5 Ways ASCs Lose Money

Half of all ASCs in the country are either losing money or just breaking even, according to Brent Lambert, MD, president and owner of Ambulatory Surgical Centers of America. Here are five ways he and Luke Lambert, CEO of ASCOA, have seen ASCs go from the black to the red or fail to ever achieve any profits.

1. Physicians receiving management fees. In some ASCs, physicians will be appointed as management experts and draw a fee for the extra work associated with running the ASC. But in many of these cases, the physicians in these management roles might think they are managing the center well but in reality they are just making money off of general oversight of the ASC, which does not contribute significantly to the bottom line, says Dr. Brent Lambert. When tens of thousands of dollars each month are going to physicians for these unnecessary positions, distributions take a hit.

"They apply a little common sense, but a little more sophistication than that is required to have a high performance center," he says. "They are not experts; it's just a way to take money out of the center. The only thing they are doing is getting a fee and they don't like to hear it, but if you get all the doctors present, they're going to ask, 'Why, if you're such great managers, are we not making any money?'"

2. Real estate entity profits, operating entity suffers.
In most ASCs owned by physicians, there's a real estate entity and an operating entity. It's ideal if the same people own both but that usually isn't the case — some physician-partners own the real estate, others do not. When the lease expires, it is not uncommon to see the real estate owner-partners raise the rate for the new lease. The increase may not be too onerous, but when you factor in increases in costs for supply and staff, together with declining reimbursement and other financial challenges, the increase saps away more potential profits for the physician-investors.

"Maybe it's another $150,000 a year on a lease rate and the physicians are able to deal with that for awhile, but with all of these other things verging, suddenly they're scratching their heads wondering where the money went and they forgot about the lease that enriches at least some of the partners in one entity but doesn't maybe enrich all of the partners who came into the ASC late and weren't part of the real estate partnership," says Dr. Brent Lambert. "Maybe initially it was a market rate but over the years with the escalators, it becomes no longer market rate but is maybe twice market rate."

High leasing costs can also serve as a deterrent for recruitment of future physicians who are asked to join the ASC and pay the lease but cannot own part of the real estate.

"If you are asking them to lease space well above market rate, they'll go to the ASC down the road and lease at market rate," Dr. Brent Lambert says.

3. Passive planning for profitability. An ASC that doesn't see itself profiting soon after opening may not ever profit, says Luke Lambert. "Some facilities see themselves on the three-year development plan and just because they're losing money the first 2.5 years, if that's according to their plan, they feel like they're doing okay," he says. "If you spend that amount of time losing money, chances are you're at serious risk of never turning the corner."

While a new ASC will need some time to achieve profitability, a few years is likely too long.

"In our world, where we're doing de novo centers, we expect return on the physician-investment in the first year," says Dr. Brent Lambert. "If they haven't gotten any money back in a year, we've failed. So that's an expectation that I think can be met in most cases."

4. Retiring physicians. During the life of a surgery center, physicians are likely to retire. Since these retiring physicians are often close friends with the physicians who are still working at the ASC, the retired physicians' ownership stake in the ASC is not bought out and they still receive distributions even though they are no longer bringing cases to the center. With this arrangement, an ASC will have less money to pay working physician-investors, and it becomes a greater challenge to bring in physician-investors to replace the profitable procedures once brought by the now retired physicians.

"No one wants to buy in to a center and bring their cases if they're going to just enrich some guy playing 18 holes a day in Florida," says Dr. Brent Lambert. "You have to get rid of the deadwood."

5. Insurmountable debt. Borrowing money is often critical to achieve a profitable ASC. But knowing the right amount to borrow and when to do so is equally critical, and failure to know when to stop borrowing can cripple an ASC.

"Sometimes physicians keep borrowing, sometimes to enrich themselves in one way or another, and then they get to the point where they have six or seven million dollars worth of debt and they can't meet their debt service obligations," Dr. Brent Lambert says. "Now you can't get someone to come in and buy in to a center and obligate themselves even on a pro rata basis with so much debt. Even if you were going to give them the shares, they wouldn't take them because they'd have a huge contingent liability hanging over their head."

Learn more about ASCOA at www.ascoa.com.

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