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8 Steps for Surgery Centers to Get Out of Debt & Stay There

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In a healthcare environment with increasing expenses and decreasing reimbursements, it's easy for providers to fall into debt, and hard to get out. Ambulatory surgery center administrators can take these steps to decide whether they are in too deep and to take affirmative steps to climb out.

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1. Look at changes in expense and income. When surgery centers find themselves in unmanageable debt, the first issue to consider is change in expense and income and to ask yourself – where does the problem lie?

Linda Jackson on ASCs"Ask whether the expense increased or income declined" says Linda Worton Jackson, Partner and Founder of Salazar Jackson, a premier business boutique law firm based in Miami. "Look at reasons for those changes and decide whether adjustments can be made. For example, one critical supply might have increased in price, so maybe it's time to change suppliers or find a substitute for that supply. On the income side, maybe the number of patients has declined. Determine the reason and then look for solutions."

When there is a problem with patient or payor mix, surgery center administrators should work with their physicians to attract a higher patient volume or work with a different demographic within the community.

"There are practical things people can do to maximize revenue," says Ms. Jackson. "Sometimes management isn’t doing an adequate job, or the center expanded too quickly. Before taking legal action, I advise clients to take business and practical steps to make sure they are doing everything possible to stay out of debt."

2. Factor future payments into the current situation.
Even if you aren't in troublesome debt now, consider what payments may be coming due in the future and how today's economic environment might impact them. If debt is accumulating and you are able to pay today, don't put it off until tomorrow.

"You have to meet debts as they come due and anticipate large debts coming due," says Ms. Jackson. "If you have a loan on the property that will mature soon, look at that far in advance because banks are generally not renewing loans right now. Times have changed, and they aren't rolling over those loans anymore even if you have made every payment on time. You don't want to find yourself scrambling at the last minute with no other options."

Providers must also think about patient volume in their area. Elective procedures have decreased in most places over the past few years, which hit surgery center patient volume hard. "Their customer base has gone down, so surgery centers need to adjust accordingly," says Ms. Jackson. This might mean not taking on new projects or finding ways to cut costs instead of enhancing revenue.

3. Cut costs where possible.
Seriously consider where costs can be cut, whether its unnecessary personnel, reduced hours, reduced overhead or renegotiating supply contracts. Consider your options for filling unused space or selling off extra capacity.

"There are quite a few ASCs that were over-built from a size perspective — they were built around block ORs schedules instead of case volume," says Rustin Becker, senior vice president of strategic planning for ERDMAN, a healthcare consulting, facility planning, development, design and construction firm. "Then occupancy expenses as a percentage of total operating expenses get out of line and centers go into debt trying to cover the costs."

Surgery center owners must also pay attention to qualitative aspects of their ASC when making future projections.

"One of the things they should be looking at is provider age and provider retention in terms of the certainty of the volume being there in the future," says Mr. Becker. "Banks are starting to look at that more before extending loans or refinancing. If you have an ASC that is heavily dependent on a few providers for a substantial portion of their volume, and those surgeons are nearing retirement, how the ASC is going to replace that volume and manage their expenses is important. Banks are looking deeper into that and it's becoming more visible."

4. Maximize revenue collection.
Make sure you are managing your revenue cycle correctly to collect all revenue due to your facility. This could mean auditing past claims for underpayments and aggressively pursuing denied payments or unpaid patient copays.

"Auditing your own books and records has tremendous benefits," says Ms. Jackson. "A lot of centers today are hiring auditors to review their books and records to determine whether they are collecting everything both from the insurance and patient side. They hire professionals that specialize in collecting from insurance companies when the insurer challenges the claim."

In other centers, tightening the revenue cycle process could make a big difference. "If you can, reduce the number of days claims sit in accounts receivable to effectively free up cash to reduce short-term debt," says Mr. Becker. "This will reduce interest expenses associated with short term debt. Reduce the operating expenses, which will put the group in a great position to refinance or restructure debt more favorably."

5. Refinance where possible.
Look at the ASC's debt service ratio, which should be in a 1 percent to 1.1 percent range. Banks want to see benchmarks around 1.25 percent to 1.5 percent range to loan money.

"If their need for debt would push a surgery center outside of those coverage ratios – that is a significant concern in their ability to obtain debt or refinance that debt," says Mr. Becker. "The other thing to consider is to look at it from a percent of operating expenses. Where debt costs and occupancy costs are above 10 percent of operating expenses for the facility, it's a concern."

Debt will further prohibit them from making strategic investments. "This debt could have an impact on ongoing capital reinvestment needs or disrupt their ability to distribute to invested partners," says Mr. Becker. "Where ASCs start to be challenged to meet distributions, there is a downhill affect. The surgeons become less interested in bringing cases into the facility."

During the refinancing process, leverage fixed assets to restructure the debt when possible. "Depending on their situation, ASCs can leverage their fixed assets, amortization would be over a long period of time, so effectively, the cost of servicing that debt would be lower than servicing shorter debt that is unsecured with higher interest cost," says Mr. Becker. "That would reduce the overall costs for the organization as a percent of operating costs."

6. Don't accept variable interest rates.
Surgery centers can prevent debt by avoiding variable interest rates. Be careful about the type of interest rates associated with any loan and make sure they won't change in the future.

"Over time, variable interest rates are going to move and that can have a significant impact on surgery center operating expenses," says Mr. Becker. "I believe ASCs are going to face a fair amount of pressure on reimbursement rates, inflation on labor and supplies that affect their operating margin and that could impact their ability to refinance debt."

For example, if the plan includes a balloon payment on a 10-year note, look forward to that period of time when you will have to replace that debt. Make sure your surgery center is in the financial situation to make those payments.

7. Restructure ASC operations.
Another option for surgery centers in debt is to restructure how the facility operates. Surgery centers can close one day per week or shut down one operating room to reduce expenses for heating, cooling and dehumidification.

"Control the facility expenses through the greatest way you can and identify other providers to bring volume into the facility," says Mr. Becker. "The other option is to consider joint venturing with other facilities in the market. We are seeing consolidation on several levels in healthcare, and if one or two underperforming ASCs in the market are willing to consolidate and divest an underperforming facility, that might be a good option if you don't want to sell the ASC to the hospital."

8. Consider Chapter 11.
When no other options are available, seeking a Chapter 11 reorganization in bankruptcy might be the right choice for owners to keep the doors open. Consider this as a real option only after every other option has been exercised, but don't wait too long to talk to a bankruptcy lawyer or to file.

"When the situation is challenging, talk to a bankruptcy lawyer early on," says Ms. Jackson. "Do some bankruptcy planning ahead of time so you know what your options are and what steps you need to take."

Being prepared ahead of time will put you in a better position when bankruptcy is the only other option available.

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