5 Steps to Avoid Critical Mistakes in Building and Operating a Surgery Center
1. Under-promise and over-perform. Mr. Skowron says due to the current economy and reimbursement environment, rates of return expectations for surgery center investors need to be scaled back from years past. "Selling historical rates of performance to potential surgeon investors will lead to disappointment," he says. "But even as the ASC market matures, returns can still expect to be healthy and continue to out-perform the stock market."
He says most surgeon investors are relatively sophisticated when it comes to the stock market, and they understand that an 8-10 percent rate of return is reasonable to expect in the last 10 years. "Real estate investment trusts, which is another avenue physicians have pursued as an alternative, had returns of 10-12 percent," he says. "I think physicians can expect ASC rates of returns to exceed those for alternative investments, but they should not expect to accomplish the 40-50 percent rate of return that management companies have quoted in the past."
He says while ASC investments may have a lower rate of return than in previous years, the investment is still a sound business decision for most physicians. "I would say to them, 'You're already spending your time performing the surgeries, and you're probably spending a lot of unproductive time in the hospital," he says. "While the ROI might not be what it's been in the past, you will still be more productive and able to accomplish more surgeries and see more patients in your office when you're done with surgery."
2. Spend time researching physician volume for the base budget. Mr. Skowron says as hospital joint venture ASCs become more prevalent, hospital board members are increasingly enforcing operating agreement terms. This generally applies to two operating agreement items: non-compete clauses and Stark regulations. In the past, he says non-compete clauses were generally not enforced because volume was not a concern. As hospitals see volume going outside the non-compete area, however, they are increasingly using non-compete clauses in the operating agreement to force surgeon partners to return the volume to the center. "If there are a few disappointing quarters, hospital board members are quick to point to the terms of the operating agreement," he says."
He says hospital board members are also increasingly concerned about compliance with federal regulations — often more so than individual surgeons. "Hospital joint ventures are starting to cite the one-third rule embedded in Stark regulations," he says. This rule mandates that an investing surgeon perform at least one-third of his procedures that may be performed in an ASC setting at the investment entity ASC if the investment is in a multi-specialty center. "I'm seeing hospital partners using the one-third rule to force out non-performing surgeons from the partnership," he says. "This is a new development."
He says to avoid problems with physician volume, ASC leaders need to spend more time with individual surgeons, reading the operating agreement before they sign it. "Often, surgeons sign quickly, and then when these issues come up at board meetings in the future, they say they weren't aware of these features," he says. "A better informed investor is a more trusting investor."
3. Institute a culture of flexing staff to meet volume. If your surgery center exists as a joint venture with a hospital partner, it's crucial to immediately instill a culture of flexible hours with your staff. Mr. Skowron says surgery centers have historically been successful because they can operate with a more flexible schedule than a hospital. "This means the ability to schedule cases vertically and close on the days when there is no volume," he says. "Labor costs are minimized, and cost per case is lower — that is the hallmark of a successful and profitable ASC." He says joint venture ASCs may struggle with employees who are used to working in a hospital environment, where the schedule is five days a week regardless of volume.
Mr. Skowron says it's important to start from the "top down" by hiring an administrator who understands the importance of flexing staff. Staff members should be told from day one that the surgery center will close if the schedule is empty. He says the surgery center can also cross-train employees to make it easier for nurses to pick up extra hours when volume drops. "A nurse can be doing pre-op calls on days where there is no volume, rather than actually touching patients," he says.
4. Diversify payor and specialty mix. Dependence on too few payors or specialties can spell problems for an otherwise well-run surgery center, Mr. Skowron says. For example, if a surgery center performs four different specialties but depends on 75 percent Medicare reimbursement of total payor mix, the reimbursement from the remaining 25 percent — coming from commercial payors — must be robust enough to make up for poor government payment rates. Depending on strong contracted rates from one or two payors is a losing battle, as insurance companies are increasingly ramping up efforts to reduce costs as they struggle to meet their minimum medical loss ratios. "They have to spend 80-85 percent of their money on healthcare, so they're looking to providers as the avenue to reduce their costs," Mr. Skowron says.
He says this means it's crucial for surgery center leaders to analyze physician payor mix before they join the center. "In the initial budgetary process, we often ask doctors about their volume by procedure," he says. "We need to spend as much time asking about volume by payor. We should strive to recruit physicians that will ensure a diverse payor mix." This can be difficult in a small market, where surgery centers may not have the luxury of picking and choosing their physicians. But surgery centers in mid-sized to large markets should be wary of picking up physicians whose payor mix will increase their dependence on one major insurance company.
He says dependence on too few specialties is also an issue. "From year to year, we don't know which specialty CMS is going to tackle to try to reduce reimbursement," he says. "Over the last few years, GI and pain were the targets, and they left orthopedics and general surgery alone. Next year, they may target those specialties." If your center performs a majority of GI cases and CMS drastically reduces the rates for GI procedures, commercial payors will follow and your reimbursement will take a significant hit. This means surgery centers should continually look for possible areas for expansion — particularly in specialties with diverse patient ages. While cataract surgeries are generally performed on 80 percent Medicare patients, ENT, orthopedics and general surgery have diverse patient populations and can help diversify payor mix.
5. Pay attention to minimum staff levels required by accrediting and government bodies. Mr. Skowron says surgery center boards tend to staff at the minimum level required given the projected case volume, in order to cut costs. He says this can be a mistake considering national accrediting bodies and state departments of health are cracking down on minimum staffing levels per operating room and number of beds. "More federal and state dollars are being put into the enforcement of these areas, so be aware of that when you are building a surgery center," he says. "Surgery centers should really plan for a cushion of FTEs to always meet the minimum standards of the accrediting bodies."
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