8 Steps to Elevate Profitability at Surgery Centers

Here are eight steps for enhancing profitability at surgery centers.

1. Work to achieve financial solvency
. Financial solvency is important for surgery centers as they consider their options for long-term growth and viability. "The recent global financial crisis has shown the importance of maintaining solvency and a healthy balance sheet," says Rajiv Chopra of The C/N Group.  "When most people think of solvency, they relate to financial measures, which are quantitative in nature. When you want to evaluate the quantitative aspects of long term financial stability, the best place to start is the surgery center's financial statements. However, there is a qualitative aspect to solvency, and you must look beyond the financial statements to predict what the future may hold."

When working toward this goal, make sure you know what the banks are looking for. Banks and other institutions which lend to ASCs have a set of solvency measures they typically utilize. Debt service coverage ratio is typically defined by EBITDA over principle and interest payments on your debt. "Banks are looking for 1.25 to 1.5 for a healthy operation," says Mr. Chopra. "A ratio of 1:1 means the ASC is generating just enough cash to cover its bank payments. You should have more than that to maintain a cushion to continue your operations."

Banks are also looking at leverage ratios: Bank Debt over EBIDTA. Take the outstanding debt you owe to the banks and finance companies in the numerator and EBIDTA is the denominator, which is proxy for cash flow. "If you are over 3:1, that's when the banks start getting nervous," says Mr. Chopra. "In go-go times, banks become more relaxed and you may see them lending at 3:1 or 4:1. However, when the economy is in trouble they tighten evaluations and underwriting standards."

2. Focus on improving the most important benchmarks at the surgery center. ASC administrators are faced with a barrage of benchmarks on a daily basis and are constantly examining data points in different ways. "I walk into centers and they are looking at 85 different metrics," says John R. Seitz, president and CEO of ManageMyASC, and Tamar Glaser, RN, of ManageMyASC.com. "They cover so many things that nobody pays attention to any of them. Administrators need to pick the ones that are most important and solve those issues immediately."

Examine the different metrics you collect and choose which ones are most urgent for the center to address. For example, tracking income per minute is largely useless because of the surgery center's economy of sale. "ASCs have fixed costs and if you can get over that hurdle you can really change things," says Joseph Zasa, JD, co-founder and managing partner of ASD Management. "The first thing to look at is the number of cases performed at the center because a lot of data is case-driven."

In addition to case volume statistics, the other key area is collections. Track your revenue cycle in its most basic form to see how many dollars you collect. "Without case volume and collections, you don't have a successful center," says Mr. Seitz. "Find what matters for you and focus on those metrics. It might be case start times, cases per day or overtime hours."

When choosing your areas for improvement, make sure they are appropriate for measuring. "We believe strongly that if it's important, you have to measure it," says Jeff Leland, CEO of Blue Chip Surgical Partners. "Identify the half-dozen benchmarks that you really want to keep track of. The most important thing is to measure them."

3. Know the data better than the insurance companies for leverage during payor negotiations. Surgery center administrators must have a firm grasp on national benchmarks as well as their individual center's data going into contract negotiations, says Steve Arnold, MD, chief medical officer at Access MediQuip. "They really need to enter into negotiations armed with better data and analysis than the payor has," says Dr. Arnold. The data they must know includes:

•    Surgery center utilization
•    Total costs and unit costs
•    Physician alignment with the facility
•    Hospital readmissions — unexpected and due to revision surgeries — broken into 30 day readmissions, 90 day readmissions and 365 day readmissions
•    Capacity management
•    Implant and device use on- and off-label
•    Quality and safety

"If surgery centers don't have these data analytics abilities, they need to partner with an organization such as ours to supply that analysis," says Dr. Arnold.

4. Keep physicians running on time. There are several ways to maintain efficiency at surgery centers, but ASCs can't be efficient unless surgeons have good time management skills.

"In my view, time management is one of the single most important things for ASCs," says Larry Teuber, MD, chief medical officer and president of Medical Facilities Corporation and founder and physician executive of Black Hills Surgery Center. "When I look at the efficiency of the facility, I look at what it costs to perform operations. The cost of a facility includes drugs and supplies, implants, payroll and general overhead. One of the largest wastes is payroll, meaning that surgical start times, turnover times and surgeon tardiness are probably one of the most expensive costs in the center, and the hardest to track."

When surgeons are chronically late for their start times, schedule their cases for later in the day. If they are usually 15 minutes late for a 7:30am start time because they have a hard time getting out of bed earlier, the scheduler can move their start times from 7:30am to 8:00am. "It's terribly inconsiderate for surgeons to be habitually late," says Dr. Teuber. "We monitor that and if we have a surgeon who's habitually late, we move back their start times. In a partnership, you should respect your partners, staff, patients and patients' families."

5. Understand your cost per case to control expenses. Jessica Nantz, president of Outpatient HealthCare Strategies, says the first step to controlling ASC expenses is to understand the costs involved in every case you perform. "You need to know the staff, supply, medication and implant cost for every case," she says. "If you don't know your cost per case, how do you control your cost? How do you which cases are profitable?" She says cost per case should be divided into four areas excluding overhead:

• Pre-op
• Anesthesia
• Operating room

For each area, you should understand the different costs and how they contribute to the overall cost of the case. That way, you can determine which cases your supply costs are highest and which areas have the biggest problems with staffing expense. She also recommends tracking cost per case by physician and specialty, to help you understand which physicians cost more in terms of supplies and which specialty cases are most and least profitable. Case costing by physician also sets a baseline for best practices.

She says preference cards need to be updated regularly to make sure your supply cost per case is accurate. Ms. Nantz recommends asking OR staff members to go through the physician's preference card at the end of the case and mark down which supplies were not needed and which were substituted or added. Then regularly update the preference card in your software system.

6. Engage in a fresh RFP process to reduce office supply and utility costs. "In our experience, indirect overhead costs are an area that is frequently overlooked by a center, but can have dramatic effects on the profitability of the center," says Jason Smith, vice president of marketing for Alliance Cost Containment, a financial efficiency company providing cost management solutions. These can include office supplies, janitorial supplies, insurance and utilities, to name a few. "Typically an ambulatory surgical center will spend up to 15 percent of their expenditure on these overhead costs, so reducing them can have a dramatic effect on the profitability of the center," he says.

Surgery centers interested in reducing these supply costs can follow several key steps taken by cost-cutting firms like Alliance Cost Containment. When working with outpatient surgery centers to cut costs, Alliance Cost Containment will examine expense categories including medical supplies, telecom, utilities, waste removal, payroll services, printing and general insurance. With each category, the company will compare the prices paid for supplies through the current vendor with prices proposed from new vendors after issuing a request for proposal.

When reviewing janitorial supply expenses for an ASC, for example, Alliance Cost Containment totaled the yearly expenses allocated to supplies such as toilet tissue, paper towels, cleaners and waste liners with the center's current vendor. They documented hundreds of recent common purchases in this category alone from the current vendor. With this purchase history at hand, they created an RFP that was sent out to the current vendor and two competing vendors. In this case, Alliance Cost Containment was able to negotiate a reduced price with the current vendor through the RFP process, and the center was able to save approximately 34 percent on janitorial supplies per year. 

7. Engage vendor representatives to lower prices. Develop a friendly relationship with the reps, but make sure they understand how things are done at the center, says John Brock, administrator of NorthStar Surgical Center in Lubbock, Texas, a Symbion facility. Rather than talking with individual surgeons about a new product at the surgeons' offices, reps should come to the center and discuss the product with ASC staff. "We see reps all the time and we like to keep the relationship friendly. 'How's you son's Little League team doing?' But we don't want the rep talking to the doctor behind our back," Mr. Brock says. "It's letting them know how we do things."

Another way to keep supply costs low is to purchase custom packs for surgery rather than buying each item separately.

8. Draw on multiple data sources to put together a competitive compensation plan. Surgery centers can consult two key sources when determining appropriate employee compensation: salary and benefits estimates compiled by healthcare associations and a point factor analysis. These tools are excellent starting points for building a fair compensation plan, says Tom Jacobs, president and CEO of MedHQ, a medical human resources, accounting and credentialing company based in Westchester, Ill. "You need to strike a balance between paying people what they're worth, but not overpaying," he says. "If you're underpaying, you're threatened by turnover. If you're paying too much, the consequences are self-evident. You want to pay people fairly in accordance with the market."

While association surveys can also be useful in determining compensation, surgery centers should be hesitant to take them at face value without evaluating the specific responsibilities of the positions in their organizations, Mr. Jacobs says. If a position requires additional responsibilities that are not typical of the positions for which salary averages are given, for example, the center should consider the full scope of tasks when determining compensation.  

The point factor analysis is a more systematic job evaluation tool that aids surgery centers in understanding the total scope of a given position. The areas of evaluation include educational requirements, years of experience required, supervisors needed, the complexity of the position, the physical effort required, the physical work environment involved and the impact of employee's decision-making or actions. "These are all areas that you can analyze the job based upon — each of these things can be assigned a point," says Mr. Jacobs. "This represents a fuller approach to the definition of a position, and there tends to be a lot of commonality among surgery centers."

Related Articles on ASC Turnarounds:
5 Tips for Finishing Your Surgery Center Expansion on Time
8 ASCs in United States Embracing Medical Tourism
6 Strategies for Seamless Ambulatory Surgery Center Expansion

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