Tenet’s outpatient push comes as CMS moves the other way

The Centers for Medicare and Medicaid Services may be slowing payment reforms designed to transition some procedures from inpatient to outpatient settings, but that isn’t dimming confidence about Tenet Healthcare’s investments in ambulatory surgical centers.

Tenet’s latest move, announced Monday, is its $1.2 billion acquisition of SurgCenter Development and that company’s ownership stakes in 92 ambulatory surgical centers.

CMS has put a hold on phasing out Medicare’s so-called inpatient-only list and allowing reimbursements for some services conducted in outpatient settings. Evidently, Dallas-based Tenet is undeterred.

“I still think the growth is there,” said Mike Holland, a senior credit analyst with Bloomberg Intelligence. “You look at the volume of procedures—musculoskeletal, cardio—that are already being done outpatient and it still makes a lot of sense for Tenet, for a number of reasons, to be reducing its inpatient portfolio and growing its outpatient portfolio.”

Tenet is committed to offering healthcare services in the most appropriate settings, the for-profit health system said in a statement. “We and our physician partners believe outpatient services will grow over time and we work to design programs that are consistent with CMS guidelines,” the company said.

Once the deal closes, Tenet’s United Surgical Partners International division will own at least part of more than 440 ambulatory surgical centers in 35 states. The SurgCenter Development deal includes ownership interests in 76 facilities and another 16 in the planning stages. Physician-investors retain large stakes in almost all of those centers. The acquisition is expected to close in the fourth quarter.

Even without CMS action to allow outpatient facilities to bill Medicare for more types of procedures, ambulatory surgical centers still offer enough profitable services that Tenet will benefit, especially Medicare has paid for hip and knee replacements since 2018.

The SurgCenter Development facilities Tenet is acquiring have a case mix that is about 80% musculoskeletal, including hip and knee replacements and spinal procedures.

“That’s bread and butter for orthopedic surgeons and for centers,” said Roger Strode, an M&A partner in Foley & Lardner’s national healthcare practice. The SurgCenter Development deal is a “scale play” that boosts Tenet’s position with health insurers in the markets where the surgical centers are located, he said.

There are currently more than 6,000 Medicare-certified ambulatory surgical centers in the U.S., and more that don’t do business with Medicare, according to the Ambulatory Surgery Center Association. Tenet plans to open at least another 50 facilities in the next five years under its agreement with SurgCenter Development and the investors who own the remaining stakes in the facilities. That would give the health system at least partial ownership of more than 500 ambulatory surgical centers.

“They do appear to be outpacing the competition,” Holland said.

Fellow for-profit hospital chain HCA Healthcare operated 123 freestanding outpatient surgery centers as of the end of the third quarter. Surgical Care Affiliates—owned by UnitedHealth Group’s Optum subsidiary—runs more than 250 facilities. AmSurg, part of Envision Healthcare, also operates more than 250 sites.

Tenet intends to buy out at least some of the physician-investors who continue to hold stakes in the ambulatory surgical centers from SurgCenter Development. But the company should be careful not to cut doctors out of ownership completely, Strode said. “You don’t really see too many ASCs that are super, super successful when there’s no physician investment.”

Doctors are at least partial owners of 95% of ambulatory surgical centers, according to the most recent data from the Ambulatory Surgery Center Association. Physicians are full owners of 52%, doctors and hospitals have joint ownership of 21%, physicians and corporations share ownership of 15%, and doctors, physicians and hospitals jointly own 7%. Corporations are full owners of 3% and hospitals are sole owners of 2%.

Tenet could risk losing patients and revenue if it takes majority stakes in ambulatory surgical centers, which may spur physicians to take their business to hospitals instead, said Dr. Neil Badlani, an orthopedic surgeon at the Orthopedic Sports Clinic in Houston, Texas, who has published journal articles on the industry.

“If the majority is owned by physicians, it leads to a much more productive environment,” Badlani said. “It leads to a situation in which physicians feel more connected to the center to help with administrative tasks and recruiting other physicians and all the things that make physician ownership important in the success of a surgery center.”