’t fit this category either. In fact, it may be the wealthier patient whose plan pays less (say if they’re over 65 years old and using their Medicare benefit), while the less affluent patient might have a menial job at a large corporation that happens to provide Aetna PPO to its employees – and Aetna contracted with the facility at $1,500 per case. Here, the doctor (or facility) will get paid almost three times as much for scoping the lowly paid Aetna patient as they will for the wealthy Medicare beneficiary.
No wonder there is such a tide of support and enthusiasm for Value Based Care. What if we could price the value of the colonoscopy based on it’s actual future value to the health of the patient, and its ability to save the health system and society money.
The two patients above, however, are not the most egregious example of healthcare mispricing. What if we take the example one step further and assume that these two patients are seen at a hospital outpatient department or HOPD (basically an ASC owned by a hospital), rather than an ASC? Now the Aetna plan will pay $3,000 and the Medicare plan will pay around $1K. In this instance you have the same doctor, doing the same procedure, but because it’s at a different location, reimbursement is far higher. Are hospitals regulated to a higher standard than an ASC for this type of procedure? No. Are hospitals less efficient? Almost certainly. You could make an argument that hospitals do take higher-risk patients who are more likely to have an adverse event, and hence the procedure is trickier and takes longer, but in this example (and most actual cases) patients are low risk and fine to be seen at either an ASC or a HOPD – it’s just that the HOPD will receive twice as much reimbursement.
This disparity in pricing began from the inception of ASCs in the 1970s. They were always the discount site-of-service, they were more efficient and less expensive, but they also had wildly less leverage with payors. Hospitals realized that just by virtue of owning an ASC and calling it an HOPD, they could extend their hospital rates well above what they would get through partnering with an ASC. Experts repeatedly talk about the ‘conversion of rates’ between the HOPD and ASC setting, but now at the start of 2024, there is still a mindboggling disparity. This hasn’t been lost on the private sector. Private hospitals and savvier groups of doctors have been converting ASCs to HOPDS which are still run the same as before — by the practice and its doctors. Revenue roughly doubles and profit increases many fold (if an ASC did $10 million of revenue and $2 million of profit, it could feasibly generate over $10 million in profit as an HOPD, a 5x increase). The doctor group then charges a hefty management fee so they are much better off than when they owned 100% of the ASC, and the hospital also takes its share, even though often it’s only role is lending its name on paper.
Fortunately, hospitals are taking the threat of reimbursement convergence seriously, and acknowledge that hospitals are generally an inefficient site of care (as a hospital administrator who partnered with us in a couple of ASCs used to say, the hospital reminded him of when Captain Willard stumbles upon a besieged platoon in Apocalypse Now. “Who is in Charge?” Captain Willard asks. A scared young man says in reply: “ain’t you?” While we will continue to work with hospitals to help them bring cases out of their buildings and partner with doctors to create efficient ASCs, there will continue to be limitations to progress until the payors start acknowledging that the ASC is a preferred site of service and until they either offer more attractive rates, or stand up to the hospitals and reduce their reimbursement. We agree that the hospital deserves a higher reimbursement, and that a selling point of the ASC is that it’s a low-cost site of service, but paying double for the same service? This remains one of the most egregious disparities in an industry that is already full of contradictions.
