Unlocking the contractual keys to success

You have run the regulatory gauntlet and obtained the necessary approvals to operate an ambulatory surgery center (ASC).

You have hired a qualified clinical staff and involved surgeons committed to quality to provide care to your patients. You know that you provide a higher level of quality and outcomes for your patients while at the same time acting as a cost-effective venue for surgery. You have done all this, but if you do not address the many contractual issues that surround operation of a surgery center, you may not be able to optimize your operations or financial return. Even worse, you may be positioned so as not to have long-term viability. A review of your organizational documents and other contracts and proactively addressing some important issues is essential to position yourself as a successful enterprise.

First and foremost, you need to look carefully at your ownership structure, governance and terms governing investment in the facility. These terms are typically set forth in your Operating Agreement if you are an LLC or in your certificate of incorporation, bylaws and shareholder agreements if you are a corporate entity. In either case, some of the important issues are the same.

3 Crucial Questions about Your Operating Agreements

Central to the success of any ASC is the selection of the right roster of participating physicians. Your Operating Agreements need to address these important issues:

• How do your documents address physician eligibility?
• Do they provide clear standards for evaluating physicians?
• Are there mechanisms to deal with physicians not meeting their obligations to the facility?

At the same time, you need to work with experienced counsel, as myriad federal and state laws affect the manner in which you can deal with these topics. Failure to clearly address these issues invites confusion, the potential for litigation and disruptions to orderly operations.

Do Your Operating Agreements Agree on an Exit Strategy?

At the outset of every business undertaking, you should identify what the exit terms for the initiative might be. You need to establish a path for the redemption of retiring or non-productive members, as well as for the recruitment and introduction of new members. Failure to pay attention to these issues or structuring arrangements that are at odds with a center's financial realities can spell the demise of an ASC.

Will You Be Poised for Investment — or Disagreement?

You also want to think about the structure of your ownership and governance arrangements so as to best position the facility for possible investment downstream. A facility with a successful track record AND a sound legal organization can be an attractive investment target for management companies or hospitals. You need to address the structural issues in the organization of the ASC as well as its financial performance before entering into any sale discussions.

Finally, any good set of documents will try to define governance and operational roles so as to clearly lay out leadership roles and minimize disputes. If issues do arise, you need to have a clear roadmap for their resolution so as to avoid confusion, delay and expense.

4 Savings Strategies for Your Vendor and Supply Arrangements

One set of issues often not carefully addressed operationally by ASCs involves dealings with suppliers and vendors. This is important from both the perspective of compliance and for financial management purposes. You should have good arrangements in place with management oversight of expenses.

• Expenses can be benchmarked to evaluate opportunities for savings.
• Group purchasing, or GPO, arrangements can result in significant cost savings for facilities.
• A strong management entity may be able to leverage broader market activities so as to promote cost-savings for an ASC.
• Finally, standardization of equipment and supplies can both promote quality and enhance cost-effectiveness.

Regular financial, expense and operational reporting to the owners should promote a robust analysis of overall financial performance for an ASC. All too often, owners get focused exclusively on volume rather than expense and margins. You need to have access to good data on all these topics and monitor them closely. A good financial management tracking and reporting system can be worth many times the investment in such reporting tools.

Real Estate Agreements: The Most Important Location Is the Future.

Location is a central issue for ASCs, since they are built around convenience and accessibility. You need to structure good real estate arrangements that allow for long-term access to a quality site. It's imperative to address Issues regarding the maintenance of the facility. You need to be mindful of opportunities for a divergence of interests if there is not commonality of ownership between the ASC and the owners of the property.

Look at some often complex lease terms, defining issues such as

• The operating costs in addition to rent to be passed through to the ASC
• Rent escalation provisions
• Any terms addressing the permitted activities of other tenants.

Your operations can be materially affected by a number of matters beyond your control but which can be addressed in real estate documentation. They include the adequacy of parking, the nature of other adjacent businesses and the proximity of competitors.

Payer Agreements: Do They Truly Reflect the Marketplace?

Be aware of the overall managed care marketplace and the nuances of managed care agreements in order to promote financial success for the facility. You need experienced negotiators representing the ASC. All too often facilities eager for volume accept contract terms that are not at market rates or that contain onerous provisions.

Your agreements also need to:

• Carefully address the term and termination provisions of managed care agreements and avoid being locked into untenable arrangements;
• Assess proposed rates in terms of the center's own case mix and volumes; and
• Consider the treatment of implants, devices or other reimbursable services and supplies.

A good contracting team, armed with data as to your operations and a market familiarity, can materially benefit he facility's bottom line without any change in volume.

IT/Business Intelligence: The Better Your Data, the Better Your Decisions.

Integrally related to your overall financial management and contracting activities is the business intelligence infrastructure in place for the ASC. This is a central consideration for success in the healthcare marketplace of the future. You need a robust IT support system that can capture and analyze data and report the same in an intelligible fashion to physician owners. Your management team may be able to again leverage their resources and broader market activity so that you can benefit from IT systems that might be out of reach for an individual facility. Without good analytic support, however, you really won't be able to have the detailed information at your disposal necessary to mange your operations and negotiate contract terms with third parties to promote financial success and long term viability for your facility.

Constitution Surgery Centers: Expertise, from Clinical Issues to Contracts

Constitution has decades of experience in the development and operations of successful surgery centers, including:

• Physician-owned single specialty facilities
• Physician-hospital joint venture ASCs
• Major physician-hospital alignment initiatives embracing both ambulatory and inpatient surgery and clinical co-management arrangements

This significant body of work has enabled us to build a broad and deep repository of expertise that we can bring to bear for each facility with which we are affiliated. We pride ourselves in working to understand the nuances of each market and facility and crafting strategies for long-term success. In today's challenging marketplace, leveraging our experience and resources can have a dramatic impact on your facility.

Our leadership includes:

• Surgeons
• Experienced health care legal counsel
• Sophisticated financial advisors including CPAs and private equity veterans

We have unrivaled depth in health care regulatory, operational and finance matters. We use this to identify the key issues for facilities and then to craft sophisticated strategies for success.

A key tool we utilize in developing and implementing these strategies is our business intelligence system and IT resources. We can model opportunities, assess the financial implications of transactions and contractual commitments and mange expenses with extraordinary accuracy. Our expertise allows us to use this data for the benefit of our partners.

We would welcome the opportunity to explore how we might employ our resources to enhance your center's success.

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