Turning around an ASC is "like diagnosing and treating an ailing patient," says Dr. Lambert, who outlined the steps ASCOA took to help a small, southwest Florida multi-specialty ASC that was in debt to the tune of $2.5 million. The facility was only performing 80 cases per month (yet open five days a week), surgical equipment was poor, credit was so bad that vendors had to be paid upon delivery, and the physician-owners were writing checks from their personal checkbooks to meet payroll and buy supplies, he says.
"Surprisingly, this scenario is not as uncommon among the 5,000- plus ASCs in the United States as you might think," says Dr. Lambert. "Twenty-five percent are losing money, 25 percent are just breaking even. The remaining 50 percent are turning a profit."
Here are some of the steps ASCOA took to remedy the situation.
1. Increase case volume. "In most troubled ASCs, there are insufficient cases being done to be profitable, usually less than 3,000 per year," says Dr. Lambert. "We looked at all cases being done by partners and non-owner users to see if the owners were bringing all their possible cases to the ASC, and if not, why not — and what we could do to ensure they did."
2. Shed lower-reimbursement cases. "The average reimbursement must be above $1,000 per case; we often see centers that could be paid more per case by the commercial payors, if only they asked for it," he says. "Review the master charge list and renegotiate contracts to bring them in line with the market and what the hospital charges for the same outpatient procedures. Let under-paying procedures go where they are appropriately reimbursed."
3. Focus on producing an accurate income statement and balance sheet. "This will reveal the staffing costs, supply costs, total long-term debt and debt service," says Dr. Lambert. "Often, we bring a center to profit margins of 30 percent just by fixing these items in a matter of weeks, without recruiting extra cases."
In the southwest Florida ASC, staffing costs were 39 percent and supplies 28 percent of collections. Staffing and supply costs should comprise 20 percent of collections each.
4. Compress and cost-out cases. Thirty-three percent of collections drop to the bottom line when you case cost and do schedule compression, says Dr. Lambert.
"Determine how much it costs to do every case, and determine where waste is in supplies and time," he says. "When you show this information to the surgeon partners, they want it fixed immediately."
With average costs of $18 per minute for patient time in the OR, they have to be efficient, says Dr. Lambert, and something as small as not being late for cases can be a solution. To help move surgeons in the right direction, he advises tracking tardiness and making a "calculation of how much that cost all the surgeons in terms of their dividend checks — sometimes it's more than a thousand dollars a month," he says. "The peer pressure is unbelievable on the tardy surgeons."
5. Take another look at the lease. Go to the landlord, let the company know that without some relief, your ASC will have to pull out of the space, and negotiate a better lease with new terms.
"The landlord doesn't want to have empty ASC space," says Dr. Lambert, because it's very specialized space, making it difficult to fill as a result. Further, the landlord company "is generally aware they are above-market. We have been successful in negotiating lower rents for failing centers."
In conclusion, Dr. Lambert noted that one of the advantages of working with a turnaround company is that it can help secure better relationships and lower interest rates with banks, which results in drastic savings overall. Further, he says, improved interest rates and amortization schedules can significantly improve distributions.
"After taking over and implementing most of the techniques I've described, the southwest Florida ASC is now distributing a substantial amount per month to the partners," says Dr. Lambert. "This is a dramatic illustration, but there are very few centers that can't be improved and made to yield 40 percent profit margins."
Mr. Mallon agrees. Further, he says that "a few key issues can make up 80 percent of the difference in your operating margins." The case study ASC Mr. Mallon presented had racked up $600,000 in debt because it wasn't accredited and had difficulty getting physicians to commit to it. After two years, of losing money, the physician-owners lost hope. Here is some of his advice for reforming ASC finances.
1. Focus on the charge master. When ASCs were working off the Medicare groupers, it was common for gross charges to commercial payors to be 200 or 300 percent of Medicare. However, when you consider that those grouper rates were 50 to 60 percent of costs, getting two to three times those figures barely covered operational costs, let alone paying down debt, says Mr. Mallon. He advises trying to uncover the charges of area hospitals to help you in negotiating rates with commercial payors. Once you do that, he advises, you should bring in high-reimbursement procedures.
2. Add high-reimbursement procedures. More complicated but higher-paying procedures such as orthopedics and general surgery can open up new avenues of reimbursement for ASCs.
"We do spine in half our centers and gastric banding in three or four, which gives us flexibility," says Mr. Mallon. "The bottom end of our business, such as pain management, we're letting go to the doctors' offices. You have to treat more acute patients if you want to remain competitive."
Such complex procedures, which can be done in the ASC at a lower cost to insurers than in the hospital setting, can help an ASC improve its payor mix by drawing in more commercial payors, which are always looking for savings; orthopedics cases in particular can mean drawing in worker's compensation business. In some cases, you may need to look at performing the cases on an out-of-network basis — a tricky area to navigate.
"We've seen centers being paid all over the map on an out-of-network basis," says Mr. Mallon.
To avoid such a scenario, have a thorough understanding of each payors' requirements for billing out-of-network (such as obtaining pre-certification), and have a system to check the status of claims payment regularly and to follow up for reimbursement, especially if the payor sends the check to the patients and not the ASC.
3. Market the center. The example center had an older surgeon who was able to get the center built financed and opened.
"Clinically, he was excellent," says Mr. Mallon. But he had a "decades-long reputation" of "being a loner, not having partners. What often has to happen in the turnaround is that the person who is the founder needs to take a bit of a back seat" so the ASC can be better marketed to new and existing physicians.
"The marketing side is really key; [ASCs] do not spend enough time and effort on it," he says. "We look like McDonald's in terms of profit margins, except McDonald's is spending 15 percent of revenues on marketing."
The most efficient way to market, he says, is to go directly to physicians' schedulers.
"Partners act like they work for their schedulers — they're going where they're told to go, they're too busy to think about directing office staff," says Mr. Mallon. "Schedulers may have been [working for the physician] for decades, scheduling with hospital; they know what they can do and can't do. Quite often in our model, 20 to 40 percent of patients are out-of-network, so it's more problematic to get them scheduled. It requires a better relationship with schedulers.
"Our centers' administrators take off with food under their arms at least quarterly to meet with schedulers. They have cell phones; if there's a concern, schedulers can call them for quick decisions on self-pay patients or other issues."
4. Take financial control. "It's amazing how many physicians we see whose ASCs or practices have had embezzlement," says Mr. Mallon. So, the first thing Regent does when it goes into a center is get control of the cash. "You have a clerk who makes $8 to $12 an hour making deposits of $3 million to $5 million a year, a [materials manager] purchasing $1 million to $1.5 million a year in supplies. There are opportunities to embezzle."
The solution, he says, is a lock box system that lets the bank handle all cash ("It's not expensive when you consider the costs of cash being lost, stolen or not handled properly," says Mr. Mallon.). In addition, the person who posts the payment should not be the same as the person who makes the deposit or opens the mail.
"Create an environment where everyone knows you will reconcile every month down to the penny; let them know we're going to look at details and not get sloppy with them," says Mr. Mallon.
In Mr. Mallon's case study, "the center became very successful; it went from doing 2,100 cases to 4,200 annually. The EBIDTA was breaking even [when we came in], and went to $3.7 million a year. The debt, crushing at first, was all paid off, and it is now a debt-free facility."
5. Look at the ownership structure. In some cases, the facility can help itself to heal by looking within and finding ways to motivate the physicians. Here, Mr. Mallon cites a hospital-owned ASC which, due to its ownership, did not incentivize physicians to improve the quality of its services. In this case, the hospital wanted to retain control of the ASC and was thus resistant to selling off any ownership shares. To provide everyone control and profitability (and motivation to make the venture work) they desired, the ASC's real estate and operations were separated into two distinct entities. The hospital retained 100 percent ownership of the real estate, and the operations entity became a joint-venture between the hospital (39 percent), the physicians (51 percent) and Regent (10 percent). This let the hospital enjoy two revenue streams: as the owner of the real estate and, therefore, landlord to the facility, and profit distributions from the operations entity. Further, the physicians had a vested interest in the facility's success, and it became more profitable.