Will ASC profits begin to fall?

Now, folks, I'm no economist, but if I were one, I'd find the ASC market in Pennsylvania to be pretty intriguing right now.

As you'll see elsewhere in this issue, a new state report suggests that profits for the state's ASCs have leveled out during the last fiscal year at about 21 percent, after growing 9.4 percent over the previous four years. This seems to be due to the dramatic growth in the sheer numbers of such facilities there, which numbered 232 this year. That's up from 48 in 1997.

In theory, falling margins are not a big surprise. Given the explosive growth in the number of such facilities in Pennsylvania, it's hardly surprising that margins haven't continued to expand. In fact, looked at one way, it's somewhat surprising that margins have remained this high, given the increased competition for patients.

The thing is, as we all know, oversupply of a particular service (notably, hospital specialty services) doesn't usually have the same impact on prices that it would it a more "rational" market. In fact, healthcare economic models are nuts. Oversupply can increase prices, and demand remains relatively stable despite price increases. So why the leveling out of margins (and, I'd imagine, prices) at Pennsylvania's ASCs?

Right now, simply sharing more patients seems to be the cause of the ASCs' profit-stall. However, I'll hazard a guess--and if you're a Real Economist, I'm eager to hear your much-better theories--that because they offer a comparatively simple service (no ED, no chronically-ill patients on third visits, predictable staffing levels), that over time fees will fall faster and harder than hospitals' ever would, further undercutting their future prospects.

Why? ASCs simply can't make the argument, to health plans, that the payers have to indirectly finance their money-losing but necessary operations. (And whether payers admit this or not, that's a powerful negotiating position--even stingy payers can't argue that hospitals have to have EDs.)

By this analysis, the threat ASCs pose to hospitals will erode significantly over the next few years, as health plans fall out of love with the "but they're cheaper than hospitals!" argument. What do you think, folks? - Anne