How a Turnaround Saved $225K for a Distressed Surgery Center: Q&A With Michelle Gigowski
Question: What were the biggest operational and financial problems in the Michigan ASC you helped turn around?
Michelle Gigowski: The need for further intervention came from an 18 percent year-over-year supply expense increase that raised a lot of questions among surgery center committee members. With supply expenses increasing approximately 6 percent, year-over-year, an 18 percent increase was surely a red flag that something just wasn't right.
The company hired me and an additional consultant in an attempt to identify where these additional expenses were being incurred. We began sifting through invoices and creating spreadsheets for the more expensive supplies. Over the course of a few weeks we identified a number of vendors and products that had significant price changes throughout the previous year.
There were a number of reasons for the increase, some of which include an increase in quantity, price inflation, recording errors, unfavorable case mix, a change in inputs and inventory waste or obsolescence.
Overall, case volume had only increased by 1 percent. Upon further review, we found that some items had significant changes in price over the course of the year. Distilled water, for example, doubled in price through our primary distributor. Suture expenses also increased significantly. Medication, cobulation wands (used for ENT procedures) and TVT slings also significantly increased the current supply expense due to price increases.
Q: How did those problems come about? What mistakes was the surgery center making?
MG: In my experience, overall surgery center culture was the largest contributor to losing money – culture with regard to settling for the status quo. In order to create value, a firm must exceed shareholder expectations. Through merely maintaining current operations without the drive to improve upon materials and inventory management, the surgery center slowly began to lose money as the supply expense continued to increase.
Partly due to a comfort between the purchasing staff and current vendors, the majority of the surgery center's accounts had been exploited. Nearly all contracts the surgery center maintained were significantly higher priced than other quotes we acquired while attempting to re-negotiate current and nearly expiring contracts.
When I refer to contracts, I'm not just talking about medical waste service or direct supply costs; I'm also talking about linen pricing and quality as well as building maintenance contracts. It seemed that the majority of our contracts were not priced competitively, upon further review.
Saying the "right things" but not doing "the right things right" was also an issue. The purchasing staff had a lot of great ideas with regard to ways to cut costs and save money but know one made sufficient time to follow through with these requests.
The worst thing the surgery center could have done was trusted their vendor representatives. In doing so, just as one example of many, our primary distributor overcharged our account significantly and in the process, we lost tens of thousands of dollars. Many contracts also became renewed prior to sufficient review and so prices increased significantly without question.
Q: How do you identify sustainable savings versus "one time" savings? Which is more important to prioritize, and which would you start with in the cost-cutting process?
MG: Value is created when a firm exceeds shareholder expectations. With regard to increasing surgery center value, one of two tasks must be accomplished. Value can occur through decreasing risks to the center, by increasing after tax cash flows or a combination of the two. There were a number of one-time savings events that saved the surgery center money but didn't necessarily increase overall value as these savings will not be realized into perpetuity. An example of these savings events includes returned inventory that would expire if left on the shelf, reimbursement from vendors who overcharged the center during the previous year and decreasing suture inventory as much more was maintained on the shelf than was necessary.
Sustainable savings events add value to the center because we will continually spend less money than expected into perpetuity, assuming the agreements are maintained. A few examples include renegotiating contracts and letters of commitment, switching surgical custom pack suppliers and reprocessing appropriate products.
In regard to prioritizing which type of savings you should target, I think in the beginning it is most important that you question every contract and never accept the first price that is presented to you by a vendor representative. I realized at least three vendors were overcharging the surgery center because a simple letter of commitment wasn't updated and so we were paying list price. Never pay list price.
The majority of surgery centers are linked to GPOs, which help decrease pricing; however, local contracts can also be developed to offer access to more competitive contracted pricing. We also realized that our medical waste pick-up service was charging over twice as much in comparison to other quotes I collected. I was able to have our medical waste service account credited and our contract amended such that we saved over $10,000 for the year.
In all honesty, I don't prefer contracts or GPOs. However, if you want the most competitive pricing available, from what I've experienced, you have to commit to a vendor so that you have access to competitive prices.
Q: What are some "quick fixes" to improve profits/cut costs that you think ASC administrators often miss?
MG: Great question. I think administrators often get so caught up in trying to improve profits that they forget the most important aspect to this business: the people factor. Patient care and quality cannot be sacrificed. At the same time, administrators need to work with their staff and get their input before they force a new product upon the center.
Gloves are a perfect example. The best of luck to anyone who is trying to transition physicians and staff to cheaper gloves. This is one item I decided is best to let be. The saving implications for our three operating room center just weren't significant enough in comparison to the push back received by staff. Additionally, the cheaper gloves were of lesser quality and the physicians preformed better in the gloves they preferred.
Other quick fixes include the following:
- Look to reprocessing companies for more cost effective supplies.
- Review all contracts and track expiry dates such that you have sufficient time to explore alternatives.
- Ask questions. I didn't realize Boston Scientific offered rebates on their urology supplies. TVT slings are expensive and saving a few thousand dollars each year due to rebates only adds to the bottom line. I had to ask about it, and sure enough, a rebate was available within our contract.
- Never accept the first offered price.
- Review your current surgical custom pack supplier. While it is quite the process to transition to a new supplier, our surgery center realized over $25,000 in annualized savings through the process.
- Tight inventory control. Don't purchase more than one month's supply of anything, if you are able. Inventory sitting on the shelf is money that the surgery could use towards equipment purchases or other needs. Keeping inventory to a minimum while still having adequate supplies for surgeries is very important.
MG: I have to go back to the people factor. Staff needs to understand they are instrumental in the success of the business. In order to create value they must also exceed their current expectations and hold themselves to a high standard. Once staff has ownership in the decisions of an ASC, they work harder to accomplish similar goals. Once staff has ownership and trusts the center, it's a beautiful thing. Once you have employee buy-in, you can do anything. It's an investment but well worth the time if you truly want to run a successful business.
Q: In your experience, what are the biggest roadblocks to implementing or identifying cost-cutting options?
MG: The people and the physicians. Here, I currently work for a physician owned surgery center and so it's a little easier to get physician buy-in. Staff must understand why these cost-cutting ordeals are worth their efforts. Once the people are on board, everything seems to fall into place. This, however, is much easier said than done.
Q: How did you manage to achieve a high ASC value for the center? It's impressive to have a 7x EBITDA multiple in this healthcare environment.
MG: While I'd like to say the center is valued at a 7 X EBITDA multiple, I do not know for certain. Over the past year, the surgery center experienced over an estimated $220,000. Of these supply savings, $160,000 is sustainable. At a 7 X EBITDA multiple, that equates to over a million dollars of value creation. Even at a 5 X EBITDA multiple, the surgery center would have experienced $800,000 in value creation.
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