Orthopedic surgeries accelerate migration to ambulatory surgery centers, medical device companies adjust strategies

A year ago, Dr. Brian Gruber opened Integrated Surgical Services in Phoenix, converting a former grocery store into an ambulatory surgery center (ASC) for outpatient orthopedic procedures.

"The whole premise was to have control over the patient experience," Gruber said. "Hospitals are our friends, but in some large institutions, you have limited say."

Physicians say ASCs give them better control over costs and patient experience while keeping expenses lower than hospitals. By purchasing their own equipment and focusing on a single specialty, scheduling surgeries and running operating rooms are more efficient, and they add that it is also more professionally fulfilling.

"Having your own space, your own ASC, from a surgical standpoint, is fantastic. We really enjoy being able to do things directly," Gruber said. "You don't have to go through tons of people, all the red tape. Just do it. If you want to give someone a financial break, you can do that too. Having that capability and power is really liberating."

Gruber is one of hundreds of physicians who have opened ASCs over the past decade. According to the Ambulatory Surgery Center Association, a lobbying group representing these facilities, the number of ASCs nationwide now exceeds 6,000, up from more than 5,000 in 2010. Orthopedic procedures in particular have accelerated their shift to outpatient centers, partly due to the pandemic and partly due to Medicare's increased willingness to pay for ASC surgeries. Total knee replacements were added in 2020, and total hip replacements in 2021.

Seeing an opportunity, medical device companies are increasingly catering to ASC needs, offering equipment financing programs and even forming teams to assist with building and designing surgery centers. For large expensive equipment such as surgical robots, more companies are offering pay-per-use, leasing, and installment plans.

Ivan Tornos, chief operating officer of Zimmer Biomet, wrote in an email that many hospitals have established capital equipment procurement budgets, while ASCs may seek more flexible financing options.

"Many are seeking cashless options to acquire capital equipment and services, along with implant and disposable purchases, to offset the significant costs required for future construction, thereby improving operating cash flow/preserving credit lines during the surgical volume ramp-up," Tornos said.

Orthopedic device manufacturers expect the number of procedures performed in ASCs to rise, but that does not mean the total volume of surgeries will increase—they are just shifting to a different setting, said Shagun Singh, an analyst at RBC Capital Markets.

"Whether this brings more people into the funnel remains to be seen," Singh wrote in an email. "(Reconstructive surgery) is a mature market that grows 3-4% in a normal environment. Compared to other underpenetrated medical device segments, the potential for market expansion may be smaller."

Nevertheless, the shift has prompted medical device companies to form dedicated teams to work with ASCs.

Johnson & Johnson subsidiary DePuy Synthes estimates that 21% of orthopedic procedures are performed in ASCs, and its U.S. vice president of ambulatory surgery center business, Andrie Leday III, said the company has an ASC team that provides customized solutions for surgeon entrepreneurs and ASC administrators. DePuy's assistance includes capital projects to purchase equipment, as well as help with coding and insurance reimbursement.

"Although this trend was already advancing for clinical and economic reasons, COVID-19 accelerated the shift," Leday wrote in an email.

Stryker, the largest orthopedic company by revenue, estimates that 10% of joint replacements are performed in ASCs and expects that proportion to double over the next five years. Chad Evans, Stryker's general manager of ASC and neurotechnology sales, wrote in an email that hundreds of ASCs are built each year. The company can assist with the initial planning, design, and construction of new ASCs—from waiting room furniture to implants, stretchers, and other equipment.

Singh noted that while competitors such as Johnson & Johnson and Smith & Nephew have dedicated teams working with ASCs, Stryker is more "overweight" in that market than its peers.

"They are actually years ahead of many people because they really have architects," she said. "They can send architects to build you the entire operating room, the entire ASC configuration. Then they will sell you everything."

ASC advocates say that because they do not bear the overhead costs of running a hospital, they can perform procedures at lower cost with similar outcomes. According to ASC Association data, Medicare pays ASCs 55% of what it pays hospital outpatient departments for the same procedure. For total knee replacement, Medicare pays ASCs $8,222, compared to $12,088 for hospital outpatient departments, according to Medicare's price lookup tool. Nevertheless, patients pay higher out-of-pocket costs at ASCs because for high-cost procedures, Medicare has an out-of-pocket cap at hospital outpatient departments but not at ASCs.

According to healthcare data company Definitive Healthcare, ASCs performed 16.5% of knee replacements and 12.1% of hip replacements in the U.S. in 2021. Although Medicare now covers both procedures in ASCs, the association has been lobbying the Centers for Medicare and Medicaid Services to include shoulder and ankle reconstructions and lumbar fusions in surgery centers.

Despite reimbursement differences, the ASC Association wrote in a September 13 letter to CMS that ASCs typically spend the same on implants and devices as hospitals. In fact, hospitals are more likely to buy in bulk through large purchasing agreements and get lower prices. To offset costs, physician owners seek funding or strike deals with device companies.

Partnership models for equipment procurement

Gruber partnered with Stryker when building his ASC. Through a joint venture with the company—where the company provides capital in exchange for a five-year purchasing commitment—he was able to acquire some of the facility's large equipment, such as the Mako surgical robot used in joint replacement procedures. Other large equipment like ultrasound and C-arms are typically financed.

While some physicians may choose to mix and match equipment, Gruber chose to source everything from Stryker, he said.

"For me, Stryker has the largest service lines. They have so much equipment," Gruber added. "Working with Stryker is the 'shortcut button.'"

In many cases, physicians band together and seek financing from private equity firms to help cover the costs of opening a new facility. They can also seek joint ventures with hospital groups, such as Tenet, which has spent billions building its outpatient surgery division.

New Mexico Surgery Center Orthopaedics in Albuquerque opened in 2000, formed by the physician group New Mexico Orthopaedics in partnership with Ortholink, which provided financing and signed a management contract. Now, a local hospital also holds a minority stake, but the physician group retains the largest share, said Dr. Bill Ritchie, an orthopedic surgeon with the group.

Ritchie said the ASC favors Zimmer Biomet products because of the company's focus on total joints. Additionally, it sources products from multiple vendors, seeking volume discounts on disposable items such as lights, cameras, power systems, and drills. For surgical robots, the company chose "the manufacturer with whom we have the highest volume," with the contract structured as a lease, reducing costs through increased usage.

Leveraging scale for pricing

Bulk purchasing is key to the success of large groups that operate hundreds of ASC facilities. At Surgical Care Affiliates (SCA Health)—an outpatient surgery company with 320 facilities owned by Optum, an insurance company based in Eden Prairie, Minnesota—the number of joint replacements performed annually nearly doubled from 2019 to 2022, said Amanda Conroy, who oversees the total joint replacement and spine service lines.

This allows SCA to set the prices it pays device suppliers for total joint replacements.

"This is the first time in our company's history that we've been able to do this collectively. It saves our patients millions of dollars," Conroy said. Lower costs also benefit the insurance company that owns SCA.

Without the capital that hospitals can mobilize, SCA uses what Conroy calls "creative solutions" to acquire expensive equipment, including surgical robots, specialized operating tables, and imaging equipment. It decides case by case whether purchasing equipment or leasing is more cost-effective.

Working with equipment suppliers is key, said Brandon Hollis, regional vice president at Amsurg, which operates more than 250 ASCs in the U.S.

"For hospital systems, capital procurement is much simpler, and in the ASC industry, we see many large expensive devices, including robots, X-ray machines, and microscopes... suppliers have done a good job offering different types of payment plans," he said.

Implications for device companies

The shift from outright purchases of expensive equipment to leasing or financing is reflected in device manufacturers' quarterly earnings.

Both Stryker and Zimmer Biomet (the third-largest orthopedic company) said the shift has reduced upfront revenue from their surgical robots, which help surgeons place knee and hip implants.

Stryker reported that sales of its Mako surgical robot grew 19% year-over-year in the second quarter of 2022, although the mix of deals reduced revenue per quarter. The company also said the proportion of its Mako robots sold to ASCs versus hospitals is gradually increasing.

"Over the past six months or so, we've seen more deals being financed rather than outright purchases, actually shifting more toward lease agreements," CEO Kevin Lobo said on an August 2 earnings call.

Zimmer Biomet, meanwhile, said about 30% of its ROSA robot installations are in ASCs.

Although medical device companies currently receive the same amount regardless of setting, RBC Capital's Singh said that could change in the future.

"ASCs are lower-cost settings with lower reimbursement. So at some point, I do expect some pricing pressure in the ASC setting, which could affect our medical device companies, but we haven't seen it yet," Singh said.