Why Orthopedics Is the Darling of ASC Investments

Outpatient surgery is the vanguard of modern healthcare and the future of surgical and medical innovation. Having gone through the worst pandemic in modern times, with its resultant bailouts and cost to the coffers, the healthcare industry is looking for ways to save money moving forward. U.S. medical costs average the highest per pupil in the world, and it’s not sustainable anymore. The powers that be are looking for breaks in this clouded sky, and that break is coming in the form of the migration of surgeries to outpatient settings.

I have spent the last 20 years building and running ASCs across the Midwest, and that experience has taught me to respect the Marvellian power of these surgical facilities. ASCs are safe, convenient and save money. This is evident in orthopedics more than any other surgical specialty.

Speaking from an investment perspective, orthopedic ASCs are financially lucrative. I have done simple ophthalmology cases and complex spine cases in surgery centers. Pound for pound, orthopedics reigns supreme — and will continue in the future. It is possible for an ASC to succeed without orthopedics, but an ASC whose orthopedic volume exceeds 25% will see much smoother sailing on the otherwise choppy seas of all its other economic pressures.

According to The American Joint Replacement Registry 2023 Annual Report, the volume of orthopedic outpatient procedures now outpaces those done inpatient by 33 times. Now, with the addition of total joint replacements performed in ASCs, the number of orthopedic cases in hospitals is falling more rapidly than ever before.

Orthopedics is the darling of the ASC in relation to profitability. It tops the list in revenue per case, even though it ranks fourth in volume (21%) behind gastroenterology (32%), ophthalmology (26%) and pain management (22%). Nevertheless, it is the revenue per case that matters, not the volume. In the last three years, hospitals have lost thousands of dollars on inpatient hip and knee replacements. As these cases move to the profitable ASC landscape, such statistics portend well for entrepreneurs looking to invest in the space.

Why Is Investing in the ASC Market a Good Idea?

From 2013 to 2018, approximately 990,980 orthopedic surgeries were performed in the outpatient setting. During that time, ASC orthopedic procedures increased from 31% to 34%. That growth continues to be buoyed. The number of orthopedic cases performed in an outpatient setting saw an 84% increase from 2022 to 2023.

The compound annual growth rate from 2013 to 2018 (CAGR) increased, respectively, for the following procedures:

• 3% for lumbar microdiscectomy
• 8% for knee arthroscopy
• 4% for anterior cruciate ligament
• 4% for carpal tunnel release
• 2% for arthroscopic rotator cuff repair
• 5% for bunion repair (P < 0.001 for all)

While the average total costs were 26% lower than at hospitals, average technical fees were 33% lower at the ASCs than their inpatient counterparts. One stunning finding was that from 2013 to 2018, the mean total costs for hospital procedures increased by 2.5% annually, while the mean total costs at ASCs decreased by 0.1% every year. These statistics are not lost on the insurance companies.

What Is the Catch?

Orthopedic surgery is a white elephant for us ASC owners. The cost and effort to do total knee or total shoulder replacement surgery far surpass that for gastroenterology or urology cases. That cost translates into a net loss on your ledgers. That loss compounds if expense and staffing costs are not cautiously monitored.

When considering investing in an ASC, an essential item of scrutiny is to vet the strength of the facility’s billing and coding departments. ASCs will bleed money if their staff isn’t well-versed in the complexity of orthopedic coding.

The other important item is the ASC’s orthopedic involvement (quantitative) and contractual prowess with insurers (qualitative). Besides some reckoning on the split in the Medicare/private insurer mix, an ASC should also have a low denial rate for surgeries. Nowhere is this more important than in the workers’ comp and personal injury world of orthopedics.

The startup costs for orthopedic surgery can be monumental. We routinely spend upwards of one million dollars on orthopedic instruments and equipment at our surgery centers. A rough breakdown of these costs is as follows:

• Orthopedic trays. These are fine instrument trays that are further divided into (usually) shoulder trays, knee trays, etc. A typical shoulder tray costs $50,000-$60,000, and a knee tray costs $40,000-$50,000. At least two of each are required onsite.
• Orthopedic drills and saws. The sticker price on these shocks you down to your bones (pun intended). Drills can cost upwards of $50,000 each, and a selective surgeon would want at least two onsite in case one gets unsterile. In that case, the not-so-fussy surgeon will settle for a few minutes and wait to flash the drill quickly.
• Orthopedic saws and blades run $20,000-$30,000.
• Ortho towers cost more than $100,000.
• Miscellaneous surgical supplies run about $25,000 for the initial purchase.
• A large sterilizer that can accommodate orthopedic and neuro instruments and is routinely more than a foot long costs $150,000-$200,000.

If that sounds like a large sum of money, wait until you factor in staffing costs. A typical orthopedic outpatient case will include:

• At least one Anesthesiologist
• Registered Nurse
• Nurse Circulator
• Assistant Nurse
• Scrub Tech
• One to two Sterilization Technicians
• At least two well-trained Post-op Nurses with orthopedic experience.

A typical ortho case can last from 30 minutes (carpal tunnel release) to one to three hours for knee or shoulder arthroscopy to well over four hours for a total knee or total hip replacement procedure. Add up the staffing costs, and you can expect to spend up to $2,000 per hour on variable expenses.

What Is the ASC Income from Orthopedic Procedures?

Medicare has a total cost allotted for specific eligible procedures. The explanation of benefits (EOB) generally includes what portion of this total cost goes to the physician, what part goes to the facility, and the 20% “patient responsibility,” which is their out-of-pocket costs.

For example, CPT code 27440 (arthroscopy, knee, tibial plateau) incurs an ASC total cost of $9,240, Medicare pays the facility $7,391 and the patient pays  $1,847.

A breakdown of CPT codes and facility fees paid by Medicare:

*Patient pays 20% of this fee; Medicare pays 80%.

The Bottom Line

A broad range of orthopedic surgeries are now performed in the outpatient setting, including ASCs. And the numbers are growing. ASCs have proven to offer cost-effective yet safe alternatives for low-risk patients who do not want the inpatient experience. Seven recent cost studies showed an average cost savings of a minimum of 17.6% to a maximum of 57.6% for outpatient procedures compared to the same procedures done in hospitals.

The total medical knowledge doubling curve is introducing new technology and innovations that will result in safer surgery and an expansion of the number of eligible procedures. As the healthcare system changes rapidly, evidence-based medicine will lead to the expansion of the ASC orthopedic menu of surgeries allowable, whether third-party payors like it or not. This is good news for the investor considering putting their money into the ever-growing ASC phenomenon.

Orthopedics leads the way in profitability per procedure, even though it’s fourth on the list according to volume. Yet, in ASC profitability formulae, the profit per procedure gives the best value to the entire ASC bottom line.

Orthopedic procedures pay well across the board. In an ASC, they cost less to do, result in better outcomes, and offer convenience for surgeons and patients alike. Simply, there is no real downside to investing in an ASC that offers orthopedic surgery.

The financial rewards for these cases can be very impressive. An ASC that performs 200 to 300 mixed orthopedic cases annually can expect a profit of more than $2 million from this specialty. The good news is that this field is here to stay in the outpatient world.

I end with a saying by Andre Gide, “You cannot discover new oceans unless you have the courage to lose sight of the shore.”

Investment in ASCs is a rewarding option for surgeons, industry and private equity. Although these settings can be fraught with risks and perils, facilities that are established and managed right will be successful.