Robert Westergard is the CFO of Ambulatory Surgical Centers of America.
1. Q: Why do you think benchmarking is critical to ambulatory surgery center success?
Robert Westergard: We feel benchmarking is a critical part of running an ASC well because it provides information needed to make good decisions and because it helps keep everyone focused on the right things. Having goals and standards is good, but when you have a whiteboard up on the wall and update your key metrics every day, everybody looks at it and sees exactly where we stand in relation to our goals, it tends to result in a laser focus on the important things.
2. Q: What does ASCOA and its facilities benchmark and why?
RW: We benchmark a standard number of different metrics. Clinical and quality benchmarking is critical, but regarding financial benchmarking we look at cases, times, A/R days and how old our receivables are, what are our receipts per case, our costs per case for supplies and for payroll. We look at all of that and more on a regular basis.
We look at the major components of costs and revenues. Industry surveys generally show the following:
- Supplies costs are around 20 percent of revenues.
- Wages are between 20-30 percent.
- Services (a broad category) are from 10-20 percent, depending upon how people define services.
- Rent is typically 4-7 percent
- Depreciation is 5-10 percent.
- EBITDA is what's left over.
If you're looking to benchmark, you want to bench the metrics you can influence that's actually going to make a difference. We can spend a lot of time trying to benchmark depreciation but what purpose would it serve? Even though it may be interesting information, it's not going to allow us to change the way we run this business in such a way that it improves performance. It will help us plan better for future projects, but for day-to-day operations, it barely merits a cursory glance. I think rent also kind of falls into this category – rent is usually locked in and there's nothing we can do to influence it now.
Look at supplies, wages or services — those are all things where you can have a real impact on a day-to-day basis. If your staff, surgeons and management are focused on supplies, there's a good chance you can make a meaningful difference.
3. Q: Why can focusing on supplies, wages and services make a bigger impact than other areas?
RW: When supplies is your second biggest cost and you drop 2 percent, that makes a huge difference because it all goes to the bottom line. Wages is similar. Wages is typically 20-30 percent and if you can be on the lower end of that, you just bumped your EBITDA margin up 5-10 percent. Services, at 10-20 percent, if you can cut that, it goes straight to the bottom line.
Rent has a small variance and it's not something you can really control per se. There is a point where you can control it and that's as the [ASC development] starts. Later on if there are problems, if the landlord is looking at losing a tenant and they can either renegotiate rent or lose the tenant, then you might have some leverage to renegotiate.
Whereas you might be able to go to your benefit providers or your vendors and say we have to shave some numbers here, you have a signed contract with your landlord and you can't go in and say we want you to take less than you agreed to take. Rent is hard to bench meaningfully because other than the time you're setting the entity up or when you're taking over in a turnaround opportunity, you really have little ability to negotiate.
The lease, or financing, is similar to rent. The time to control both of those is when you're looking at starting the project. That's an important lesson and unfortunately it's one that's learned by many centers after it's too late to make a difference. By the time you've learned it, the chance to act on it is gone.
So the benchmarking focus needs to be on supplies, wages and services. The rest of the costs make up just 10-15 percent of the total and are harder to influence.
4. Q: If a group of physicians is considering developing an ASC, how can it keep rent and financing costs low?
RW: When you're building the facility, keep the size as small as possible given your projected caseload. It has a huge impact on both on the lease/financing and on the rent. If you build it too big, you buy too much equipment, you pay too much rent, you pay too much CAM (common area maintenance expenses) and it has other bad effects as well. You fill it with too many people and buy too many supplies. When you're building or buying it's your one chance to meaningfully impact your rent and your debt payment.
If you're working with a corporate partner or somebody who is involved in your development that is financially savvy, you can avoid most of these common problems. A big part of ASCOA's business is turnarounds and a huge part of it is people who are going under because they're paying too much rent and their debt payment is making them top heavy and they're falling over.
Understand that rent in Boston and New York is going to be far higher — maybe triple or more — than rural Georgia or Tennessee. That's not really something you can control except for understanding that if you want Class A business space, you're going to pay a lot no matter where you go.
If you're willing to take a location that's not in the mall or right in the top building in town, you can save a lot on rent. Unfortunately people look at this and say nothing is too good for my ASC and they load themselves up with costs when they have money and then later on when things get tight, they're locked in with these big payments and there's nothing they can do about them.
Depending on what you're looking for in your financing terms, you're going to pay a rate as low as 4.5 percent up to around 10 percent, depending on your lending source and your financial strength. That can make a significant difference. If you're borrowing $5 million, a 5 percent interest spread can save you $250,000 a year.
5. Q: What are some other areas ASCs try to benchmark which may prove challenging?
RW: One area that's harder to benefit from benchmarking is payor contracts. Payments vary widely depending on things like your location and case mix. It's important to know what your costs are and how much you need to get paid to be profitable. Otherwise you can cause your own problems by signing poor contracts as you seek to increase volume.
It's harder because you're dealing with people who are very savvy, they're expert at this – it's what they do all day. It's also harder because most payor contracts have confidentiality clauses that prohibit sharing specific information among competitors in a market. Benchmarking your own payments provides helpful information. The value is knowing at a macro level that if someone is offering you a contract for $700 per case, you may want to decline knowing you need to get, say, $1,200 to be profitable, so at $700 your ASC will lose money on most cases before you even get to the OR.
Sometimes a contract is for a limited time period or occasionally there are triggers that allow you to cancel a bad contract or seek periodic adjustments, but the contract is a signed agreement with few opportunities to renegotiate.
6. Q: Is it worthwhile for ASCs to benchmark payables?
RW: We used to track and benchmark payables. We don't any more, we just assume it to be an absolute — that is we expect our centers to stay 100 percent current on their payables.
There are people who will teach you how to time payables and how to manage your cash flow so you have the maximum cash in your bank. Our feeling on this is that the benefit obtained by extending your payables —sending this payment out on this day, that payment out on that day — is miniscule. If cash is very tight, then it's a process that needs to be managed carefully. In a turnaround situation, one of the first things we do is bring payables current.
We expect our centers to pay their bills on time. They should set payment due dates in their system so vendors receive payments a week ahead of when it's expected. If you're late on your rent or your debt, very bad things can happen. The landlord can put you in default and kick you out, the bank can put you in default and raise your interest rate — those things are so bad that they're not worth any small incremental interest benefit you might get by keeping the cash in the account for an extra day or week. The peace of mind that comes from knowing you're never late and never have to worry about being late is incredible. It also allows you to focus your time on more important things.
Learn more about ASCOA.
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