Are you embarking on a new ASC development? I’d like to offer a few tips that our firm shares with physicians at the outset. In our experience, there are 5 cardinal sins that cause disaster.
1. Don’t Overbuild
In the planning stage, many physicians underestimate the efficiency that an ASC is capable of, and plan for too large a space. Though well intentioned, the planners and architects they work with also tend to oversize the facilities to create attractive spaces with room to grow, then build the center to hospital grade construction specifications – the costs for which they will not have to live with. They don’t factor in an ASC’s operational efficiencies, such as just in time inventory, disposable anesthesia circuits, specialized surgical packs, reduced size medical records and space, anesthesia closets rather than rooms, reduced sterile storage, and electronic filing of records in the space planning.
Every extra 1,000 square feet costs the center $50,000 a year in operational costs—in rent, utilities, insurance, housekeeping and supplies, staffing, property tax, and the equipment, maintenance and repairs with additional HVAC.
The majority of existing ASCs in the U.S. have not had to increase their size due to increased case volume. Many centers are over sized and over built causing unnecessary ongoing fixed cost. This is exacerbated by the reduced reimbursement for ASCs. The building should have good flow, proper storage for equipment, proper sized clean up and sterile rooms. ASCs that are built too large result in a permanent overhead expense that owners will have to bear.
2. Don’t Over-Equip
Some fixed and much of the movable equipment does not need to be purchased brand new. Re-manufactured equipment with guarantees (there are many reputable resources) is much less expensive. You also don’t have to equip and furnish every square inch just because you have the space. And, you can outfit the center in stages, since equipment can usually be acquired quickly once it is ordered. Because they purchase in huge volumes, equipment procurement companies working on a fixed fee, and not receiving referral fees from manufacturers, can save you a great deal of money.
There is no reason to pay interest or lease charges on equipment that is not used routinely – hoping that some physician will use it someday. You can develop per-use agreements with equipment dealers for paying when the items are used, particularly helpful for expensive scopes, lasers and other infrequently used, specialized items. It is unwise to tie up your cash, especially for equipment, which can often be leased with an option to buy on a nonrecourse basis (no personal guarantees required) for a reasonable interest rate.
3. Don’t Over-Staff
When opening the ASC, it is impossible to know how many cases the physicians will really bring to the center or how quickly the ramp-up will occur. At the beginning, staff new to the facility will not be as efficient either. Certainly, you want to provide excellent service even at the beginning, so we recommend to our centers that they hire at least one additional FTE nurse. This will be particularly important for preop/recovery where there is much patient contact, and where there will be impact on the ORs. However, the timing of bringing on the staff before Medicare certification and the extracted time it is now taking between occupancy, getting the State or AAAHC to come survey, getting the results back from Medicare, the time it takes to process and obtain the Medicare number and further time it takes to get the Medicare billing number (usually 4-6 weeks after getting the Medicare number in some cases) creates a cash flow issue. The number and timing of when the staff starts is a major issue. Staffing also needs to be planned well in bringing in the correct types of personnel at the proper time in the early development stages of an ASC.
Our guidelines for staffing a multi-specialty center performing 2,400 to 3,000 cases a year are to have total payroll not exceed 25% to 27% of net revenue for a multi-specialty ASC. This percentage will increase to 30% if there will be an inordinate amount of lower revenue cases performed at the ASC such as GI, Pain, or Cysto cases. Staffing usually runs 10 to 11 man-hours per total productive-hours per patient (not procedures) after the first three months of ramp up. It can be lower for ASCs where there are over 4,000 cases performed per year. In these cases the productive-hours per patient, including the business office, could run 8.5-9.5 hours per patient (not per procedure. Often there are multiple procedures per patient.) Total payroll includes salary plus benefits, and contract labor in business and clinical areas. Endoscopy and pain services in the surgery mix will lower the productive-hours per patient. More orthopedic, plastic and eye patients should be factored into the surgery mix.
Staffing is the second largest variable cost in your operations. Too many staff causes undue financial burden. It is better to use flex staffing to meet variability in hourly caseloads. Permanent, part-time and PRN staff are critical at opening and as a long-term plan. However, under the guise of quality service, many centers carry 3 to 4 more staff members than are actually needed to meet that goal. It’s critical for your center to set financial parameters based on reliable statistics to ensure staffing is adequate for providing excellent patient service. Remember, you can always hire staff – but it is hard to fire them.
4. Don’t Under-Capitalize the Business
For small businesses, like an ASC, cash is king. Many small businesses – including ASCs – fail because they run out of cash and have insufficient staying power for slow growth periods, paying problems for expenditures or time delays in the project. Proper cash flow is critical – and should be part of your formal business plan done at the outset to project the costs of pre-opening and expenses. Your plan should be conservative about case ramp-up to project prudent cash flow. Projections for accounts receivables less than 60 days for the first 6 months of operations are unrealistic. The rule of thumb is 120 days for the first 6 months, and then tightened down to 40 as operations move forward. Pre-opening rent is often overlooked since ASCs cannot usually bill patients at least 90-120 days after they move in due to the time it takes to obtain Medicare provider and billing numbers. Most third party payers will not even contract with an ASC until they have their provider number. The timing of this must be factored into the planning of a credit line and the amount of money invested by the owners into the business.
You must correctly calculate the current amount of investment in the ASC per share or per unit, if an LLC. Often, ASCs undervalue the per share per volume amount to make the deal more attractive to physician investors – only to find they have not raised enough cash to fund the project, construction, tenant improvements or delays. A good guideline is to raise 25% to 30% of the total project from the investors. This percentage is calculated from the costs for pre-opening, equipment and operations for the first 6 months. You should also arrange a credit line for the first 6 months in case of delays so the center never runs out of cash for its start-up 18 months (6 months pre-opening + year 1 operations).
5. Don’t Allow 1 Entity or Doctor to Own Too Much
Most doctors don’t want to bring cases to a center that is owned significantly by 1 or 2 doctors. They will refuse to "line the pockets" of another surgeon. Therefore, never allow 1 doctor or group to own too much of the center, unless the center is being developed for that practice alone.
It is important to properly remunerate founding surgeons. Certainly, those who conceive the center, take time away from their practices for development, who are first in the deal and take the risks, deserve to buy extra shares and/or receive development fees or management fees, if they will provide ongoing services. (Their commitment has nothing to do with their case volume.) Units or shares can be divided into founder and non-founder shares. We have found that "Class A" and "Class B" stock does not work well among surgeons (except in the case when the split is with a hospital). No surgeon wants to be considered a Class B surgeon. If your founder physicians want to create a different class of stockholders, you may want to create different risk levels or voting levels to differentiate the two types of stocks.
The issue of founder contributions – often intangible – is a very sensitive area when initially structuring the center, and needs guidance from legal counsel. The rule of thumb is to make sure that the services being delivered are tangible and visible in order to justify any additional fees or shares/units being purchased by the founding surgeons. We strongly suggest that the per-share costs of the founding surgeons be exactly the same as all other investors— not only for legal purposes, but also for political reasons. Undervaluing the shares for founders leads to numerous problems, which can be easily avoided by following these recommendations. This is practical advice we give our clients, and the surgeons should always consult ASC experienced, legal counsel to guide them in these matters.
This is just an overview of all the issues needing foresight and planning before embarking on your endeavor. It is always best to have a development partner that understands the ins and outs of all phases, and one that you will have confidence and trust in for the long haul. Here’s to your success!
Robert J. Zasa is a partner in Woodrum/ASD, an ASC development, management and partnering firm focusing on new and existing centers. For more information, visit www.woodrumasd.com or call 626.403.9555.
