1. A hospital partner does not solve all problems. A hospital partner can make it easier to obtain contracts and can make it easier to recruit physicians. But the extent of the benefit that a hospital can provide to an ASC on managed care contracting is quickly declining. However, there are still several other benefits a hospital partner can provide to surgery centers.
“In some cases, a hospital can contribute to securing better payor contracting,” says Rick DeHart, CEO of Pinnacle III. “This depends on the hospital’s experience with ASC contracting and the amount of leverage it is willing to apply based on its other agreements. The other benefits could include supply purchase agreements and shared service agreements (i.e., bio-med service, housekeeping, maintenance, etc.). Also a hospital partner can add benefit to efforts such as physician recruitment, physician referrals and community support.”
2. Turnarounds have become more common than startups. Over the last few years, as more surgery centers have been built and fewer independent physicians are available, there has been greater growth and attention paid to turn around surgery centers than to building new surgery centers. We expect this trend to continue. Turnaround ventures typically see one party buying out a developer or surgeons in a surgery center with the intent of re-syndicating and trying to develop a new and more successful surgery center at the same place.
“Turnarounds are definitely less expensive and less time-consuming than a pure start-up,” says Todd Mello, ASA, AVA, MBA, principal of HealthCare Appraisers. “ASCs typically have heavy investment in fixed costs (equipment and leaseholds), so obtaining sufficient volume is critical in maximizing staff efficiency and covering heavy fixed cost burdens. Once fixed costs are covered, and assuming staff is sufficient to cover the volume (i.e., staff is not purely variable and behaves in a step-wise function in that there is a certain level of minimum staffing required regardless of volume, and at various case levels, new, incremental staff may be required), incremental costs are limited predominantly to supplies (and perhaps billing if outsourced), which causes the margins on incremental cases to be significantly higher.”
“New physicians added to an existing ASC is a win-win for all parties in that existing owners, while diluted, share a smaller percentage of a larger pie, and new investors are allowed the opportunity to forego a very risky start-up and expeditiously begin doing cases,” he says.
3. Distributing income based on referrals is illegal. A surgery center cannot distribute ASC income, whether the ASC is owned indirectly or directly by physicians, based upon the referrals or the value or volume of referrals by physicians. The federal government (and many state governments) deems these type of distributions illegal. There is no “clean” way to avoid this rule.
“Under the old saying, ‘You get what you measure,’ it would seem to make sense for a rational business to incentivize business referrals through compensation related to the volume or value of those referrals,” says Jon O’Sullivan, a senior partner with VMG Health. “Real estate agents get paid commissions, insurance agents get paid commissions, lawyers and investment professionals get a percent of the business they bring in, why not surgeons?"
Simply put, he says, the federal government understands the old saying (i.e., it doesn’t want to increase referrals, it wants to reduce them); because Medicare is funded by taxpayer dollars, our legislators don’t want tax dollars "wasted" as a result of doctors who perform unnecessary procedures; and "you can’t trust greedy doctors to make decisions based on medical necessity versus dollars."
But there is a major disconnect here.
“If CMS and other payors don’t want physicians to increase referrals, then why is it that all of healthcare is reimbursed based on individual procedures?" Mr. O’Sullivan says. "If a physician wants to make more money, he should see more patients and bill for more procedures. Isn’t that why healthcare costs have been going up each year — more volume? (The answer is yes.) This is a quandary, a clear contradiction and evidence of a broken system. Maybe physicians can be compensated on keeping people healthy (before they need surgery for obesity, a hip replacement or a heart bypass). Then physicians can be partners in staying healthy and can be compensated on the ability to keep patients at statistically measurable levels of good health (i.e., not obese, heart healthy, etc).
“A little far flung … but maybe a better method of compensating physicians in the long run.”
4. Think twice before opening a second site. Business may be booming and you may be considering opening a second site. Before embarking on this project, stop. The surgery center business is based on economies of scale and, therefore, the more cases that can be performed at any one site with one staff results in higher profits. Opening another site creates double the overhead, which often results in diluting the profits at both sites. For this reason, opening a second site is generally bad, not good, for business.
“It’s more a question of whether excess capacity exists and there’s the ability to spread center overhead over more cases,” says Marc Jang, CEO of Titan Health Corp. “Obviously, if excess capacity exists and you can add additional cases, the average overhead cost per case is reduced and center profitability improves at an accelerated rate.”
