10 Lessons on ASC Turnarounds by Tom Mallon

Often working smart is just as important as working hard. Through our experience developing and managing ASCs and physician-owned hospitals nationwide, we've identified 10 common lessons learned in turnaround situations.

The following are a list of the top 10 lessons we have learned for avoiding the red and improving a center's financial health.

1. Bad contracts with payors place you in the fast lane to bankruptcy.
Contracting is critical to a center's success. Follow the simple rule that contract rates can never be below costs.

We recommend contracting with every payor who controls more than 10 percent of commercial patients. When negotiating, focus on the rates. Most contracts still trade from old Medicare base rates of 110 percent to 180 percent. Medicare rates, however, can be devastating when most centers need 150 percent to just break even. If payors sell your rates to other payors, you have just written off the most profitable part of your business — the small, out-of-network payors. For example, imagine negotiating an aggressive deal with one payor who represents 10 percent of your business. That payor then sells your contracted rate to 10 other payors who represent two percent each of your business. Now that aggressive deal is being offered to 30 percent of your patients.

The worst contract we have seen was at a facility in Ohio. The prior administrator signed with a national payor under a three-year term with no opportunity to cancel. The rate was 110 percent of Medicare and included anesthesia fees. We ended this contract, increased charges to the 80th percentile, established a separate business office in the surgery center and immediately hired a biller. The changes were significant and the results immediate.

2. Without a scientific method for determining a chargemaster, you risk giving away the only high-margin business available.
Most centers set their charges at two to three times the old Medicare rates. With break-even at 150 percent of those rates, these centers need to achieve a collection percentage around 50-70 percent, which is unheard of in this industry.

To set a reasonable market chargemaster, we use the Ingenix database. In facility billing, the data is skewed to the high side, not the low side. That is why carriers will not agree to a blanket 50-percentile reimbursement for out-of-network cases. Nevertheless, using Ingenix rates for facility billing does result in actual collections sufficient to provide solid investor returns.

3. Recruiting the right doctors is as much about attitude as it is about specialty.

Physician partners make or break ASCs and small physician-owned hospitals. Often, the founding physician is the spark to start the venture but lacks the relationships necessary to attract enough colleagues. A profitable and functional partnership must have the right number and kind of doctors as well as a business model that keeps them involved over the long term.

Any physician venture needs to have the "A Team" as its core. You cannot attract the A Team if you start with B players. To find the elite, form a relationship with a senior anesthesia provider who knows all the surgeons in the community. He or she knows who is fast, efficient and cost effective, and is aware of who is difficult to work. Also, look for the top surgeon in a desirable specialty — either high reimbursement and low to moderate volume (such as spine, orthopedics and ENT) or low reimbursement and high volume (such as pain, GI and ophthalmology).

The business model that works well in today's post-Stark environment is a smaller group of physicians committed to supporting the business and bringing at least one-third of their cases to the center.

4. Even with the right surgeons, an inferior management team and administrator can lead to financial disaster.
In the case of one center, surgeons had built the center, hired a management company and opened the multi-specialty center. Although they handled a fair share of specialties in four operating rooms, the center didn't turn a profit in its first two years of operation. Twice, the center issued cash calls.

As the surgeon owners became dissatisfied, they sought a new management company to turn the center around. One of the first things Regent did was hire a new administrator, unify the physicians and bring in new doctors and specialties to support the center. Within six months of Regent's partnership, the center made its first distribution to members.

Three years later the largest healthcare systems in their area approached this thriving center for a hospital partnership. The joint venture has enhanced the center's revenue by providing access to new payors through its managed care contracting. Also, the center has been able to reduce expenses by taking advantage of lower equipment and instrumentation prices through its group purchasing contracts. The three-way partnership makes sense, and each party's expertise is leveraged to contribute substantially to the partnership through cost savings, quality of care and growth.

5. Without an exemplary director of nursing, you are like a salmon swimming upstream.

Critical to clinical excellence and cost containment, a director of nursing walks a fine line between the staff's and the owners' competing priorities. The right DON identifies waste and inefficiency and establishes the clinical team's discipline for abiding by the accreditation and quality programs needed to maintain licensure and provide excellent care.

The wrong DON carries a chip on his/her shoulder in regard to the physician partners. Reacting to years of perceived slights by physicians in hospital environments, this person has been trained to "protect the patient" (i.e., tell the doctor what he can and cannot do). This, of course, is not the team spirit that makes our facilities run smoothly. Although these nurses may be excellent from a clinical standpoint, we cannot afford self-righteous and inflexible attitudes. It ultimately hurts patient care.

6. An unhappy staff leads to poor patient and physician satisfaction.
Invest in your people. Create a strong human resources program and cultivate an internal culture. Our goal is to select staff based on our corporate values — Respectful caring, Integrity, Stewardship and Efficiency (RISE). These values guide us in our interviews, goal setting, reviews, communication, training and leadership development.

This is a journey for us, not a destination. Over time, we have seen a huge improvement in our staff and our leaders. Without a strong, dedicated employee base, a center has no legs to stand on. Soon after the grand opening of our new Surgical Hospital of Munster, record-breaking rain hit northern Indiana. The chief operating officer contacted employees and enlisted their help to move $1 million in surgical equipment from the first floor to the second before losing power and use of the elevators. In less than 90 days after the flood, the very determined Regent team and hospital staff had the facility ready to reopen.

7. ASCs that wait until the end of the month to understand their cash position typically throw money away daily.

In our first turnaround project, we found a vendor account payable for more than $70,000. Based in Santa Barbara, Calif., the vendor sold penile implants. We quickly assessed that Medicare patients received the implants However, Medicare not only refused to pay for the implants, it did not even pay for the procedure because it was unapproved. The lesson here is manage your supply and labor costs.

Our surgery facilities order more than 2,000 SKUs (individual units). To protect ourselves, we use an electronic ordering system that matches our pricing to the agreed upon discount. If the price is incorrect, the system holds the order, giving purchasing time to talk with the distributor. The software also alerts us before a commitment letter expires, allowing us to renew and avoid price increases. Because physicians select implants, this supply is a greater challenge to control. If our physician partners allow us to choose between several vendors, however, we often achieve remarkable discounts.

Labor represents more than one-third of most surgical facilities' costs. Success depends on flexing labor to meet the ebbs and flows of our business. To achieve this, either make a deal with full-time employees to flex in and out based on the case schedule or minimize the number of full-time employees and hire a facility-based registry of per diems. Travelers are not a good option at any time — their unfamiliarity with the facility and surgeons is unacceptable.

8. High revenues per case and volume solve almost all problems.
When we look at a turnaround situation, the center is either doing very few cases at a reasonable reimbursement rate or many cases at a low reimbursement rate. These two situations result from very different mistakes.

Too few cases typically indicate that the physician partnership failed. The busiest surgeons either did not join the venture or they left after several years. This leaves a gaping hole in the schedule and creates an unprofitable, underutilized facility.

If a large physician partnership pressures the center to do "all" cases, this also creates underperformance. Administrators often sign contracts without calculating the average reimbursement per case. For example, one center previously performed 800 cases per month and lost more than $1 million per year. The center only achieved an average reimbursement of $850 and performed no out-of-network cases. The center increased its contracts and out-of-network business and increased its profits dramatically.

9. Too many ORs can cause gaps in the schedule and unnecessarily high labor costs.

If you open early and have people waiting in between procedures, you're going to run into financial problems. Fully staffed empty rooms drain the economic viability of centers. We engage the board and anesthesia to establish criteria for adding rooms, and we make sure the scheduler supports protocols and communicates any issues to the administrator.

The sooner you realize that outside schedulers are key, the easier it will be to run an efficient, profitable center. In a busy practice, scheduling is a thankless job. Our challenge is to make schedulers' jobs easier, not harder. Market to outside schedulers by visiting them often, developing good relationships, listening to their concerns and making adjustments.

10. High debt service facilities with limited working capital equals failure.
In its simplest form, capital structure is the balance between the amount of debt and equity used to fund the facility. The danger in a thinly capitalized transaction surfaces when pre-opening costs exceed budget, revenue ramp-up is longer than anticipated and the eventual level of profits achieved are less than predicted. Without a balance between the amount of debt and equity used to fund the facility, the facility is in danger of not producing enough to pay the bills.

Another aspect of capital structure is the source of the debt capital. We recommend using one source to fund both tenant improvements and equipment. Not only is this easier, it may be less expensive than handling the two separately. In turnaround situations, we frequently see multiple loans and separate leases. The terms and covenants of these various finance sources frequently conflict with each other, making loan administration almost impossible.

Capital structure alone will not guarantee the success of your facility, but if constructed improperly can cause misery in an otherwise well conceived business.

The biggest lesson that we have learned is that no matter how strong your clinical outcomes, if you don't run the surgery center as a profitable business it will not last long.

Mr. Mallon is the founder and CEO of Regent Surgical Health. At Regent we are proud of our track record: 100 percent of the centers and hospitals we have opened and/or turned around are profitable, and solidly so. Learn more about Regent at www.regentsurgicalhealth.com.

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