7 Critical Areas of Focus for a Successful Turnaround of a Physician/Hospital Joint-Venture ASC

It seemed like a perfect arrangement: an interested and loyal group of community-based physicians teaming up with the local hospital to create a win-win joint-venture ASC. But, as the saying goes, “even the best laid plans often go astray.” When the business of a physician/hospital joint-venture ASC does not meet expectations, perhaps it’s time to look at it from a turnaround perspective.

Before a turnaround can begin, support of the involved physicians and hospital is required. Both groups need to be committed to fixing what is wrong and expending the necessary resources to back the turnaround plan. The physicians need to be willing to give the ASC a second chance — to stick it out through the turnaround period. The hospital must put their resources behind the ASC to assist with refinancing, recruiting additional partners and securing viable managed care contracts. In PINNACLE III’s experience, the best place to start is by creating a joint-venture advisory group consisting of both physician and hospital stakeholders. In many cases, this group is the center’s existing board of managers with, perhaps, a few additional physicians. This group will be the primary point of contact for the turnaround effort.

The initial task of the group is to perform an analysis of current operations. Problems and opportunities are most easily identified and defined by thoroughly reviewing every aspect of the business. Here are seven of critical areas to review.

1. Financial review
An obvious area to begin with is a financial review. A cash flow analysis reveals losses sustained thus far as well as whether or not the center has tapped out available resources in an effort to obtain additional cash. PINNACLE III has walked into facilities that were several hundred thousand dollars behind in accounts payable, but were aware of every outstanding invoice; in essence, the facilities knew how bad the situation was. On the other hand, there are ASCs several hundred thousand dollars in arrears that are totally unaware of what they really owe and to whom. In the latter scenario, an accounts payable aging should be created to effectively track unpaid invoices. A thorough review of the revenues versus expenses can reveal deficits the ASC may be incurring monthly, thereby highlighting areas that need to be addressed. A comprehensive review of the operational cash and A/P may reveal opportunities for cutting expenses. This information provides a springboard for discussion with the board regarding the age old questions of how many cases are required to (1) break even and (2) make budget.

2. Debt and debt structure
A thorough examination of the center’s debt and debt structure needs to be conducted. Has all the available credit been utilized? Is the repayment schedule too aggressive? In an ASC’s haste to retire debt quickly, some centers opt for incredibly aggressive payment schedules that have set the facility up for failure. Is the debt structured on a recourse or non-recourse basis? If neither party in the joint venture has responsibility for the debt, refinancing efforts can be difficult, especially in today’s economic climate. If the turnaround plan is a compelling one, some hospital systems are willing to sign on the facility’s refinanced debt.1

3. Accounts receivable
Accounts receivable is another critical area to assess. A good portion of the physician/hospital joint ventures PINNACLE III has worked with on turnaround projects have quite glaringly neglected their A/R. Questions to ask include:

  • Does a significant portion of the outstanding revenue reside in patient balances?
  • If so, has there been a lack of appropriate follow-through by A/R staff members who have simply pushed outstanding balances to patient responsibility rather than appealing claims?
  • How are write-offs handled?
  • Are the contractual adjustments syncing up with the center’s payor contracts?
  • How much of the A/R is located in the 90-120-plus days range?

There may be prompt payment issues that can be addressed with thirdparty payors. A thorough review of credit balances also needs to occur to determine if the amounts are truly balances to be refunded to patients and payors or simply payment posting errors. At times, thousands of dollars are categorized as credit balances that are actually facility revenue.

4. Physician satisfaction
Reviewing the level of physician satisfaction with the ASC may reveal additional trouble spots. Candid conversations need to occur with physicians who are still utilizing the facility as well as those who are no longer bringing their cases to the center. Is the facility meeting the needs of the physicians? If not, why? Does the staff meet the needs of the physicians? Sometimes physicians feel the center’s staff is too inexperienced to meet their needs. Perhaps the physicians are not comfortable with the staff because they hold the perception that there are too many temporary or traveling workers. Is the equipment adequate or do some cases and unforeseen consequences require borrowing equipment from other facilities or vendors? Is scheduling a hassle or does a perception exist that there is a dearth of available OR/procedure room time?

5. Staffing
Performing a staffing review may identify issues that lead to positive change. Interview operating room staff to determine if improvements can be made in the ORs. What is the staffing expense ratio? Is the center overstaffed? Thoroughly reviewing salaries and controlling or, better yet, eliminating overtime can lead to recapture of previously lost revenue. Unfortunately, it is not uncommon to encounter facilities where low census days are not utilized appropriately and part-time and PRN hours are more of an entitlement for the staff than a staffing tool for the center. Are employees leased from a management company or hospital? Facilities may save as much as 20 percent of overall salary and benefit costs when employee lease arrangements are eliminated. Lastly, assess the skill levels of the staff to determine if they are adequate for the ASC’s needs. If not, obtaining additional training (possibly with the assistance of the hospital partner) or making staffing changes to meet the level of expertise required may be necessary to satisfy the facility’s utilizing physicians.

6. Managed care contracts
Review managed care contracts. Perform a market analysis. Are the center’s contracts on par with the rest of the community? Does reimbursement reflect the region’s benchmarks for the facility’s case mix and payor mix? Do the ASC’s contracts reflect the needs of its physician-investors? Is the center maximizing the advantages available to it by being a physician/hospital joint venture? At times, PINNACLE III has worked with the hospital’s contracting department regarding the unique needs of an ASC and how to appropriately maximize the benefits of the joint-venture relationship.

7. Organizational structure
The organizational structure of the ASC should also be thoroughly reviewed. What do the operating agreement and organizational documents allow? Do they still present the best opportunity for the facility to succeed? There are situations where the operating agreement needs to be rewritten to allow the hospital to hold a 50 percent or 51 percent position in order for the center to realize the full benefits of having a hospital partner.

Create a turnaround plan of action
After conducting a full review of the financial, organizational, and operational aspects of the ASC, the next step is to create a plan of action designed to turn the business around. The physician and the hospital stakeholders need to agree the plan reflects steps they are willing to see through to the end. Changes then need to be prioritized based on the assessment. As the ASC’s finances get under control, volume should increase, thereby eliminating many of the woes the center originally faced.

Although the process of successfully turning around a physician/hospital joint-venture ASC can be frustrating and downright painful at times, partnering with the right team can make a world of difference. Common mistakes are avoided when the turnaround team is experienced with implementing processes that have proven to yield successful outcomes. An underperforming joint-venture ASC isn’t necessarily a roadblock to prosperity; it may actually be a stepping stone toward increasing market share and positively impacting the health care needs of the surrounding community.

Learn more about PINNACLE III at www.pinnacleiii.com.

References

1 To ensure OIG compliance, proceeding with such a plan requires proper structuring. A competent healthcare attorney’s legal opinion should be obtained prior to proceeding.

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