Financial planning issues
1. Financial feasibility; a comprehensive feasibility study. A group of physicians (or physicians and management company or hospital) must first examine their outpatient case numbers to determine whether an ASC will be financially feasible. The formula for this is easy: ASC revenue is equal to the number of procedures the group can perform multiplied by the expected reimbursement for the type of procedures expected to be performed. As a general rule, in a reasonable reimbursement market, a center focusing on higher reimbursement procedures can be profitable with as little as 2,000 procedures per year. With lower reimbursement cases, this number can jump to 3,000-3,500 procedures. Further, in low reimbursement markets, it can be very hard to be profitable in some specialties at almost any case level. Financial prudence dictates that one should only begin a project with a case level that is substantially higher than the threshold or break-even amount.
A pro forma analysis and feasibility study can help you determine if establishing an ASC is possible. You should rely on sound physician data regarding projected case volumes, case mix, scheduling preferences and expected reimbursement rates.
The case volume and reimbursement rate data that are collected are the key assumptions upon which the revenue part of pro formas are built. The greater the accuracy and certainty of these two types of information, the greater the accuracy and reliability of the final pro forma projections. In one center we helped to develop, the viability of the project itself was threatened when one or two of the key assumptions changed, resulting in the prospective loss of several hundred cases per year.
In addition, the physician partners involved in the project should be fully committed from the outset. There are few things that will negatively impact the financial outlook for a new center as much as the departure of a core physician during the later stages of development. Although a project can recover from a minor setback or challenge during the early planning stages, it is more difficult to correct more severe problems that occur later in development.
Here is a sample summary pro forma from the VMG Health 2008 Intellimarker:
| $'s in Thousands |
Mean |
| Patient Revenues |
|
| Gross Charges (procedures mulitpled by revenues per procedure) | $21,764 |
| Adjustments | (14,926) |
| Net Revenue |
6,490 |
| Operating Expenses | |
| Employee Salary & Wages |
1,541 |
| Employee Taxes & Benefits | 337 |
| Occupancy Costs |
421 |
| Medical & Surgical Supplies |
1,360 |
| Other Medical Costs |
224 |
| Insurance | 77 |
| Depreciation & Amortization | 315 |
| General & Administrative Bad Debt |
145 |
| Management Fees | 309 |
| Other G&A |
609 |
| Total G&A |
934 |
| Total Operating Expenses |
5,027 |
| Operating Income |
1,915 |
| Other Expenses (Income) | 127 |
| Net Interest Expense |
104 |
| Earning Before Taxes |
1,474 |
| EBITDA | $1,862 |
Case-counting is an essential part of the development process. "Regardless of which specialties you develop the center around, it's critical to understand the surgical case volume represented by each," says Catherine Kowalski, executive vice president and chief operating officer of Meridian Surgical Partners. "Determine the universe of surgical case by physician and always calculate the net case transfer to the ASC, factoring in issues that discount volume including insurance contracts, regulatory, politics, convenience, scheduling, surgeon behavior, etc. A good rule of thumb is about 50 percent of the surgical case universe for a conservative analysis."
Attendance at planning meetings is another crucial part of the development process. "If after two meetings to investigate and develop a project your key physician members' attendance of remains strong, then it is time to get excited," says William Southwick, CEO of HealthMark Partners. "Every surgeon likes the concept of developing a center; it is the core group that remains after two initial meetings that tells you whether the excitement is real or not."
2. Reimbursement by market differs significantly; out-of-network concerns. Throughout the country, centers have had difficulty contracting with certain insurance companies. Therefore, in assessing case volumes, it is important discount the number of cases, to a certain extent, in order to reflect the fact that certain insurance plans may not contract with the ASC. Moreover, certain insurance plans and geographic regions reimburse at levels below national standards. Therefore, the center may not be able to provide services to these patients covered by such plans or in such regions. A mediocre ASC located in an area with strong third-party reimbursement may do better than a great ASC in a bad reimbursement market. There is almost no way to fix a center that is built in a market with poor reimbursement from third-party payors.
In the planning stage, the center should attempt to discuss contracting with payors and obtain a real sense of whether contracts will be available and at what price. Payors have increasing power in many markets and are becoming harder to work with on an out-of-network basis. Payors and state regulatory agencies are increasingly scrutinizing out-of-network reimbursement strategies. In recent months, more insurers are attempting to recoup amounts they have paid on an out-of-network basis. Similarly, state agencies have been more aggressively policing this area. In one recent case in New York, state auditors alleged that several surgery centers improperly waived patients' out-of-pocket payments in connection with the care they received at the centers. In all, the state alleged that about $8 million was overpaid by the state employee insurance plan, the Empire Plan, and United HealthCare, the state's insurance administrator.
I. Naya Kehayes, MPH, managing principal for Eveia Health Consulting and Management, warns that insurance companies are taking more aggressive approaches to target out-of-network ASCs and encourage in-network participation.
"They are actively pursuing surgeons who practice in non-contracted ASCs and are sending notices to surgeons who use non-contracted ASCs that indicate they are in violation of their professional contracts by directing patients to a non-participating facility," she says. "Some payors are demanding from surgeons copies of the ASCs' out-of-network billing practices, policies and procedures. They are threatening to terminate their professional contracts as a result of taking patients to an out-of-network facility."
In its 2008 annual report on ASCs (dated Feb. 4, 2008), the Deutsch Bank reports that for ASCs, "out-of-network situations typically result in greater overall costs to the system because both the patient and the third-party payor have higher outlays." The report also notes that, in the long-term, "any ASC that builds its business model around unsustainable out-of-network reimbursement levels is bound to fail."
One of the benefits of a hospital partner is that it is able to jointly negotiate reimbursement rates or to include the center in on the hospital's own payor agreements. However, this is often legally restricted as it is subject to certain antitrust rules and regulations that require the hospital to have a sufficient amount of control over the venture on whose behalf it is negotiating. In many situations, the hospital will be unable to force the payors to negotiate on a joint basis. To further complicate matters, some hospitals fear that by seeking to negotiate the ASC's rates with a particular payor, they will be exposing themselves to renegotiation of their current hospital outpatient department rates.
As out-of-network practices continue to raise concerns, and there is increasing pressure due to the economic environment for providers to be contracted with payors in order to reduce out-of-pocket responsibility to the patient, Ms. Kehayes advises ASCs to develop an in-network strategy.
"A new ASC should evaluate the contracts that their physician-users have in place at their practices and determine the most critical payors," she says. "It is important that the ASC align its contracts with the surgeons that will be using the center. Products offered by the insurance company should also be evaluated. Often, payors sell HMO as well as PPO products or they have products that are very restrictive with respect to out-of-network benefits. Therefore, if there are product limitations to out-of-network access, these payors are typically more important to get in place soon after an ASC opens."
Ms. Kehayes suggests that ASCs start making inquires to payors at least six months prior to the opening of an ASC in order to evaluate access to contracts and to speed up the negotiation process. "The initial contracts an ASC secures with a payor are the baseline for the future of all contracts as well as the relationship with the payor," she says. "The initial contracts present the most opportunity for negotiation especially if the surgeons working at the ASC are moving volume from a more costly environment, the hospital, and to the ASC setting."
She also warns ASCs against signing contracts just to boost volume as it actually reduces the power of the ASC to renegotiate its contract. Once the ASC signs an initial contract to attain access to volume, and surgery is performed at a contract rate that is below the cost of providing the surgical service, it demonstrates to the payor that the ASC can afford to perform the case for that rate. In reality, the ASC is often subsidizing the insurance company by paying to perform surgery on their members because the contract rates are below cost. The payor is unlikely to make significant changes to rates after the initial contract has been signed and there is a contractual term in place, which can range from 1-3 years.
Some ASCs may find it more advantageous to provide services as an out-of-network provider, when out-of-network benefits are available, for a period of time when the center first opens and while the center is in active negotiations with a payor, according to Ms. Kehayes.
"This helps to demonstrate the cost-savings opportunity to the payor and its members of contracting with the ASC," she says. "The payor will have claims data showing their opportunity to reduce cost by moving the ASC in-network. In addition, if a center does not provide any services to a particular payor out-of-network while in the contract negotiation process, it is often devalued and it lowers the ASC's importance on the payor's contracting priority list. This can prolong the already lengthy contracting process."
Hiring a third-party contracting consultant is another alternative to consider. A consultant can provide insight and advice with respect to the planning stages of reimbursement contracts. In addition, these consultants ultimately can be used to negotiate the contracts on behalf of the center. Some management company partners employ their own in-house contract negotiators whereas others outsource this function.
3. Capital requirements. The typical development of a standalone ASC with tenant improvements costs approximately $220-$250 or more per square foot to become operational. Additionally, money is needed for equipment. Of the total budget amount, a substantial portion can be provided through debt financing without guarantees; however, a certain portion of the debt may require personal guarantees (such as tenant improvements, working capital, etc.). Moreover, a substantial cash capital contribution is usually required in an ASC venture. Typically, anywhere from $500,000-$1.5 million is required as an equity cash contribution in total by the owners.
An ASC will typically initially issue 100 ownership units to members based on the amount of capital that each member contributes. For example, if each unit costs $10,000 and a member owns 15 units, he or she contributes $150,000. The amount of capital required depends on the size of the project, the amount of debt to be secured and whether the ASC will be a "tenant" or own and develop the real estate. The equity plus the debt borrowed from lenders equals the total amount of money needed to develop the project. If a single-specialty ASC, such as an endoscopy ASC, leases the space in which it operates, total initial equity capital contributions are often around $400,000-$800,000; however, the members may be able to contribute less money upfront if a more substantial working capital line of credit is obtained. For a multi-specialty ASC that leases space rather than owns the building, initial equity capital contributions are often between $700,000-$1.2 million. One option, even when all of the investors want to invest in both the surgery center and the real estate, is to hold the ownership of the real estate and the ownership of the surgery center in separate entities. This allows for additional investors to own a portion of the real estate holding company, thus making it less expensive for the investors in the surgery center entity. By separating the real estate from the surgery center entity, investors can choose where they would like to invest: in the real estate, the surgery center or both. However, there are significant benefits to fully congruent ownership.
The operating agreement sets forth the dates on which the capital must be contributed. Typically, all or a significant portion is due at signing. In some situations, part of the capital is due at a later date, such as upon receipt of a certificate of need or at six months after the initial signing. Additional capital contributions may be required upon the vote of the board of managers and often a vote of the holders of a certain percentage of the units. The group will need to assess the total equity to be contributed.
Working with experienced lenders will facilitate the financing of an ASC. It can be tempting to work with a friend or a local bank, but this could be a mistake. Often with ASCs, time is of the essence and problems occur which are better handled by an experienced lender than by a friend. For the best result, look for a lender with specific ASC financing experience.
The current state of the economy is something that should be considered heavily when determining financing for your new ASC. Robert Westergard, CPA, CFO of Ambulatory Surgical Centers of America, says that banks are currently looking to see as much as 30-40 percent of the total cost contributed by partners, compared with the 20 percent or lower seen previously.
"In the past, we used our cash only for working capital," he says. "Some back are asking that we now use some of it in lieu of bank financing for some capital expenditures."
Mr. Westergard also notes that the banking environment has changed dramatically over the last year. "In the past, banks seemed to be looking for reasons to lend money," he says. "Now, they're often looking for reasons not to lend money." This changed environment also has affected the amount of time it takes to obtain a loan. "We've doubled the amount of time we tell our partners to expect obtaining a loan to take. Some banks suggest this may still be a somewhat optimistic view," he says.
4. Expense management. Surgery centers tend to have a level of fixed costs that generally require at least $3-$5 million in revenue to be significantly profitable and to cover the necessary expenses. Centers with $5-$10 million in annual revenues can, on average, expect to have an EBITDA of around 20 percent or earn about a 20 percent operating margin before deducting interest, taxes and depreciation. The three biggest costs for an ASC typically include staffing costs (about 25 percent of revenue), supply costs (about 20 percent of revenue) and general and administrative costs (about 14 percent of revenue). With staffing costs making up most of ASC's expenses, it is critical to benchmark the hours per case to those at other similar centers in order to ensure that your staff is working efficiently. Generally, multi-specialty cases take between 13-15 hours and single-specialty cases take 6-8 hours. This number is often translated in simple terms to approximately five full-time equivalents per 1,000 patients. To control staffing costs, staff must be used efficiently by cross-training where appropriate, by staying open only as many hours as cases require and, if possible, by sending staff home when they are not needed.
Supply costs may be reduced by the use of a group purchasing organization or a hospital or management company partner that is able to aggregate expenses over a number of facilities and, as a result, benefit from volume pricing with vendors. Another common way to reduce supply costs is to standardize certain common surgical supplies and reduce the use of nonessential supplies. A seasoned management company can help a surgery center to achieve greater operational efficiency in both of these areas. Although staffing and supply costs can be modified over time, facility costs are much more difficult to change once a lease has been signed or construction has begun. It is very important to obtain expert advice relative to these three cost items early and often.
Equity ownership, physician partner issues and hospitals and management companies as partners
1. Management and equity ownership. It is important to determine whether or not your ASC will have a management company as an equity partner. An experienced manager can help with myriad aspects of the project, such as financing, financial planning and analysis, Medicare certification, equipment planning, construction planning and physician recruitment. A good management company can significantly reduce the likelihood of problems in completing the project, operating the center, financing the project.
Working with an experienced partner can help add focus to the project and help in areas such as efficiency and cost management. "Management teams allow physicians to focus on their core business, patient care and surgery," says Larry Taylor, president and CEO of Practice Partners in Healthcare. "Since management companies take a lead role in the process, having their success linked directly to the success of the facility often leads to a minority ownership. By having the management company tied to the success of the center, incentives are aligned with the partnerships. Experienced firms sequence processes and the ramping of employees to reduce cost."
Mr. Taylor says that the management team should produce results that are valuable to the partnership in both the financial and clinical areas.
"If a management company is an owner in an ASC, the financial performance of the ASC has a more significant impact on the management company than the size of their fee," says Christian Ellison, vice president of Health Inventures. "Requiring a management company to put their capital at risk alongside the other investors appropriately aligns incentives among all of the stakeholders that drive value in the ASC business."
The key downside to having a management company as a long-term equity partner relates to the disparate quality of companies that provide services to ASCs and the profits that are shared in bringing in a management company. Physician ownership alone can be very attractive under the right circumstances. However, an experienced management team substantially lowers the risks and, in most situations, can provide substantial benefits and improve profitability. Further, an equity owner/advisor often will have a much greater level of concern regarding the project's success, even when it owns only 15-30 percent of the center.
The 2008 ASC Report from the Deutsch Bank says that the 25 largest management companies own interests in aggregate in about 1,000 of the country's 4,700 Medicare-certified ASCs.
Critical items to negotiate with the management company include the percent of ownership, management fee, services provided, personnel employed or provided, length of the management contract, board rights and reserve or veto rights of the management company. A group should interview 3-5 management companies and talk extensively to other centers managed by the company.
In addition to a management fee, the leading management companies are increasingly requiring equity in the surgery center. Before rejecting such an arrangement, evaluate how that management company compares with other management companies. Mr. Ellison says that hospitals and physicians are increasingly requiring that management companies make an equity investment in the ASC to ensure that there is increased focus on the value creation that the risk creates.
A solid management company partner can also substantially improve the financing prospects of a center. Some finance companies will not finance an entity without an experienced management company being involved.
2. An ASC can have too many physician investors. Determining the right number of physician investors requires significant forethought and planning. With too many physician investors, there is often a dilution of individual physician responsibility and ownership interests. However, with too little ownership, physician investors often lose their commitment to the ASC and look for alternatives. Further, a great deal of resentment can develop between productive and less productive parties. Of course, with too few physician investors, the price of buying-in will be greater, there will be more risk of case volume losses with a smaller number of investors and the overall case volume of the center can suffer. The average number of physician owners in an ASC is approximately 15.1, according to the Deutsche Bank 2008 ASC report.
3. Single- or multi-specialty center. Single-specialty centers can be more efficiently staffed and built than multi-specialty centers. Moreover, a single-specialty center avoids competition relating to sharing space, profits and revenues with other specialties that is often present in multi-specialty centers. However, changes in reimbursement can affect single-specialty centers more dramatically than multi-specialty centers. For example, Medicare has instituted significant cuts in ASC reimbursement for gastroenterology, pain management and, to an extent, ophthalmologic procedures. These cuts can disproportionately impact a single-specialty GI or pain management ASC's overall revenue and financial health.
On the other hand, a multi-specialty center can help reduce reimbursement reduction risk through a diversification of reimbursement sources and a mix of physicians. In addition, a multi-specialty center can provide for greater staff and physical plant economics of scale, which may be needed if single-specialty volumes are insufficient. In many cases, the operating margins in single-specialty ASCs are much higher than multi-specialty ASCs.
Barry Tanner, president and CEO of Physicians Endoscopy, says there are several things to think about when considering a single-specialty center as compared with a multi-specialty center. "With single-specialty ASCs, no one specialty is subsidizing the costs associated with performing another specialty," he says. "In other words if GI physicians working in a multi-specialty ASC are highly efficient and productive in terms of patient volume, they may perceive, rightly so, that they are subsidizing the higher costs (such as inventory, equipment, etc.) associated with performing orthopedic procedures."
Mr. Tanner also says that there are the advantages to a single-specialty ASC. "We like to believe that because we do one thing, we do it very well," he says. "When a patient goes to a single-specialty ASC, we know who you are and why you are there. This can improve both the patient experience as well as the overall quality of care."
Mike Lipomi, president of RMC Medstone, says there are several important factors to consider between operating a single- versus multi-specialty ASC. "As a single-specialty facility, your ability to syndicate to additional physicians will be restricted to the practicing physicians in that specialty," he says. "You will limit your ability to spread the overhead costs between specialties and to fully utilize the resources available in your facility."
Mr. Lipomi also notes the areas of crossover in surgery centers, regardless of whether they are single- or multi-specialty. "Areas of the business office like reception, billing, collections and management can perform the same or similar functions for one specialty as well as multiple specialties," he says. "The issue of rate fluctuations in a single-specialty center is a major concern. In a multi-specialty center, reducing reimbursement for one specialty is absorbed by other specialty reimbursement. This is better for the center as a whole and at the same time hurts those physicians who are getting better reimbursement."
Specialty net revenues per case, according to the VMG Health 2008 Intellimarker, for several specialties are as follows:
| Specialty |
Net Revenue |
| ENT | $1,855 |
| GI/Endoscopy | $859 |
| General Surgery |
$1,696 |
| OB/GYN | $1,907 |
| Ophthalmology |
$1,409 |
| Oral Surgery |
$1,438 |
| Orthopedics |
$2,426 |
| Pain Management |
$1,127 |
| Plastic Surgery |
$1,653 |
| Podiatry |
$1,884 |
| Urology |
$1,649 |
The number can be heavily influenced by sample size and several factors such as out-of-network considerations.
4. Hospitals as partners. Approximately 25 percent of ASCs in the country have a hospital partner. In many situations, a hospital can add value by helping with managed care contracting, making it easier to recruit physicians or otherwise reducing physician concerns regarding being excluded from privileges or having other types of retaliatory action taken against them by the hospital. On the other hand, it is critical for surgery centers that physicians own a significant amount of the equity and that they remain interested and excited about the venture. We have seen hospital partners own 10-30 percent of the venture on the low end to 60-70 percent on the high end. A number of lawyers representing hospitals believe that physicians have to own 51 percent or more. In contrast, many lawyers believe that hospitals can own a smaller interest and either agree to treat the income as taxable income or otherwise have separate special powers to help ensure that the venture serves exempt purposes. From a business perspective, having a hospital partner has been helpful in many circumstances. However, it is not a panacea for surgery centers, and there are a great number of surgery centers that have hospital partners that still under-perform.
"Some hospital-physician joint ventures never survive the transition form a 'spirit of negotiation' to a 'spirit of partnership,'" says Tom Yerden, CEO of TRY Healthcare solutions. "Regardless of the strength of the projections (business plan), those joint ventures that I have seen fail [do so] due to lack of trust among the parties."
Mr. Ellison believes that physician-hospital joint ventures can create a significant competitive advantage for surgery centers if structured properly and done for the right reasons. "It is critical that regardless of the level of hospital ownership, ASCs should be physician-led businesses," he says. "Legal frameworks exist for this to happen in a way where the physicians still feel that they have control over their future."
5. Ophthalmology procedures can still be profitable. Do not make a blanket decision to exclude ophthalmology as a specialty. ASCs can still profit from ophthalmology procedures if the ASC has significant volumes and effective internal cost control; in other words, the ASC must run very efficiently.
According to Luke Lambert, CEO of the Ambulatory Surgical Centers of America, most mature eye practice are already participating in ASCs, noting that the quick nature of most eye cases play to the strengths of surgery centers. "When ophthalmologists start working in an ASC they never want to go back to the hospital," he says.
According to the 2009 HealthCare Appraisers Surgery Center Valuation Survey, 89 percent of respondents believe that ophthalmology is a desirable specialty to have at an ASC. Ann Deters, from the cataract division of Vantage Outsourcing, suggests several reasons why this is so.
"Ophthalmic procedures represent steady caseloads, consistent revenue and added profits to a center," she says. "Plus, these cases don't fluctuate with the economy, like elective specialties. At the same time, the majority of ophthalmic cases are cataract procedures, which are low-risk surgeries." In addition, she says that ophthalmology increases the surgeon-user base at an ASC and can increase the number of physician investors for a surgery center.
"Senior citizens have proven to be a great marketing tool for a surgery center [with an ophthalmology specialty]," Ms. Deters says. "Minimizing travel time for senior citizens and their families is a 'plus' and much appreciated by [this] population."
6. Pain management and anesthesiologists. Centers are increasingly concerned that physician-investors will perform their pain management procedures in their own offices rather than at the ASC. Medicare's site-of-service differentials, which often pay more for in-office procedures (along with other incentives), may very well encourage this practice. ASCs should plan accordingly and diversify their services to accommodate a potential loss of pain management revenue. CMS has also implemented relatively large reductions in pain management reimbursement for ASCs. In order to control the flight of pain cases from the surgery center to physician offices, it is necessary to engage in a frank conversation with pain physicians fairly early in the planning process to clarify which procedures will likely be performed in their offices versus those that will likely be performed in the surgery center. For financial planning, it is critical that both parties fully understand the expectations for these types of cases.
Notwithstanding these concerns, "Efficient pain specialists can be a pillar of strength in a successful ASC," says Mr. Lambert. However, he does advise against inviting anesthesiologists to be owners in ASCs. "We feel it is better to be the consumer and contractor of anesthesia services than to be partnered with them," he says.
7. Gastroenterology can still be profitable. In a 2006 study, gastroenterology was the largest surgical specialty, representing 25 percent of all surgical cases performed at ASCs. Medicare has implemented decreased reimbursement for gastroenterology procedures performed in an ASC. This can hurt an ASC because gastroenterology/endoscopy centers typically rely on Medicare for about 20-40 percent of their cases. Fortunately, because these centers still generate 60-80 percent of their gastroenterology business from outside Medicare, the specialty can still be profitable if they have significant volumes and the "non-Medicare" business continues to grow.
"This is a specialty characterized by high volumes," says Mr. Lambert. "ASCs are important to enhancing productivity. Profits per case are low and declining but given sufficient volume it can be attractive."
Gastroenterologists will increasingly have to minor in anesthesiology. Increasingly, payors will not pay physicians separately for anesthesia procedures provided in connection with gastroenterology procedures. Thus, gastroenterologists should be competent at offering all types of anesthesia procedures.
8. Plastics. In multi-specialty surgery centers, plastics, particularly cosmetic procedures, often are very challenging. Here, the physician often bills globally, and the ASC and the physician are adverse to each other in that the ASC must negotiate its rates with the surgeon as opposed to charging a third-party payor.
9. Bariatrics are booming, but do not count on bariatrics as a long-term profit center. Bariatric procedures are growing rapidly and are increasingly performed in ASCs. Initially, ASCs will earn outsized profits from these procedures; however, as the number of bariatric providers increases and price competition evolves, the prices on these procedures will eventually normalize and become less profitable. For this reason, and because substantial concerns remain regarding the safety and risks related to bariatric programs, ASCs should use caution and be conservative when developing bariatric programs.
Thomas Michaud, chairman and CEO of Foundation Surgery Affiliates, notes the "patient acquisition" syndrome he sees as a common trend in bariatrics. "Many bariatric surgical patients come from 'obesity programs' that include seminars, continuing education, postsurgical support, etc.," he says. "Many of these programs, which are very costly to operate, are sponsored by hospitals, and the hospitals are not likely to let their surgical candidates leave 'their program' to have surgery performed elsewhere without effort to retain these patients in 'their program.'"
10. Lasik. Lasik surgery, for reasons akin to why plastic surgery is problematic, is often best left to practices.
11. Orthopedic procedures remain great procedures for ASCs. "How well you do with orthopedics depends — to a great deal — on how successful you are in negotiating payor contracts," says Mr. Lambert. "Medicare's new fee schedule phase-in is making it possible cover costs and setting a reference point that is helpful when negotiating with other payors."
12. Neurosurgery and spine. Spine procedures are increasingly performed at ASCs and remain a popular and growing specialty for ASCs. Orthopedics profits from the new CMS surgery center rates. These are likely to remain good specialties for ASCs for a substantial period of time. In the best situation, the center has a base of cases from both specialties.
Despite the promise of these specialties, it is important to consider the costs.
"Spine service costs up to $360,000 to set up," says Tom Mallon, CEO of Regent Surgical Health. He says that it can cost $80,000 for microscopes, $80,000 for trays, $120,000 for a C-arm and $80,000 for a Jackson table, and he says that costs should not be taken on frivolously. "However, if the surgeon uses loops instead of a microscope and if you have a C-arm, the entry cost is much less, [around] $160,000," he says.
In addition, Mr. Mallon mentions some caveats in this specialty. "Spine often cannot be performed on contracted patients," he says. "So in order for you to begin even a small program (five cases per month), you need at least some out-of-network patients. However, the surgeon will love the efficiency, and the patients will love the facility. This will grow over time and as payors recognize the benefits, you will be able to negotiate reasonable reimbursements."
13. ENT continues to be strong. Ear, nose and throat procedures continue to be a strong specialty for surgery centers. This specialty continues to be reimbursed reasonably well in many markets.
"We see ENT as an attractive specialty if the cases in your area are not overly dependent on Medicaid," says Mr. Lambert. "Special considerations for this specialty include requiring skilled pediatric anesthesia and having a private recovery area for children."
14. Urology. Urology can be a profitable specialty for ASCs.
Dr. Herb Riemenschneider, founder of Knightsbridge Surgical Center says, "Many procedures are short and can pay well on a time of utilization basis. Of those that are longer, some reimburse well." He notes that longer procedures, for urinary tract stone disease (such as extra corporal shock wave lithotripsy and ureteroscopic stone work with laser), urinary prosthetics (such as penile prosthesis and artificial urinary sphincter), prosthetic slings for treatment of female incontinence and most recently, cryoablation for the treatment of prostate cancer, have the most potential if they are performed correctly.
"Urology can be profitable when it involves lithotripsy and female incontinence surgery," Mr. Mallon says. Both are predominantly commercial populations. Serving Medicare men with prostate cancer can often be break even at best."
"The surgery center has allowed our urologists to remain more efficient doing outpatient surgery than they could be by performing the same procedures in an outpatient hospital setting," says Bill Monnig, the president of a large urology group. "The single-specialty designation allows us to gain maximum benefit of the special endoscopic equipment that urologic surgery requires and, therefore, may be more financially advantageous than a multi-specialty center where this equipment may not be used as much." He also notes that the number and type of procedures that can be performed at a surgery center continues to grow yearly.
Building issues
1. Do not overspend on real estate. Physicians planning centers should purchase property that is cost appropriate. Normally, a second- or third-tier commercial property that is level, safe, accessible to your physicians and patients and has easy parking will be sufficient. Make sure that the less expensive land will not ultimately cost you more due to unknown variables. If a property has setbacks, zoning restrictions or a lack of utilities, it may ultimately cost more in the long term. A site should be evaluated by an experienced ASC architect to ensure that it can meet the ASC's requirements. This includes performing a thorough analysis of state and municipal codes and regulations in regards to health and zoning issues prior to purchasing the land. Do not assume, for example, that a space that has been used previously as an ASC is automatically qualified to fit your needs. In many cases, existing structures may not be up to standard code, and a change in ownership or management of the facility will trigger a need to update it to current specifications.
A visible, expensive parcel is often an unnecessary cost. It is not important that the ASC be visible in order to attract drive-by or foot traffic. This is significant because premier commercial lots can cost considerably more than otherwise equally appropriate, yet less visible, lots.
2. Do not overbuild. A building should meet the group's volume and specialty needs, as well as the financial parameters. The space plan should be integrated with your staffing and equipment plans. Knowing your case numbers, how many technicians, nurses, schedulers, business office and administrative staff and other staff you will need and your equipment requirements should determine your space needs.
3. Lease or build from the ground up; lease or own the real estate. A center needs one operating room per every 1,000-1,500 cases. A typical two-room ASC can be built in 7,000-8,000 square feet. An average size ASC is approximately 14,000 square feet. VMG Health's Intellimarker also indicates that the median ASC includes four operating rooms and two procedure rooms. Centers can be leased from a third party or built from the ground up. Often, it is quicker and less expensive to lease space and operate as a tenant. On average, rental rates are approximately $28 per square foot each year. The disadvantage to this approach is that one does not ultimately own the real property nor completely control the project. At the same time, the long-term capital costs can be substantially lower.
Mr. Lambert says that leasing is preferable because it is possible to lease without personal guarantees and to avoid putting cash or equity into real estate. "Surgery centers, if conceived and managed properly, can offer returns that are superior to that of the typical ASC real estate investment," he says.
4. Equipment budget and planning. As you develop a center, you have to decide whether or not you are going to use an equipment planner. It costs approximately $200,000-$500,000 to set up a single operating room and is one of the largest expenses at the surgery center. Employing an expert can help you save costs, plan more efficiently and coordinate better through design, development and construction. However, a center may be able to do this on its own or it could use a management or development company. In fact, many people resent the extra cost of using an equipment planner coupled with management fees. Further, there are situations where the equipment planning firm may have such close ties with equipment manufacturers that using an equipment planner might not get you some of the benefits that you expected to get from the process.
5. Other building issues. Early in the design process, an ASC should examine how information technology systems, fluid management systems and anesthesia systems will be incorporated into the design. Bill Merkle of MD Technologies says there are a number of factors to consider with fluid management systems.
"ASC design should consider fluid waste management, since disposal systems require plumbing, drains and medical gas piping most easily installed during construction or remodeling," he says. "Procedure room layout should address fluid management to ensure that utilities and piping are conveniently located near the patient bed as well as near medical equipment (such as an endoscopy cart with light source). System size and floor space requirements should be assessed, particularly if suctioned fluid must be transported to disposal sites. Today, most (around 80 percent) fluid management costs are for canisters, with the remaining cost for waste disposal. Tremendous cost savings can be realized if both costs are eliminated. Advance planning can improve room efficiency, reduce turnaround time and minimize fluid management costs."
Miscellaneous
1. Accreditation and state licensure. Many surgery centers are state-licensed, Medicare-certified and accredited. For example, in 2005, more than 4,500 of 6,000 ASCs in the United States were Medicare-certified. Many states require ASCs to be licensed. In addition, ASCs should attempt to become accredited by the Joint Commission, the AAAHC or another reputable accrediting agency such as the AAAASF. Accreditation often enables ASCs to be deemed Medicare-certified, to serve certain payors and to measure their services and performance against national recognized standards, thereby helping them to improve the quality of their care.
Speak with your state health department early on in your development process. Each state has different ASC licensing requirements. In all cases, you will want to speak with them very early on to access state requirements and processes, and to help avoid unexpected delays in licensure requirements.
2. Hire strong leadership. High-quality management is critical to an ASC's success. All management companies are not equal. Many management companies offer superior services; however, many are of little value. For this reason, it is important to work with an experienced management company that has a proven track record of success. Working with a low-quality, inexperienced company will do more harm than good. You will need to start by hiring an administrator and director of nursing.
Greg Zoch, a partner with Kaye/Bassman, says that hiring top-rate leadership is critical to setting up a new ASC for success. "Leadership (administrators and clinical directors) will attract (or repel) great staff, manage the budget, negotiate payor and vendor contracts, manage inventory, mange staff, build the culture [of the ASC] and can be the determining factor in not just profitability, but in physician and patient satisfaction as well," he says.
Mr. Zoch suggests having your administrator and clinical director on the job six months prior to opening. This allows them to build a good working relationship with one another and to make any changes to work-flow or design before the center opens. They can also deal with the processes that are necessary to handle so that your center can be online and on-budget when it opens. He advises ASCs to start their recruiting process for an administrator or clinical director nine months before opening. He also advises ASCs to use an executive search firm to find good leadership. "Most top talent rarely, if ever, reads employment want-ads and can only be reached by a proactive approach," he says.
A great staff can lead to a successful, efficient and profitable ASC. You need not necessarily employ your staff full time. However, you are best off paying your staff well and attempting to obtain the highest quality staff — even if they are highly paid on an hourly basis. It is also critical that you treat the staff extremely well so that you are able to recruit and retain the best possible staff. Finding and retaining an experienced and competent staff can be difficult.
Experienced RNs often make superior ASC administrators. Generally, RNs are trained to be disciplined and dedicated workers; a work ethic that carries over to the administrator position. As such, RNs are often vibrant and willing to contribute in myriad ways to improve the surgery center. The RN must study and be interested in the business side of ASCs.
There are several important things to remember when determining salaries. Roger Manning, founder of the Manning Search Group, says that base salaries vary depending on geographic location, with California and certain areas of the Northeast (such as Boston) being the highest. He says that the average salary for an administrator ranges from $70,000-$110,000 annually, based on experience. Salaries for multi-site management positions range from $110,000-$125,000 on the low-end, to $150,000-$175,000 on the high end. This difference is again due to experience, according to Mr. Manning.
For directors of clinical services (directors of nursing), base salaries also vary depending on the geographic location. "Owners should expect to pay on the average $75,000-$88,000 [annually]," says Mr. Manning. "Recruiting a doctor with experience from a national competitor will probably coast you [upwards of] $90,000 because of the highly competitive nature of the ASC industry, coupled with the nursing shortage (especially in California)."
Mr. Manning advises physician-investors to consider hiring an administrator with prior ASC development experience who will stay on as administrator. He suggests hiring this person at "the conception of the deal."
3. Establish MIS and billing systems early. An ASC should establish its management information system and other operational systems — such as billing, materials management and marketing — as early as three months prior to your ASC's opening. The MIS is a critical part of an ASC's organizational backbone and can support the effective management of the ASC. If established early and populated with appropriate information, upon opening, your clinicians, front office and management will have immediate efficiencies scheduling surgeries, billing, performing collections, case-costing and taking inventory, among many other tasks.
According to Laura Gilbert, director of marketing communications for ProVation Medical, it takes around 90 days to set up an electronic documentation system, but she advises new ASCs to take as much as 6-9 months to evaluate systems and to see them in use. She recommends evaluating vendors for MIS and other systems by considering each system's features and functionality. A site visit can give you a feel for how the system works. "If [a provider] is proud of their product, they will give you access to other end users so that you can have an honest discussion as to the pros and cons of their product," she says.
Ms. Gilbert also recommends finding systems that have intuitive user interfaces on the clinical side of operations. Flexibility is also a priority, she says, and it is important to find a system that can be configured to your ASC's needs and a provider that is willing to do the "heavy lifting" and make the modifications for your company.
Caryl Serbin, CEO of Serbin Surgery Center Billing, implores those planning ASCs to decide early whether to outsource billing or handle billing internally; an ASC should decide at least 4-6 months prior to becoming operational.
An ASC should also set up its billing office early so that it can start billing (and collecting) reimbursements from day one. Another option is to outsource billing and collections services. If you choose to use an outside provider, it is advisable to also get them involved early in the develop stage in order to expedite implementation of their systems.
Contact Scott Becker at sbecker@mcguirewoods.com; contact Bart Walker at bwalker@mcguirewoods.com; contact Renée Tomcanin at renee@beckersasc.com.