7 Financial Warning Signs: How to Know if Your ASC is in Trouble

ArthurCaseyAs operating margins become more difficult to maintain, ASCs cannot afford to allow any financial issue to linger. The sooner a surgery center can identify a problem, the faster it can dig into the cause and begin to remedy the situation. As Benjamin Franklin said, "An ounce of prevention is worth a pound of cure."

Here are seven warning signs to watch out for that may indicate your ASC may soon be facing financial difficulties.

1. Identification of declines in physician case volume. The moment you start seeing an unexpected decline in case volume from any of your physicians, you may be facing a problem. There's a good reason why it's not uncommon to hear that "case volume is the lifeblood of a successful ASC." Without cases, you can't generate revenue.

To catch potential problems associated with case volume before they become bigger problems, there are a few steps you can take. Start by making sure you're tracking the number of cases performed by each of your physicians every month and compare that figure to the number of cases they indicated they would perform monthly when they joined your ASC, or compare their current volume figure to an average identified by looking at the physician's history (and confirmed by the physician). If the current figure is less than 80 percent of their projected number or historical, it is a worthwhile to speak with the physician about the reasons why there is a difference between the current and projected or historical figure.

While tracking case volume monthly is important, fluctuations from month to month are not necessarily a warning sign. If you compare a physician's case volume in February to March, there will likely be a disparity simply because of the difference in number of working days or block schedule in each month. This makes it worthwhile to examine your average volume per week and per day so you can better spot whether the difference between months is indicative of an actual problem as well as spot declines even earlier than you might when just looking at monthly data.

In some cases, the practice may just be running a bit slower or has closed for a vacation. But the issue could be more significant, such as a new employee in the physician's office who is diverting cases elsewhere unknowingly, or there have been unknown scheduling problems and the staff has opted for an easier process. If you can, obtain the information, track how many cases are being done elsewhere and determine why. It would be prudent to make sure such a trend does not continue for long.

Over the long term, there are many reasons why case volume declines. If you have older physicians, perhaps they're starting to slow down their practice (but didn't tell you). Maybe they've brought a fellow into their office and are passing along some of their business, but the fellow is taking the cases to the hospital in order to obtain full privileges. Perhaps they've changed the office schedule to allow for "down" time. Whatever the reason is, if you're not aware of it, you can't take steps to rectify the problem or reverse the decline.

2. Distributions are being made, but the ASC is still encountering cash flow issues. While making large distributions is often preferable, it may not be in the best interest of the ASC to always do so. Typically, an ASC's operating agreement describes the method of calculating distributions, but often allows for some discretionary working capital holdbacks. If distributions are causing cash flow issues, look at whether you are leaving enough money in the bank to cover short-term working capital or operating expenses. You don't want to end up in a situation where you're not paying a bill and end up getting hit with late fees or missing out on discount opportunity because you paid a distribution without considering upcoming expenses. Sometimes the difference of $200 to $400 to an individual physician may not make a big difference to the physician owner but it could make a huge difference with managing the accounts payable.

3. Distribution checks are declining. A noticeable decline in distribution amounts is often tied to A/R or revenue cycle management. The cause may be a number of reasons that include:

•    Bills not going out on time
•    Bills not being followed up timely
•    A change in a contract that nobody identified
•    Failure to obtain pre-authorizations, leading to case cancellations or, more significantly, denial of payment
•    Failure to collect money upfront
•    Failure to verify contracts rates

One of the biggest, most common problems in ASCs is claims going out that are not clean, but no one in the business office is checking on them for 30 days to 45 days. ASCs should confirm within two weeks, or at least no more than three weeks, that claims are on file and being processed. With this approach, you're more likely to catch a problem and resubmit the claims early enough that you won't significantly impact your A/R days.

4. High percentage of accounts with A/R days over 90. Depending on your payer mix, the average days in A/R should be close to 30. If it's not, you should try to determine why and then work to get your number down to get closer to this benchmark.

But just as important as maintaining your total outstanding days in A/R near 30 is looking into how many accounts in your A/R have aged greater than 90 days. If the percentage for all accounts over 90 days is higher than 5 percent of your total A/R, then you may have an aging problem relative to those older accounts. The longer an account ages, the less likely you are to actually collect that money and get your accounts back in line. (Note: This is the case, unless you are accepting liens, which often will not process in less than nine to 12 months at the earliest.)

5. Management of accounting on an accrual basis. If your ASC is managing the financials on an accrual basis versus a cash basis, there are several factors to keep in mind. Accrual-based accounting indicates that you estimate your write-offs (difference between billed charges and actual reimbursement). Some facilities, based upon negotiated third-party payer contracts will proceed to write down the accounts at the time billing versus at the time of payment. Those accounts not under contract remain at 100 percent and any adjustment taken is recorded at the time of payment. This makes the accounts receivable's figure on your balance sheet a net A/R or mixed net vs. gross.

Under cash accounting, your net revenue documented on your profit and loss statement is how much you collected, not what was billed. As such, if you end up taking write-offs or deductions greater than anticipated at the time of payment, your revenue will be negatively affected. This has the potential of reducing your net income, which could impact your distributions depending on the calculation. Conversely, if you are managing the accounting on a cash basis, then excellent collections or a slowdown in collection activity will affect your profit and loss statement, and your bottom line net income.

Another difference between cash and accrual accounting would be seen in your payables. In cash accounting, the invoices you actually pay would be reflected in the expenses, whereas under accrual any purchase order that is issued and product received is accounted by making an accrual entry so the expense is reflected in the month-end figures. This is definitely a more accurate way of reflecting expenses. However, if you do not accurately accrue all of your expenses, then you could be distributing cash that will be needed the next month to pay those bills.

6. Benchmarks on costs are higher than the national average. When you benchmark cost figures such as salaries, wages and benefits per case and supply costs per case against national benchmarks and you come in higher, consider this a possible red flag. Although there are always varying reasons why your ASC's numbers may be higher than those in a national benchmark, you need to make sure the reasons for the difference are sound and supported by evidence. Be extremely careful of excuses or reasoning based upon assumptions. You want to make sure a poor benchmark scores is not indicative of a larger issue, and that you do not have more money going out the door than necessary.

If your cost figure is high, one of the first places to examine is your OR capacity. Make sure you're not just opening up a new room for a day to handle a single case and bringing in a whole team to cover that room. Most states require staff to work — and be paid — for a minimum of four hours per work day. So if you bring in a team for a one-hour case, you're going to end up paying those team members for four hours. While you can assign staff to tackle other tasks during those remaining three hours, this approach is rarely cost effective in the long run. Experience has shown that many employees will run out the clock in an attempt to get more hours. However, if the same work is assigned at the end of the day when everyone wants to leave, it often does not take as long to accomplish.

7. Poor inventory management. When it comes to supply management, it's imperative that ASCs examine their days in inventory, and how quickly staff is turning over the inventory. You should not be spending more in a given month than what you have on your shelf, and, conversely, you should have no more on your shelf than you typically spend in a given month.

What this means is you should essentially turn the value of your inventory every 30 days. If you're spending less money than what you have on the shelf, then that's an indication you have too much inventory on your shelf and therefore have money sitting in inventory that's not serving any legitimate financial purpose.

Conversely, if your inventory is substantially lower and you're spending twice that amount of money, you need to examine your supply costs to ensure there's not something usual happening with your supply contracts.

"The Game of Management is accomplished by staying constantly alert and then reading and reacting to potential problem situations before they materialize. It all boils down to paying attention to the details" — Jim Evans

Arthur E. Casey, CASC, is senior vice president of business development for Outpatient Healthcare Strategies (www.outpatienthcs.com), a provider of healthcare management consultancy services for ambulatory surgery centers and hospitals based in Houston.

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