Expanded Outpatient Services Offer New Opportunities in Healthcare Provider Contracting
By David H. Glusman, CPA/CFF, FABFA, CFS, Cr. FA, Partner, Advisory Services
In healthcare, outpatient, virtual, and remote services are primed for growth. Traditional outpatient (OP) services, such as ambulatory surgery and imaging, are growing rapidly, and they are being supplemented by new, cutting-edge medical technologies. At the core of these new and expanded OP services are new partnerships and alternate arrangements between a wider range of provider organizations and physician specialties, as well as entrepreneurial developers and private equity.
The contracts that underlie the new services are changing also. They are becoming more elaborate and detailed, and often feature more complex and clearly defined responsibilities; new performance requirements; new financial terms; and additional business terms. Counsel needs to fully understand these complexities for both documentation and regulatory purposes.
Contracting for Traditional Outpatient Services
Ambulatory surgery continues to grow rapidly. From 2012 to 2017, the number of ASCs increased 5.1%, from 4,121 to 4,333. From 2017 to 2022, the number jumped 19.3% to 5,169 facilities1. The growth is being fueled by advances in surgery protocols, pressure from insurance carriers, and rapid expansion in Medicare-approved procedures. CMS recently proposed adding 267 new services, mostly concentrated in orthopedics and cardiology. New ASCs are being developed by ASC management firms, physician groups, private equity, and recently by health systems. For example, in Arizona, Banner Health implemented an ambitious strategy with physicians participating in multiple ASCs.
Ambulatory surgery is competitive and increasingly risky from a financial and operational perspective. Existing centers occupy prime locations with established volumes and referral sources. That means new centers must either capture some of the existing cases or develop new business.
Bringing Value to Provider Contracts
The competitive and risky environment makes contracting more important. Ambulatory surgery partnerships may involve several equity, management services, co-management, or medical directorship contracts. Attorneys can provide important value to their clients by carefully identifying all the details and issues that need to be included in the documents.
The key issues remain equity, control, and financial terms. The goal for all parties is to have a successful, high-quality center and achieve a reasonable return. There are also new considerations that should be addressed in the contracts. These include arrangements for contracting with payers, entering value-based arrangements with payers, performance standards, and future expansion. Other topics, such as buy-in, buy-out, and removal of shareholders must be contemplated. In some cases, complex tax issues and regulatory restrictions need to be considered if the transactions involve the sale or other changes within the physicians’ professional corporations.
The investment, return, and compensation arrangements in ASC contracts generally must meet the test of fair market value and commercial reasonableness. That review requires developing accurate capital, start-up, and operating budgets. Attorneys often overlook the value that budgets can provide in ensuring the success of new projects.
Pro forma budgets can be a tool to bring the parties together to work out many of the details of a new venture. Pro forma budgets contribute to successful projects in several ways. First, they include a realistic projection of the scope and volume of services and revenue. Second, they focus attention on longer-term planning by including multi-year projections. Finally, they focus attention on compensation and return projections that are realistic and meet the tests of fair market value and commercial reasonableness. Since pro forma budgets are a standard part of most fair market value determinations, internal financial staff or a hired consultant can take simple steps to ensure they are fully utilized.
Innovative Outpatient Services
Pro forma budgets play an equally important role in implementing new clinically and technologically advanced outpatient services. These services are commonly implemented through an arrangement between the developer and a provider organization, such as a hospital or physician.
Management services agreements (MSAs) are a common vehicle for implementing these next-generation services. MSAs face the same considerations that are standard in other contractual ventures, but MSAs covering new services face additional challenges associated with bringing together new partners and new services that lack an existing delivery model. The implementation of telehealth and other virtual services during the COVID pandemic is an example of trials that tested MSAs. In many cases, the initial implementation of telehealth was very inefficient and rife with technology, communication, and follow-up glitches.
Expanding outpatient services provides opportunities for healthcare attorneys to develop state-of-the-art contracts that will address myriad financial, regulatory, operational, and control issues and ensure the success of clients. Pro forma budgets are a tool that the parties and their attorneys can use to develop these contracts.
- Data from Ibisworld.com