Brent Lambert, MD, founding principal, and Luke Lambert, CEO, of ASCOA, make regular visits to ambulatory surgery centers throughout the United States which are struggling financially and in need of a turnaround. They say some of these facilities can be saved because, fortunately, the poor choices made by the owners are correctable over time. Unfortunately, that's not true for all of these ASCs.
"We actually look at a lot of centers we don't think we can fix because of decisions made," says Luke Lambert.
Here are 12 decisions (or "fatal flaws" as Dr. Brent Lambert terms them) which they have seen cripple an ASC.
1. Overbuilding. One of the most common mistakes they see is when physicians have grandiose plans and therefore overbuild their facility. "We've seen a center with four ORs and yet they're only doing 150 cases a month," says Luke Lambert. "That fixed cost of the large center is a long-term burden for a relatively low volume facility."
Dr. Brent Lambert says this hurts physicians two ways: "It hurts the doctors who spend all this money on the build-out but then it's a two-way sword because they're spending all this money for rent."
2. Expensive lease. The signing of a lease that's too expensive is a related mistake to overbuilding, says Luke Lambert. "Physicians sometimes feel like they need to be in a fashionable location for their facility," he says. "Of course, none of the payors pay you extra for being in a fashionable location."
3. Signing contracts without negotiating. Another mistake made by startup ASCs seen quite frequently occurs when a physician group is anxious to start using their new center to perform procedures that they will sign any contract offer from the payors without negotiating the rates.
"That locks them into payment rates that can be very disadvantageous over the long term," says Luke Lambert. "They may be busy right away but maybe they don't make money because they signed on to rates that were too low. Once you're doing the cases, it's very hard to negotiate them upwards.
"Your point of greatest negotiation advantage is when the cases are being done at a high-cost place, like the hospital, and you're offering to move them to the low-cost place, like your new ASC," he says. "If you demonstrate a willingness to leave them in the hospital unless you're given a good contract, that's your best position of negotiation."
4. Terminating contracts but keeping the cases in an ASC. The most leverage ASC physicians have over payors is their ability to dictate where they perform their procedures. Sometimes physicians who are frustrated with the rates they are receiving will terminate a payor's contract with the threat of taking the cases out of their ASC in order to gain this leverage. But instead of taking the cases to a high-cost place, they will take them to another ASC.
"This doesn't cost the payor any more money so [the physicians] don't achieve any leverage," says Luke Lambert. "If you want leverage, you have to take your cases to a high-cost place like the hospital."
5. Holding on to hospital block time. Oftentimes, new ASCs are started by physicians well-established in their careers, says Luke Lambert. They may have spent many years influence peddling and cajoling to optimize their schedules and earn what they see as their perfect block time at a hospital. When these physicians open their ASC, it is conceivable that half of the time they were spending at the hospital performing procedures should now go to the ASC. For some specialties, it might be all of their time. But this doesn't always happen.
"Because so much of their professional life was spent obtaining that block time, they don't want to give it up," he says. "To try to maintain it, they don't take everything they could to their own ASC. They sort of starve their center and keep sprinkling cases into their [hospital] block so they don't give up what they see as almost a prime piece of real estate."
6. "Hijacking" the ASC by senior partners. Dr. Brent Lambert says he regularly sees situations where senior surgeons nearing retirement will "hijack" their ASC. "They don't want the monthly distributions to stop," he says. "If there's no language for redemption at time of retirement, they actually prevent any [language] from getting into the bylaws and the operating agreement of the center, so these guys will have income for life."
He notes one ASC which was distributing checks to physicians for 10 years after they retired, and says he has seen situations where anywhere from a quarter to a half of the physicians receiving checks are non-performers.
"It's discouraging for the people in [the ASC], it destroys the morale," Dr. Brent Lambert says. "We don't allow that. The moment they retire, they are redeemed at fair market value."
7. Formation of an executive board. In some ASCs, a few dominant physicians will convince the other physicians that the facility needs an executive board or committee to make the significant decisions for the facility. Whatever name they assign to it doesn't matter to Dr. Brent Lambert as it means only one thing to him: a red flag.
"If we're acquiring an ASC with an executive board where three guys are speaking for 20, we don't allow it," he says. "We say everybody has one vote so it can't be dominated by these three people. If they're fighting to maintain this executive committee, my antenna goes up and I ask why it is so important for them. Then you start seeing medical director fees or even board fees in some of these places."
8. Plastic surgeons as partners. Another common mistake seen is when an ASC brings one or two plastic surgeons into the partnership. "The plastic surgeons can be very persuasive, they can use a lot of the center, but if they're cosmetic plastic surgeons, we've rarely seen them as profitable," says Luke Lambert.
The challenge with plastic surgeons who focus primarily on cosmetic procedures and see these cases in the ASC is that the surgery center will often unintentionally subsidize the professional payments of the plastic surgeons.
"Let's say the plastic surgeon wants the ASC OR for an hour and will pay $400," Dr. Brent Lambert says. "That's a money loser for an ASC." The plastic surgeon may find a hospital willing to offer that rate, so the ASC tries to compete with that pricing to keep the physician happy and performing procedures at the surgery center.
"These plastic surgeons have a global fee of let's say $25,000 for a facelift," Dr. Brent Lambert says. "Out of that they have to pay the facility fee, anesthesiologist fee and themselves. If they can cut the facility fee by two-thirds, then they get to keep it. If you allow a plastic surgeon partner to have a room for $400 when they really should be paying $1,000 or $1,200, then the ASC is basically handing the plastic surgeon money.
"If a plastic surgeon has ORs at the local hospital for $400-$500/hour, and he's going to be in the ASC, he wants the ASC to match those rates and then the center loses money," he says.
The ASC would be better off letting the physician take these procedures to the hospital, but then the surgery center still has the problem of a non-performing physician-owner.
9. Physician involvement with human resources. When a physician becomes involved in the hiring and firing of staff, it can cause many challenges for an ASC. For example, if a surgeon critical to the surgery center's volume and income hires a family or significant other to a staffing position, if there is ever a problem with this staff member, it becomes a problem for the entire facility.
"They're the favorite of this doctor … and they know they don't have to produce anymore because they have a virtual lifetime employment contract," says Dr. Brent Lambert. "Those kinds of staffing/HR problems can really corrupt a center and cause wholesale defections of the other staff that see this and they know what's going on. It's very demoralizing; the other partners don't like it. It can destroy the chemistry of the center."
It is scenarios like this which make it critical for ASCs to keep their physicians out of the human resources component of the operations and task hiring and firing to an independent person.
10. ASCs built in or near physicians' offices. In today's market, it's becoming harder for a single practice to support an ASC effectively, says Luke Lambert. Many practices will develop their ASC in a real estate space that is either in or next to their office. That affiliation or perceived connection between the practice and the ASC can create challenges for recruiting additional surgeons.
"Maybe they're an orthopedic practice and they want to recruit the other orthopedists in town," says Luke Lambert. "The other orthopedists aren't going to want to send their patients to another practice for their surgery. This can create a problem for growing the center and keeping it viable long term."
11. Lack of rules for conduct. Every surgery center should, as part of its bylaws, include rules for proper conduct which applies to all physicians and staff members who work at the ASC.
"You have to protect your employees from some of the surgeon-partners (and also staff members) who may have obstreperous personalities that offend and create hostile work environments," says Dr. Brent Lambert. Without rules of conduct and clearly spelled-out ramifications for violating the rules, an ASC could quickly lose its staff because of the actions of a single person.
"Some partnerships are very cognoscente of this so they put it into their documents," he says. "If [a physician] ever does such and such, we'll give him a warning. If he ever does it again, he's redeemed."
Luke Lambert says this challenge is most often seen in smaller centers where 1-2 partners are very dominant. "The reason they tend to be small centers is other people don't put up with it as partners or they may have started small but have been unable to grow because these types of issues keep people away," he says.
One of the advantages of a corporate partner is the ASC has a disinterested third-party who can adjudicate such situations, Dr. Brent Lambert says. "You can't write a document that covers everything," he says.
12. Physician-owners stuck in a single-specialty dream. Many physicians who open an ASC envision it at the start as a single-specialty entity which will help to define who they are as surgeons, and they cannot fathom cohabiting the facility with any other specialty, says Dr. Brent Lambert. This, he says, is a huge flaw in the thinking of ASC owners.
"They envision this single-specialty orthopedic (for example) ASC that they walk to from their office," he says. "They have a rehab facility on the same floor for their total joint patients. They come up with an idealized dream of what would be a perfect ASC.
"Well, if you look around the country, there are all of these single-specialty ASCs not thriving," he says. "They haven't been making any money for years and [the physician-owners] have had to feed the ASC cash in order to maintain this single-specialty status, which means nothing. It actually is a huge detriment to them. If they could bring in other specialties and cover their costs, they would be distributing money but instead they're fixed on this dream concept. It's the height of ego fulfillment."
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