10 Steps to Improving ASC Profitability With Dr. Brent Lambert of ASCOA

The profitability of ASCs across the country varies greatly, with some posting substantial profits while others suffer substantial losses. Industry reports estimate that roughly half of ASCs are just surviving, so it is more important than ever that ASC leaders take steps to increase revenue and reduce costs. Some of the traditional methods used by ASCs in the past to increase profits, such as refinancing debt, are not viable in the current economy. However, the following 10 steps, if implemented properly, can help ASCs significantly boost short- and long-term profitability and improve the likelihood of a center's success, even in today's economy.

1. Recruit additional physicians. Recruiting additional physicians is currently the single most important activity ASC leaders can do to improve profitability. Because the pool of available physicians in each market is diminishing, ASCs that are not actively recruiting unaffiliated physicians will find the opportunity to do so rapidly closing. Five to 10 years ago, recruiting physicians was fairly easy, but today, with the proliferation of outpatient facilities, the number of physicians that are not already aligned with an ASC is dwindling. In some markets, there may be no unaffiliated physicians to recruit. If ASCs are located in markets with available physicians, they should attempt to attract those individuals to the ASC.

Adding new investor-physicians further stabilizes an ASC's capital base and the patients that they bring to the center can improve revenue and profitability. ASC leaders should look to bring in physicians who have similar staff and equipment needs as the current owners and users in order to maximize economies of scale. Additionally, if your ASC complies with anti-kickback safe harbors, criteria for new physicians should include the following: 1) They will not discriminate against Medicare or Medicaid patients; 2) They are willing to receive distributions on a pro rata basis based on their ownership without regard to volume or value of referrals; 3) They generate at least one-third of their medical practice income from performing outpatient procedures on the Medicare ASC list; 4) If at a multi-specialty center, they will perform at least one-third of their procedures that can be performed at an ASC at the center they invest in; 5) They will not receive financial assistance from other partners of the center or the ASC itself to acquire their interest in the ASC; and 6) They cannot buy fewer or more shares or buy shares at a higher or lower price based on the volume or value of the referrals they could generate for the ASC.

2. Review and renegotiate managed care contracts. Renegotiating managed care contracts is one of the surest ways that ASCs can improve their profitability. Renegotiating contracts is relatively inexpensive. Thus, any reimbursement increases that result will flow directly to the ASC's bottom line. Having strong contracts is more important now than ever as many payors are taking actions to limit out-of-network payment to centers. ASCs should examine their contracts regularly to identify any weaknesses and renegotiate those contracts with payors. In many markets, ASC managers have negotiated rates between 110-150 percent of Medicare or higher. ASCs with contracts that pay a percentage of Medicare should also determine whether they are being reimbursed at national or local rates. In some situations, national rates may shortchange an ASC because local rates are higher. In these instances, ASC leaders may find success in arguing that the local rate is more appropriate.

If an ASC has signed a contract that is not reimbursing at satisfactory rates, the ASC should push for renegotiation. Even if a payor is not willing to pay a higher rate for all procedures, ASC leaders may be able to negotiate a higher payment for specific procedures. For example, a payor may increase reimbursements for more complex procedures or for the high-volume procedures at a center. In addition to negotiating separate fees for specific procedures, leaders can request add-on payments for certain supplies or costly implants. If payors are unwilling to provide reimbursement rates that meet case costs, then ASCs may want to walk away from the contract as treating patients covered by that payor will only take money away from the center.

3. Know your costs.
Many ASCs do not fully understand their true costs and, as a result, may make decisions that are not in their best interest. ASC managers have the tendency to omit costs from their calculations. For example, when calculating staffing costs, staff benefits and taxes must be taken into account; supply costs must include the cost of shipping and transporting the supplies. Fully understanding both the fixed and variable costs per procedure is tremendously valuable for two reasons. First, this information allows ASC leaders to demonstrate to a payor that reimbursements for a procedure do not meet case costs. Second, it can help educate staff and physicians about avoiding wasteful practices.

Management information software packages are a key way to accomplish accurate case costing. When used appropriately, this software can accurately and easily determine your case costs. Once accurate case costs are available, ASC leaders should work toward reducing these costs. Discussing case costing at every monthly partner meeting and having partners brainstorm ideas to cut costs for every procedure is a great way to approach this task. Introduce your 10 highest volume procedures first and then work through additional procedures at additional meetings. Monthly income statements, including supply and staffing costs, should be distributed to all partners, and the ASC should financially benchmark the center against industry standards for supplies and staffing as a percentage of revenue.

4. Reduce supply costs. Many ASCs can reduce their supply costs, and doing so greatly impacts a center's bottom line. Even small supply cost reductions for your highest volume procedures can produce significant financial gain. For example, an ASC with 3,000 cases per year can realize a savings of $150,000 annually by reducing per case supply costs by $50.

Reducing supply costs requires buy-in from physicians on reducing wasteful spending and, if possible, agreeing to standardize the supplies used for each procedure. ASC management must also be willing to evaluate competing bids for supplies, either from group purchasing organizations or from individual vendors. GPOs provide members with negotiating clout that an individual ASC may lack, which may help in lowering your supply costs. However, ASCs may find that, for some supplies, lower prices can be found directly from suppliers. As a result, ASC leaders should still seek multiple competing bids directly from vendors to compare to the cost of the supply through the GPO. Although this can be time consuming, any cost savings that can be realized will directly reduce case costs. Consolidating the purchase of more supplies from fewer vendors will also help to reduce costs. The more an ASC buys from one vendor, the more bargaining power it has to get better pricing.

5. Reduce staffing costs. Many ASCs are overstaffed, which produces unnecessary costs. ASCs should review their staffing costs and full-time equivalent personnel and reduce staffing accordingly. As staffing is the biggest expense for many ASCs, this type of reduction can directly benefit a center's bottom line. Paying staff to wait between cases is extremely inefficient and can be easily remedied by switching to part-time staff and scheduling cases appropriately. Additionally, educating physicians about the staffing costs associated with starting cases late (which is said to be as much as $18 per minute in the OR by some reports) and working to shorten turnover time in the operating room can also benefit the ASC.

Hiring practices should favor part-time staff over full-time staff. Part-time nurses and technicians that can be sent home when cases are done do not require benefits. Also consider cross-training staff to perform more than one function. Even if they are paid more per hour for their additional responsibilities, total staffing costs will be reduced.

ASCs should also compress schedules into fewer days, if possible, or at least reduce gaps in which staff would be paid but not utilized. As a general rule, ASCs should not open the center on days with fewer than six cases. If a day has less than six scheduled cases, they should be moved to a another day. An ASC open only three days a week could be more profitable than a center open five days, if the scheduling of cases for the five-day center was done inefficiently.

In addition to variable costs such as supplies and labor, ASCs should consider the impact of fixed costs, such as the facility's mortgage or lease, on per case costs. If an ASC owns or leases more space than they need to perform its cases, its leaders should consider alternative uses of the extra space. Some ASCs have leased additional space to investing physicians for medical offices, and others have leased to outside groups, such as physical therapy and sleep study organizations. Leasing out space that is not utilized by your center generates income that reduces case cost and increases profitability.

6. Limit capital expenditures. ASCs should limit capital expenditures to only that equipment which is necessary to improve patient care. Equipment that does not directly improve care should not be purchased. Surgeons have the tendency to want the latest technology for performing certain procedures, but these new "gadgets" do not always directly correlate with improved outcomes.

In today's economic climate, it is more important than ever that ASC leaders restrain from making these types of purchases. One strategy that often works is to aim to pay cash out of the ASC's monthly profit distributions (see #7 below) for all new equipment. This prompts physicians to perform a more careful cost-benefit analysis of purchases and is likely to limit excessive expenditures.

7. Start or convert to a monthly profit-distribution plan. ASCs that do not already have a monthly profit-distribution plan should use this approach. Distributing profits on a monthly basis is a powerful tool in getting investor physicians to focus on the financial performance of the center. Investors receiving monthly profit checks and financial performance reports are often more willing to eliminate wasteful practices and actively seek out additional, perhaps innovative, ways to reduce costs. A monthly profit distribution plan could include distribution of a moderate monthly amount to investors — just enough to reflect the cash flow improvement of the ASC. Even small distributions — as low as even $500-$1000 per month — can be effective in cultivating a financially responsible mindset among investors.

8. Offer buyback options. ASCs should consider regularly offering to repurchase shares held by existing owners who are not safe harbor compliant or are no longer fully involved with the center, either through a reverse auction process or through voluntary or, in some cases, required redemption. An ASC may offer to buy up to a specified amount of shares based on the lowest price at which parties will offer to sell back those shares. Investors who do not comply with relevant ASC safe harbors or those nearing retirement are good candidates for buyback options.

9. Amend your operating agreement. ASC operating agreements should be reviewed on a regular basis and amended if necessary, and ASC leaders should consider adding provisions regarding redemption of shares and competition restriction, if they are already not included in the agreement. As a general guideline, operating agreements should be amended long before there is a perceived need to do so. Otherwise, there may be difficulties in persuading existing investors to vote for changes that may be needed. Agreements may also need amending in response to changes in state and federal laws governing ASC ownership and financial relationships.

If a majority interest of your ASC is owned by physicians who are not safe harbor compliant, either because they are no longer practicing medicine or because they use other facilities regularly, the viability of the center is jeopardized. Limited shares are available to attract new physicians with the potential to increase volume. Thus, ASC owners may want to consider adopting operating agreements that include provisions requiring physicians to redeem their investment if they no longer meet safe harbor requirements or upon their retirement, disability or death.

If an ASC's operating agreement does not include a non-competition covenant, it may benefit from amending its operating agreement to include this. Five to 10 years ago, many ASCs were founded without non-competition covenants, which typically restrict physicians from owning interests or having compensation relationships with other ASCs in a narrowly defined geographic area. However, as interest in outpatient facilities continues to grow, ASCs without these covenants are at risk as strong investor physicians decide to invest in another center or develop their own. Additionally, the diminished pool of unaffiliated investors restricts the ability that ASCs have to bring in additional physicians in to recoup volume and revenue.

10. Consider strategic partnerships. Finally, ASCs may benefit by entering into strategic partnerships with third-party management companies or a potential joint-venture party. Independent ASCs that go it alone may not have capable billing and collection systems or administrators with managed care contracting experience, both of which are required for success. ASCs need to be realistic about their own capabilities, and seek out third parties for their expertise, when necessary. ASCs should be careful to evaluate any partners as the quality of various management and billing and collection companies varies substantially.

An ASC may also consider bringing in a hospital joint-venture partner. Hospitals are increasingly recognizing the competition ASCs create for them as well as the value and the efficiency of ASC-based outpatient surgery. As a result, they are now more than ever willing to consider partnerships with ASCs. A hospital partnership can bring more patients to a center and may help obtain managed care contracts that would not be available otherwise.

Dr. Brent Lambert is a co-founder of Ambulatory Surgical Centers of America and is currently responsible for supervising all of its business development. Learn more about ASCOA.

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