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11 Ways to Cut Overhead Costs at Surgery Centers

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Tom Scott on cost cutting at ASCsWith increasing costs and decreasing reimbursements coming in the next year, it will be important for ambulatory surgery centers to cut overhead costs where possible to realize an impact on the bottom line. "Almost any cuts in overhead costs will flow directly to the bottom line as most facilities have fixed costs covered," says H. Thomas Scott, director of operations for Surgical Management Professionals. "Any expenses you can cut fall to the bottom line and have a huge impact on the distributable cash to the investors."

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Mr. Scott and Charles Dailey, vice president of development at ASD Management discuss 11 ways for ambulatory surgery centers to cut overhead costs next year.

1. Examine and reorganize materials contract structures.
Most ambulatory surgery centers are part of a group purchasing organization, either individually or with their management company. GPOs can help surgery centers lower materials costs by negotiating bulk contracts and restructuring old contracts so they are more beneficial to the bottom line.

"There is always room for improvement when we are watching how much we are paying for products at our centers," says Mr. Dailey. "A lot of centers are so busy that they don't look at how their contracts are organized and they could get better pricingCharles Dailey on cost cutting at ASCs if they reviewed those details. It takes some extra leg work, but it's worth it to jump from one price bracket into the next."

If you aren't part of a GPO, consider joining one. "A GPO can typically save you anywhere from 7 percent to 15 percent on materials costs," says Mr. Scott. "A good inventory system is a must so you can track costs of supplies and target the outliers to work with vendors for reduction in cost."

2. Focus on organization in inventory management.
Materials managers at the surgery center should focus on organization when purchasing and maintaining inventory. Organization with stocked supplies is crucial because it leads to cost savings down the road.

"A lot of centers do inventory and purchasing by hand and eye, and things are lost," says Mr. Dailey. "It's hard to keep track of pricing. We encourage electronic inventory management systems. By partnering and recording inventory management there, it cuts down on their work load and decreases error, which yields cost savings. We see a significant reduction in our costs; there is a direct correlation."

3. Continuously renegotiate supply contracts.
Dedicate one person at the surgery center or management company to track the most commonly used items at the center and review those contracts annually. Renegotiating high volume contracts stands to save surgery centers the most money in the future.

"We use a lot of sutures in our surgery centers, and they cost a lot of money," says Mr. Dailey. "We renegotiate those contracts all the time for better pricing. A lot of centers also have a high volume of eye implants. I make a special contract for those and look very closely at negotiating the best rate for our volume."

These renegotiations take a lot of focus, so zero in on a few items and develop a relationship with those manufacturers and distributors. Also work with physicians to streamline implant choices.

"Some vendors will provide you the device and assist you in informing and training your physician as to the benefits of the lower cost device," says Mr. Scott. "You can also put the surgeon in touch with other physicians and specialists in the area that are using a particular implant so they can talk amongst themselves about the benefits of a particular device.  Keeping the physicians informed and getting their buy-in is what counts."

4. Reduce shipping costs with new contracts.
Shipping costs are significant for surgery centers ordering implants or other supplies on a regular basis, especially when those supplies are shipped overnight. There are several independent companies that can perform audits of the shipping logistics and pricing to help you negotiate a better contracted rate with shipping companies.

"With one ASC in Florida, which had a high volume of orthopedics and pain procedures, we were able to save $60,000 in shipping costs annually after renegotiating their contract," says Mr. Dailey. "We forecasted this savings and showed it to the surgeons, which was huge. People take shipping costs for granted because it's important, but it costs so much."

Renegotiating these contracts can have a significant impact on the surgery center's bottom line.

5. Purchase implants wholesale.
Several implants on the market today are considered commodities, which means they should be purchased wholesale from the manufacturer instead of from sales representatives at a mark-up. There are new companies forming to facilitate wholesale purchases of the most common implants for a lower price.

"They are like brand name pharmaceuticals because after the initial patent comes out they release the generic product," says Mr. Dailey. "The products are close to the same, but the generic costs less. There is a 60 percent cost difference per implant in some cases, which can make a big difference in overhead costs."

Not every implant will fit into this category, but surgery centers can save on implants and cases that do. "I think, over time, more people are going to use these quality implants because they are comfortable with them and the cost savings will be there," he says.

Physicians may be weary of switching from their name brands and sales representatives, so work with them to make sure the new devices are clinically viable. "Work with your physicians to identify supply choices that may have the same clinical results at a lower cost," says Mr. Scott.

6. Place drug orders electronically.
Look at how your surgery center orders pain drugs and anesthetics to see where cost-savings could occur. Many centers order manually with paper, but there are new platforms available online to make electronic purchases which are more organized and limit user errors.

"These applications on the computer can also highlight when you are ordering a name-brand drug that has a generic equivalent so you can decide which one you want to order," says Mr. Dailey. "People may not know there is a generic drug, so we encourage our administrators to use these applications."

These programs can also calculate the savings surgery centers achieve when ordering generic implants, which adds up to a significant amount by the end of the year.

7. Reprocess materials when possible.
Several implant companies — including large companies such as Stryker — have developed reprocessing branches. Take advantage of reprocessing services to lower implant costs and become more economical.

"There are companies that focus on reprocessing and they are safe," says Mr. Dailey. "The instruments are still effective after they are reprocessed, so you can get a second or third use out of them. This cuts down on the purchasing. I encourage people to take a closer look at reprocessing because there are services out there."

8. Refinance debt and renegotiate leases.
Most surgery centers have high building and equipment costs that aren't necessarily fixed. If these costs are problematic, refinance your debt on them because interest rates are low and banks may be willing to work on a new contract for the future. Surgery centers can also renegotiate leases on equipment.

"One option is to restructure equipment leases to a per procedure cost structure," says Mr. Scott. "If you are not using the equipment pretty consistently, you may be able to work with your vendor to pay for the equipment on a per use basis instead of a flat monthly rate."

If you do restructure the lease to a per use basis, the vendor typically brings in the equipment on a scheduled basis and removes the equipment. This may present some scheduling issues with your physicians that use the equipment.

9. Reconsider employee benefit plans.
Another way to lower overhead costs is to offer employees a health savings account instead of the traditional PPO plan. HSA premiums are typically lower than traditional PPO plans which will allow employers to save each month for each employee that  enrolls in a high deductible health plan. The employee can also contribute to their HSA account on a pre-tax basis and the contributed amounts build up in the account unlike a flex spending account were the funds must be used within a calendar year.

"The cost savings from switching to a HSA account can be considerable and should be considered," says Mr. Scott.  By involving the employee in the decision of how to spend their funds for healthcare has shown to reduce healthcare cost thereby helping to improve the surgery center's bottom line.

10. Send employees home on slow days.
Give your work schedule some much needed thought.  Do not over schedule staff on slow days and be open to sending employees home early if necessary.   In exchange for leaving early, you can still always employees accumulate paid time off or comp time for hours that were cancelled.

"It's always good for employees to take time off," says Mr. Scott. "It's better for their mental health to have time off. By spending some time on the schedule, you can plan for that time off around the slow times thereby reducing your employee-related costs. Allowing employees to carry over two and three weeks of PTO instead of taking the time off can have a real impact on the center."

Surgery centers can also eliminate overtime for employees to improve the bottom line.

11. Benchmark and set goals for next year.
It's difficult to benchmark a facility's costs because they are different depending on the types of procedures, location and surgeons involved. Find a system where you can drill down to cost data based on similar centers because you don't want to compare an orthopedic surgery center where surgeons perform scopes to ASCs where surgeons are performing joint replacement procedures.

"If you compare centers with different specialty mixes, you are going to get a different set of values," says Mr. Scott. "Supply costs per case are hard to compare, but you can use benchmarks from ASCA or similar facilities if you are with a corporate partner can provide a place to start digging deeper. Salary data can be a bit easier to benchmark using FTE's per case, cost per OR minute and other benchmarks."

Mr. Scott suggests benchmarks for salaries should generally be in the range of 25 percent of total net revenues. For cases per full time employee, you want to be around the 18 to 23 cases per FTE depending on the case mix.  Try to keep billing and equipment costs around 25 of net revenues if possible. "The closer you can get to the 25 percent range or even below, the better," he says.

More Articles on Surgery Centers:

5 Steps on the Road to Higher Profits in ASCs

5 Action Steps for In-Debt Surgery Centers

10 Statistics on Surgeon Compensation for Key ASC Specialties

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