6 Characteristics of Failing ASCs & How to Fix Them

Ira Kirschenbaum, MD, chairman of orthopedics at Bronx-Lebanon Hospital Center in New York, discusses six characteristics of failing ambulatory surgery centers and how to avoid hitting rock bottom.

Dr. Ira Kirschenbaum1. Negative cash flow. It may seem simple, but surgery centers that spend more than they make are on their way to financial ruin. Keep good financial records and understand where each dollar goes to make sure they are profitable.

"The surgery centers that fail do so because they don't take in as much money as they spend, it’s just that simple." says Dr. Kirschenbaum. "You have to ask whether you are spending more than you are making in an ASC every step of the way. Some hospitals can do things that appear to lose money because they are making that money somewhere else."

For example, hospitals can have a service line that isn't profitable because other profitable services compensate for the difference. ASCs, on the other hand, work on such low margins that many aren't able to withstand providing unprofitable services. If your surgery center does have a negative cash flow, take steps to cut costs and increase case volume or profitability.

2. Weak strategy and business structure.
Like any business, surgery centers must have a solid strategy for success. This is especially important because ASC margins are so low that operational efficiency becomes critical for survival, not just success. ASC owners can build an effective strategy by considering their reasons for investing in an ASC and how to ultimately reach those goals.

"Are you building the ASC because you want equity in something that will make profit?" asks Dr. Kirschenbaum. "Do you want more cases in a day? Are you looking for efficiency? Are you building this in preparation for accountability care organizations? Maybe you are a large medical group and built it to save money in the long run. Figure out your reason for investing in the center."

After you have concrete expectations for the surgery center and outline how you will get there, consider the center's ownership and management structure. Some surgery centers fail because there are structural issues with who runs the centers and who profits from them.

"Are the owners also the management company?" asks Dr. Kirschenbaum. "Are you as an owner also making money from the management contract? Is the hospital an owner? Is there a private group that is an owner? The structure determines how much money you can pull out and make; it should address exactly who owns it, who makes money managing it and how decisions will be made."

Devise a focused strategy and clear business structure to drive the center forward.

3. Poor financial modeling.
Healthcare supply and demand, especially in surgery centers, doesn't always follow standard market forces. Unless the facility accepts cash-only services, the ASC depends on insurance contracts for their revenue and they can't increase the charges based on the quality or demand of care.

"Your money is dependent on insurance contracting," says Dr. Kirschenbaum. "You are going to have a fixed income coming in based on these insurance contracts, and you can't charge more because you have nice wood trim banisters. You really have to know that and do very careful financial modeling, which people don't spend enough time doing."

Surgery center leaders must continuously analyze their financial status and understand the impact of any changes before making them. If the surgery center is looking to expand or embark on a more extensive marketing campaign, they must first know they'll be able to sustain those costs and profit from their endeavors.

"People might tell you that if you do 300 cases per month you will break even and any more will be profitable, but you have to test all your assumptions in multiple ways with different variables," says Dr. Kirschenbaum. "It's like balancing your check book: if you are a multimillionaire, you don't have to pay close attention to your check book because your margins are high. If you are making $32,000 per year, you need to budget themselves. ASCs really need a tight budget."

Keep good track of your expenses and understand how each line item impacts your bottom line. Where possible, cut costs and wait until you are financially stable to make significant changes at the surgery center.

4. Looking at employee payroll as a fixed cost.
Surgery centers must understand all costs and differentiate true "fixed costs" from "time-driven activity costs," as they are described by Michael Porter, a management professor at Harvard Business School. Mr. Porter refers to "time-drive activity-based costing" as a cost projection for tasks completed by employees based on the employee's hourly wage and the amount of time it takes to complete a task.  The focus needs to be on value.

"We can't have $16/hour employees taking an hour to do a task when a $10/hour employee can do it," says Dr. Kirschenbaum. "It almost doesn't matter how much you pay in salary for an employee if their time-driven activity cost is low. Furthermore, if you pay someone $20/hour to complete a task that takes one hour, but someone else paid the same amount gets it done in less time, the second employee is more effective. Salary is only a fixed expense if everyone works at the same pace."

Encourage all employees to maximize their time. Where possible, re-delegate tasks so highly paid and experienced employees are focused on using their expertise while lower paid employees complete the less demanding tasks.

When looking at employee costs, also consider surgeon behavior and costs. Surgeons that cost more per case are those who spend more time in the operating room or prefer more expensive implants. These costs aren't fixed either; you can cut them by standardizing processes for efficiencies and implants for cost.

"There will be some surgeons at the surgery center that can do a procedure cheaper than another," says Dr. Kirschenbaum. "You need to standardize protocol for what you use. If all you did was truly look at your fixed costs, surgeon preferences and time-driven activity-based costs, you're 90 percent there."

5. Operating under capacity.
Surgery centers often build with the future in mind, which means having extra storage space or operating rooms. When this space is unused, it becomes a burden on the surgery center. However, even when it seems like surgery centers are filled, utilization may not be at capacity because surgeons aren't using their time and space efficiently.

"You need to fill the rooms," says Dr. Kirschenbaum. "If the original ASC investors built the center for location convenience but aren't invested in efficiency, there could be trouble. When an original investor takes three hours per case and another surgeon takes 10 minutes for the same procedure, you have to have the guts to fix the problem."

Operational efficiency should be at the forefront of every surgeon's mind, and investors must realize they would benefit from changing their processes and making surgery more efficient for everyone. This may mean tightening the schedule, reviewing block times and reassigning shifts to make sure everyone is using all of their OR time.

6. Understand state and national regulations in the context of your plan.
National healthcare facility regulations are constantly changing, and it takes a great deal of effort to stay compliant. ASCs must also pay attention to changing regulations at the state level to make sure their relationships with other providers are legal and their every day functions are lawful.

"State by state, there are many different regulations governing ASCs," says Dr. Kirschenbaum. "You really have to be careful what state you are in and understand the nuances. You can speak to a friend of yours in New Jersey about opening a surgery center in your home state of Montana, but there are different regulations and billing rules."

Make sure you really understand the regulations pertaining to your environment. Otherwise, you may come under fire from regulators and eventually go out of business. Work with experienced consultants, healthcare lawyers and other surgery centers in the state to make sure you are following the rules and interpreting them correctly.

More Article on Surgery Centers:

8 Mistakes for ASCs to Avoid During EMR Implementation

5 Medicare Trends for Surgery Centers to Watch

8 Steps for Profitable Materials Management at Orthopedics ASCs

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