1. Undercapitalization. Mr. Carrera advises jointly planning capital needs early on. He recalls one ASC that had an overly aggressive payback schedule for its loan and was undercapitalized from an operating line of credit standpoint. "It took much longer than the original group predicted to reach a positive cash flow. They were unable to service their loans because the payback was so aggressive and they’d asked for too little capital upfront," he says.
2. Information gaps. Keep both physician and hospital partners informed throughout the process, especially during the early stages of design, construction, equipment purchasing and hiring, Mr. Carrera advises. "And once operations begin, inform everyone about volume, revenues, expenses and capital requests from partners. We hear the same thing all the time from failing ASCs: ‘I never heard about these details from the previous management company.’ Whoever is operating the ASC needs to communicate well and often."
3. Lack of physician involvement. Physician/hospital joint-ventures ASCs can work, Mr. Carrera says, but physicians must take ownership and be involved at all levels. "The most successful ASCs are the ones with the most active and involved physicians — physicians who not only practice there, but participate in the planning of the facility, the medical advisory committee and recruitment efforts," he says. "If your physician investors are involved with a passion in all aspects of the operation, that center will be successful."
4. Poor contract negotiations. Many physician investors assume that if a hospital is partnering with them in a joint-venture ASC that they’ll get better managed care contracts because of the hospital’s greater muscle with payors. "But that’s not always true," he says. "We were asked to come into a joint-venture ASC where the hospital had helped negotiate the contracts. Those contracts were paying 30-40 percent less than market rate for many services. We pressured the hospital system, which wouldn’t budge. One year later we resigned from that project and that center is still struggling today, partly because of lousy rates."
5. Overbuilding. Planning the size of the facility should be completed early in the process. "One joint-venture ASC was performing enough cases, but was saddled with too much space and an onerous lease. The ASC’s lease was $70,000 a month and left very little room for negotiation," Mr. Carrera says. "They ended up turning over square footage to other tenants. Had it been better planned, it would have been more profitable."
6. Overstaffing. Some centers fail to schedule and staff appropriately, thinking more like a large hospital and less like a lean ASC responsive to market conditions. "I remember one ASC that was losing $40,000-$50,000 a month when it should have been making money. We restructured their staffing and switched to a new vendor for their benefits program," he says. "We also implemented a low census days staffing plan and eliminated some unnecessary staff. Prior to our involvement, the ASC never adjusted staffing to deal with actual case volumes. On days with no cases, the staff might complete their assigned tasks by 11 a.m. but would stay around until 5 p.m. and be paid for a full day’s work."
7. Overequipping. Mr. Carrera says failure to plan appropriately for volume of procedures can backfire. He says while hospitals can tap into large cash reserves to purchase costly equipment, ASCs must be more cost conscious. "It’s important to make the physicians aware of what things cost," he says. "I’ve seen facilities where the pro forma documents say a neurosurgeon will perform 10 cases a month and, based on that assumption, the ASC buys specific equipment costing them $200,000 and the doctor never sets foot in the place. Doctors are pretty good about only buying and wanting what they’re going to use. And unlike hospitals, they’re willing to forego purchasing the latest and greatest, especially when it’s their own money. Early on when choosing partners, the parties must figure out who’s going to bring in the cases and what it will cost to do them there."
Mr. Carrera (rcarrera@pinnacleiii.com) is president of PINNACLE III, which develops and manages ASCs, and its sister company, Specialty Billing Solutions, which codes, bills and collects for ASC and physician practices. Learn more about PINNACLE III at www.pinnacleiii.com.
