The Elements of an ASC Turnaround

The principals of ASD Management are, first and foremost, operators of ambulatory surgery centers. We trace our roots back to 1986, when we launched our first surgery center management firm, the forerunner of our current firm founded in 1996. Over the last 30 years, we have developed and managed over 100 surgery centers throughout the United States. We are still doing it today and find it as enriching an experience as when we first started. In 2016, we felt there was a gap in the ASC industry because there was a lack of proper literature describing a proven, systematic approach to operating and developing surgery centers. Along with noted co-authors, ASD Management published the first compreshensive book on surgery center management, Developing and Managing Ambulatory Surgery Centers, now in its second printing and co-published by the Ambulatory Surgery Center Association. The following is an excerpt from the book.

This content is sponsored by ASD Management

In the summer of 2007, we received a call from a former client who invested in a surgery center. He told me the center is a multispecialty surgical center doing approximately 10,000 cases per year. My client then told me the center lost its administrator, is showing a significant loss, is nearly bankrupt and has not paid dividends in two years. Finally, he stated the bank was considering foreclosing on the loan and asked if we could help.

The Diagnostic

Prior to arrival, we requested financial information from the center along with operational information including a staffing analysis, inventory analysis, and collection and accounts receivable reports. We took this information and benchmarked the center against similar surgery centers using the ASD Management database of over 100 surgery centers, as well as the excellent benchmark studies generated by the ASC Association and VMG Health. The results were surprising — staffing and supply costs were excellent and well within acceptable standards. However, several issues emerged. First, revenue per case was very low based on the mix of cases and the payer mix. Second, the accounts receivable were not accurate. Third, expenses in certain categories looked very high and we needed detail and backup to better understand the rationale. Fourth, the center was unable to determine its accounts payable situation because it did not keep a general ledger. Finally, the center had too much debt and would be unable to pay dividends, much less dig out from its current hole with the current bank loan covenants in place.

Element One: Perform a financial diagnostic and benchmark against other centers to identify areas of concern.

The Site Visit

You cannot run a surgery center off a spreadsheet; however, you can identify areas that require attention. The areas to assess include:

• How the business office functions — collections, billing, coding, cash management, accounts payable, fee schedule, payer contracts, and the staff's understanding of the MIS system and how to use it

• How the clinical side functions — inventory, turnaround times, policies and procedures, and adherence to a sound quality assurance and risk-management program

• Accounting and financial reporting — What general ledger system is utilized? How are the financials presented? Do the physicians understand the financials?

• Legal and operations structure — What structure is used? Is it still applicable? Are updates needed?

• Interviews of the physicians, managers and staff — Assess the ability of the nursing director and the business office manager as well as the staff members. Over the course of a few weeks, we realized they are excellent and have a firm grasp on the fundamentals of their jobs. They told us the center lacked leadership and a direction. Bickering among the physicians was rampant, and the former administrator did not pay the bills, resulting in vendors cutting off the surgery center. Not only did they have no cash to pay the bills, but the former administrator did not fund the 401(k), and the Internal Revenue Service intended to assess penalties and audit the surgery center. Lastly, physician interviews were conducted to obtain feedback on the staff and impressions of the center.

Element Two: Perform a site visit to find out what is happening within the center. Meet with the staff, physicians and managers to understand the issues impacting the center.

The Analysis

Since the accounting was in flux and the investors did not receive actual financial statements, accurate numbers became a challenge. Nevertheless, a line-item analysis of all expenses was performed. Several areas were identified where the center could avail itself of savings.

Element Three: Perform a line-item analysis of all expenses.

The Plan

Based on the benchmark analysis, the site visit and the analysis of the financial statements, a plan of action was developed. It became known as the 14-Step Plan.

1. Managed Care — Key managed care contracts were renegotiated to include multiple procedures and implant costs.

2. Collections — A front desk collection policy was adopted and charted each day. Front desk collections went from an average of $7,200 per month to $41,250 per month. A full-time coder was hired. Payer contracts were loaded into the MIS system and denials and follow-ups from insurance were tracked daily. Reporting to our firm was initiated to track collections, days to billing, and coding.

3. Coding — A coding audit was performed for compliance purposes.

4. Accounts Payable and General Ledger — A general ledger system was purchased and the staff was trained to use it. Invoices were entered on a daily basis and accounts payable was set to occur twice a month.

5. Fee Schedule — A new fee schedule was adopted that better reflects charges in the community. The old fee schedule had not been changed since 1994.

6. Employees and Bonus Program — Prior to our arrival, the employees were guaranteed 40 hours per week regardless of whether they worked the 40 hours. This policy was discontinued and a bonus program was adopted to allow the employees to participate in the success of the surgery center.

7. Supplies — The surgery center received deeper discounts on supplies by affiliating with our firm's group purchasing organization. The savings generated are significant.

8. Accounting — The center moved to accrual accounting and prescribed closing and reporting standards.

9. Regular Reporting — On a monthly basis, the investors receive a balance sheet, statement of cash flows and an income statement, along with a benchmark analysis and management report. This allows the shareholders to better understand the fiscal health of the center and keeps them aware of happenings at the center. The updates engender loyalty with the center since the investors are informed of decisions and operational and financial items.

10. Expense Control — Areas of improvement were identified and resulted in significant decreases in monthly overhead for the center.

11. Bank Debt and Raising Equity — The surgery center raised equity and used the proceeds to reduce debt. The terms of the bank debt were renegotiated to be more favorable to the surgery center. The debt guarantees were lifted and the covenants negotiated to give the surgery center a clear path to declaring dividends when its fiscal health improved.

12. Employee Matters — The surgery center drafted and adopted an updated employee handbook and conducted in-services with employees on risk-management items.

13. Legal Matters — The surgery center had not changed or adopted its bylaws in 15 years. As new investors purchased shares, the subscription agreements reflected different terms and conditions. At the direction of the new management team, the center engaged a law firm to draft updated bylaws that reflect the current regulatory environment.

14. Equity Offering — At the behest of ASD Management, the surgery center raised additional equity from new and existing shareholders. The proceeds were earmarked to reduce debt and the infusion of equity became a condition precedent to the renegotiation of the loan with the bank on much more favorable terms for the surgery center.

Element Four: Develop a plan based on initial findings and execute the plan.

The Result

Nine and a half months after the center was on the verge of bankruptcy, the surgery center declared a substantial dividend to the investors and a bonus to the staff. Certainly, the story above is much more dramatic due to the size of the center. However, the keys to success are always the same. Successful surgery centers are collaborative efforts between the surgeons, anesthesiologists, staff, on-site administration and management. At this center, management was the problem, resulting in a lack of leadership and direction. The key fundamentals of successfully operating a surgery center were not addressed or understood. Eventually, the physicians became disgruntled and began to fight, upsetting the collaborative balance. The elements of the turnaround always center on the basics of surgery center operations (quality of care; attracting and retaining good staff; turnaround times; inventory management; controls on supply and staffing costs; billing, coding and collecting procedures; proper pricing; payables systems; effective accounting; and many other items beyond the scope of this article). However, health care is a people business and effective and competent leadership allowed the center to come back into balance by giving the center a clear direction and purpose.

Joseph S. Zasa is the co-founder and managing partner of ASD Management, one of the oldest continually operating ambulatory surgery center development and management companies in the United States. He can be reached at (214) 369-2996 or joezasa@asdmanagement.com

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