Turnaround Case Study: Minor Issue or Fatal Flaw?

Understanding performance trends is key to running a surgery center. Unfortunately, trends are often contradictory. Revenue may be good, but profit per case is down. Market share is steady, but few new services have been added in the last three years. Physician relations are generally positive, but certain surgeons have become a bit more vocal with their complaints.

Negative trends can be temporary fluctuations — or signs that serious problems are about to tip a surgery enterprise over the edge. Knowing the difference between a minor blip and a fatal flaw is critical. But how to tell which is which? Recently, the owners of an ASC in the Southwest took a careful look at some relatively small issues. What they found were deep organizational problems that threatened the center’s financial performance and market success.

Mixed messages
The multi-specialty ASC was launched several years ago as a joint-venture between a 270-bed hospital and a group of local surgeons. It enjoyed an established position in its small urban market, with annual case volume totaling 2,738 procedures in 2007.

The ASC had several positives. Leading the list were high patient satisfaction and a good reputation within the community. Another strong point was financial stability. Thanks in part to good managed care contracts, income per case exceeded the MGMA 75th percentile. Average annual cash profit topped $1 million, and the center had paid shareholder distributions for the past several years.

In spite of these advantages, the center also experienced several problems. One was schedule inefficiency. Case times had been increasing for several years, and turnover times were creeping up. Procedure delays were common, often because surgeons double-booked cases at the main hospital OR.

The ASC also had high operating expenses:

  • Medical and surgical supply costs totaled $628 per case. One factor was poor inventory management. The center maintained a large mix of orthopedic supplies and a significant inventory of expensive custom packs. There were no set par levels, and bariatric lap bands were purchased, not stocked on consignment.

  • Staffing costs were $625 per case. The support staff of 17.9 full-time employees exceeded the MGMA median (15.15 FTEs for the same case volume) by 2.75 FTEs. Pre-surgery and PACU staff levels were high, and the team included two travelers.

Total operating costs for the ASC were $1,862 per case — well above the MGMA 90th percentile of $1,503. Clearly, the organization was running one of the most expensive surgical suites in the country.

The ASC was also experiencing a growing disconnect with physicians. Several surgeons had begun to complain about the variability of staff skills. Many were becoming increasingly discontent with the infrastructure. Orthopedic surgeons, for instance, were unable to pull up patient films during surgery since the center did not have access to the hospital’s PACS network. There was also dissatisfaction with anesthesia coverage — surgeons never knew which anesthesiologist would be available at any given time.

These problems and inefficiencies were beginning to impact enterprise performance. Between 2007 and 2008, case volume slipped 8 percent. The decline was due in part to one retirement and one relocation. However, one high-volume ENT stopped using the ASC altogether and switched to a competitor. In addition, surgeons began performing most total-joint replacements at the hospital OR.

Although the ASC was not yet at a crisis stage, the owners chose not to ignore the trends. A detailed assessment commissioned by the stakeholders revealed several weaknesses in the way the enterprise was designed and operated.

Structural flaws
One major defect was the ASC’s ownership structure. Surgeons held just 16 percent equity in the venture. This stake was too small to give them significant control over decision making or keep them personally engaged in the organization.

This weakness was reflected in the ASC’s governance structure. Minimal physician involvement meant the governance body did not focus on the operational issues that made a difference to surgeons. It also meant the organization could not really develop an effective strategy for reaching out to other surgeons in the market.

The third flaw was the ASC’s management structure. Its medical director was on site only one or two days per week. The nursing manager was experienced, but too stretched to give needed attention to organizational strategy. Also, because the nursing manager could not engage surgeons on a peer level, many physician-related concerns were not being identified and addressed.

The ultimate problem was customer service. Lack of physician involvement created an ASC that was not focused on meeting the needs of surgeons. The result was a poor practice environment that was at risk of losing a large chunk of surgeon business.

The problem was not just theoretical. During the previous year, the ASC started to experience increasing competition from other surgery centers in the market. One in particular began aggressively recruiting orthopedic surgeons who practice at the ASC. Since orthopedics accounts for about one-third of the ASC’s total procedure volume, the growing pressure on this service line represents a significant threat.

Shoring up the foundation
The hospital and the physician owners launched a series of changes aimed at bolstering the ASC’s foundation and invigorating the center operationally and strategically. Key steps included the following:


1. Increasing surgeon ownership. Recognizing the importance of physician engagement, the hospital sold more than one-third of its stake in the ASC to current physician owners and other surgeon investors. The re-syndicated joint-venture is now owned 51 percent by surgeons.

2. Engaging surgeons in governance. The organization created a new governance body called the "surgical services executive committee." Reflecting the new ownership structure, this multidisciplinary committee is led by surgeons and includes representation from nursing, anesthesia and hospital administration. Its job is to steer the ASC toward operational excellence and create a strategic vision that will drive volume growth.

3. Appointing a full-time anesthesia medical director. As an anesthesiologist, the new medical director is very knowledgeable about perioperative processes. His job is to collaborate with the nursing manager to lead clinical operations and promote smooth daily case flow. The medical director also works directly with surgeons to address the causes of schedule inefficiencies, such as double bookings and late starts.

4. Introducing business management processes. To cut operating expenses, the management team reduced staff levels in the PACU and is allowing contracts for two travelers to expire. The team also instituted modern inventory management practices, including par level controls and a better approach to high-cost supplies and implants. In addition, the team began tracking the ASC’s performance using more sophisticated measures, such as profitability by case, staff utilization and block time utilization.

5. Hiring a dedicated business development lead. The new business development representative’s job is to help the ASC serve its physician customers. Through regular meetings with surgeons and their office staff, the representative is helping the ASC understand how to deliver on surgeon needs, distinguish itself from competing surgery centers and secure more surgical volume.

The most important aspect of all these changes is that the ASC is being positioned to establish relationships with key surgeons in the market. Guided by the surgical services executive committee, the ASC has begun looking at some service-driven strategies for engaging providers:

  • Creating an orthopedic center of excellence. By outfitting a dedicated orthopedic OR suite that is supervised by an orthopedic medical director (and an orthopedic advisory committee), the center could create a stronger bond with area orthopods and go after referrals from outside the market.

  • Developing a bariatric service line. An outpatient bariatric surgery program with a 23-hour-stay option could have a competitive advantage in this market. With advertising support and business development work among primary care physicians, this service line could grow the ASC’s volume significantly.

Dramatic turnaround
When surgeons see that a surgery center is committed to improving, practice patterns can change quickly. Less than three months after the ASC described here began reorganizing itself and enhancing management, case volume was up.

Looking forward, the ASC is on track for significant progress in operational, financial and strategic performance. Centers that have implemented similar changes have seen major improvements in a six-month timeframe — increases of up to 10 percent in case volume and decreases of as much as 5 percent in operating costs, accompanied by dramatic movement in operational measures like turnover times, on-time starts and OR utilization.

Not every negative trend heralds a complete enterprise meltdown. However, when a small problem is the symptom of general structural weaknesses, aligning ownership, governance and management incentives is the only way to avoid strategic problems and build a financially successful surgery organization.

Mr. Peters (jpeters@surgicaldirections.com) is president of Surgical Directions, a physician-led consulting firm focused on helping surgical services organizations improve their operational and financial performance. He can be reached at (312) 396-5403.

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