Implant costs vs. ASCs: How 1 management company leverages payer contracts
As higher-acuity procedures move outpatient, independent ASCs could have difficulty securing reimbursements.
Joe Zasa on Becker’s Healthcare Podcast
This episode features Joe Zasa, Founder & Managing Partner of ASD Management. Here, he discusses how to grow a successful business, his top three priorities for the rest of the year, and more.
Scott Becker Interviews Joe Zasa
What are the success factors of a surgery center, so crucial when building an ASC company? Listen to Joe Zasa’s audio interview by Scott Becker, publisher of Becker’s Healthcare.
ASD Management’s Randy Todorovich Receives Award
The California Association of Ambulatory Surgery Associations (CASA) has awarded The Richard LeBlanc Award to Randy Todorovich, ASD Management Senior Vice President of Managed Care. Originally called “The President’s Award,” the honor is given to a CASA member who has given tirelessly to the volunteer organization, above the call of duty. The award has been given only 11 times in CASA’s 30-year history.
CASA President Deborah Miller made the award to Todorovich on September 5 at the 2018 CASA Conference in Huntington Beach, CA. President Miller acknowledged Todorovich’s active leadership role and committed volunteerism in the development of relationships between the ambulatory surgery center (ASC) association and managed care industries throughout California.
“The ASC industry owes many of the strides it’s made forward to (Randy’s) efforts,” stated President Miller. “He has been instrumental in developing payer relationships, and is now working toward engaging the large employer community to discuss (health premium) benefit design and the advantage of utilizing the ASC model. At times these conversations have been difficult, but Randy remains the consummate gentleman, and his character and mild demeanor are a credit to this success.”
CASA is a leading and pro-active volunteer organization in the ambulatory surgery industry, with a mission of advancing communications and education, appropriate legislative and regulatory actions, and continuous enhancement of excellence in the ASC industry as it embraces the challenges of the 21st century.
“We believe strongly in forging relationship with health plans, payers and other health related entities so they understand the value of surgery centers,” said Todorovich. “Over the years, they have come to understand not only the value of surgery centers, but also the resources that CASA offers in advancing quality and cost-effective health care delivery.”
Through Todorvich’s leadership, CASA has staged executive level conferences bringing together health plans, large surgery center companies and business groups on health, where they can meet face-to-face about key issues on all sides. “This really helped educate us all,” he said, “and now, after 10 years, the health plans find ASCs a viable part of the health delivery chain.”
Todorovich, along with other CASA Board members, is now focusing on developing relationships between surgery centers and large employers with self-funded health plans. CASA is developing objective data to demonstrate that ASCs are not only a lower cost alternative to hospitals, but are also the highest quality provider for non-urgent, outpatient procedures. “The quality piece of the puzzle,” Todorovich said, “is critically important to employers.”
Todorovich’s volunteerism on behalf of the industry dovetails his role at ASD Management, where he promotes and maintains relationships between the firm’s surgery centers and the managed care providers with which they contract. “Through CASA, I have had the good fortune to work with executive level professionals of the health plans, and these connections and resources broaden what I can bring to our surgery centers.”
6 key focus areas regarding ASC materials management
Written by Charles Dailey
In regards to ambulatory surgery centers, the materials management program begets responsibility for procuring products with the expectations of cost control, distribution mediums and inventory management.
The ASC’s supply and drug expense as a percent of the facility’s net revenue should be approximately 25% to 28% for a typical ASC. If this is not what presents, six key focus areas could influence materials management outcomes. As a contributing author in the groundbreaking book, Developing & Managing Ambulatory Surgery Centers, published by ASCA and available on Amazon, listed below are the key areas excerpted from the book highlighted to improve your materials management program.
Joe Zasa on Writing the 1st Comprehensive ASC Development & Management Book
What were the motivations and strategies behind writing the first comprehensive book on ASC development & management? Becker’s ASC Review interviews Joe Zasa.
ASDManagement publishes first comprehensive book on ASC development and management
After 30+ years in the business, and 1 year in word processing, ASD Management has published the first book taking a systematic approach to the strategies and details of developing and managing an ASC. In the words of co-author Joseph Zasa of ASD Management, “Many articles are published every year, but few describe a proven, systematic approach written by people who are successful developers and operators of surgery centers.”
“There are now over 5,000 ASCs in the U.S.,” writes co-author Robert Zasa of ASD Management. “The low cost of ASCs with very high quality of care have fostered the creation of these centers in almost every area of the country.” Yet, not every surgery center is successful in meeting the prime directives of high quality patient care and safety within a profitable center.
Developing & Managing Ambulatory Surgery Centers is the first book dedicated to the cornerstones of ASC operations: patient care, business office processes, risk management programs, payer contracting and revenue management. The cornerstones are detailed in the four book components: ASC predevelopment, development, management and lessons learned from the field.
Contents is enriched by contributions from the ASD Management team, and experts revered in the ASC industry: Scott Becker JD and Amber Walsh JD of McGuire Woods, Ken Seip of Siemens Financial, Aaron Murski of VMG Health, Joe Baugh of CG/Medvest, Randy Bishop of Surgical Notes, Durr Boyles, Steven Dobias of Somerset CPA and Steve Sorey. And ASC physician leaders: Dr. T K Miller, Dr. John Fitz, Dr. Michael Latham and Dr. Alan Valadie.
Informative, current and entertaining, a must for seasoned professionals as well as industry newcomers, instructors and students. First edition published in March 2016.
Are ASCs in for another rough Q1?
By Carrie Pallardy
This article is reprinted from Becker’s ASC Review
Harsh winter weather and underwhelming financial results were the hallmarks of the first quarter of 2014 in the ambulatory surgery center industry. Winter is threatening to bring another round of record low temperatures in 2015, and the challenges of 2014, if anything, have intensified. How can ASCs prepare for the new year?
The opening quarter of 2014 was undeniably difficult for the ASC industry, but if nothing else it can serve as a lesson for the times ahead. Here are key points from the first quarter results of eight public ASC companies.
- AmSurg. AmSurg’s revenue increased marginally, 2 percent from $258.2 million in the first quarter of 2013 to $263.1 million. Same-center revenues declined 2 percent.
- Foundation Healthcare. Foundation Healthcare’s revenue was up 18 percent to $22.1 million for the first quarter of 2014.
- Hospital Corporation of America. HCA’s net income inched upwards 0.9 percent to a total of $347 million. The company’s net revenue had a larger bump of 4.6 percent to $8.83 billion.
- Medical Facilities Corporation. MFC reported $72.9 million in revenue, consistent with the amount reported in the first quarter of 2013.
- Northstar Healthcare. Northstar reported a 194.1 percent growth spurt in net patient service revenue, from $4.1 million in the first quarter of 2013 to $12.1 million.
- Surgical Care Affiliates. SCA’s total net operating revenues, excluding centers the company does not own a controlling interest in, increased 2.1 percent to $196 million. System-wide net operating revenues rose 8.7 percent.
- Symbion. Symbion’s revenue rose slightly from $130.38 million in the first quarter of 2013 to $133.97 million in the opening quarter of 2014.
- United Surgical Partners International. USPI reported consolidated net revenues of $145.3 million, compared to $145.1 million during the same period in 2013.
The majority of these companies reported flat financial results or slight increases in revenue and income. AmSurg, SCA and USPI all made reference to the impact severe winter weather had on patient volume and financial performance in the news releases announcing the quarter’s results. Aside from winter woes, ASC companies had to contend with the onset of high deductible insurance plans and expanding effects of healthcare reform.
What to expect in 2015
Though predicting the future of healthcare is an uncertain exercise, the new year is just around the corner. Many forces that will shape the upcoming first quarter are already at play. High deductible plans, just beginning to roll out in 2014, will have an even greater impact in 2015 as more patients become insured and select these types of plans. “We will see a state of flux as high deductible plans gain traction,” says Joe Zasa, managing partner of ASD Management. Patient volumes may suffer another dip in the opening of 2015.
While ASC leaders may not have control over when patients with high deductible plans decide to schedule elective procedures, they can compensate. For example, ASC physicians can schedule heavy Medicare case loads for early in the year, as Medicare deductibles are not nearly as high as the $5,000 or more deductible plans that are rapidly becoming commonplace.
If another brutal winter is in store, ASCs can steel themselves for an onslaught of cold and possible closures. For example, Charlotte (N.C.) Surgery Center closed in winter of this year due to weather, but was able to reopen and perform 44 scheduled surgeries without missing a beat with the help of an online pre-admission solution.
Healthcare reform is not only affecting providers, but is also reshaping the payer landscape. Payers are facing the same fierce pressures to cut costs and produce quality results. “Many centers were lulled by their ‘success’ when reimbursement for out-of-network claims was very high,” says Mr. Zasa. OON volume, while still leveraged in some markets, is drastically dwindling. More and more ASCs are making the move to in-network.
Armed with the knowledge, in part, of what lies ahead for the beginning of 2015, ASC leaders can prepare their centers. “Each ASC is different and must find its niche. It must find ways to grow, recruit and be more efficient,” says Mr. Zasa. The best positioned ASCs and companies will be those that shoulder a certain amount of risk. Whether that risk is a gamble like AmSurg’s acquisition of Sheridan and Surgery Partner’s acquisition of Symbion, a new joint venture or narrow network participation, diversification can pave the way to a stronger first quarter and overall 2015.
© 2014 Becker’s ASC Review.
Reprinted with permission from Becker’s ASC Review.
The Making of Great ASC Board Members & Administrators
12 Key Concepts
By Laura Dyrda
This article is reprinted from Becker’s ASC Review
Leadership can make or break a surgery center. The best centers have strong administrators and board members who motivate and guide the entire organization toward success in the future.
1. Vision. A clear vision will help the leader guide others effectively. “Leaders see the solution or goal and clearly define it,” says Joe Zasa, managing partner of ASD Management. “Vision keeps you focused, fueled and helps you finish.”
These three “F’s” — focus, fuel and finish — embody the best leadership qualities:
- Focus — When vision is so compelling you cannot become distracted. But self awareness is also important. “Focus on the task but keep a third eye on yourself,” says Mr. Zasa. “Be spatially aware.”
- Fueled — Communicate vision effectively to set the tone and provide positive reinforcement. Leaders can say, “I’ve watched you, and I like what I see. If you follow our plan and work hard, you will succeed and achieve results.”
- Finish — Don’t quit, even when the going gets tough. “There are peaks and valleys in life. Hanging in there despite setbacks and interference and finishing strong is the solution,” says Mr. Zasa. “If your vision is so compelling, it will drive you and force you to hang in there and not quit. If you persevere by finishing, you will generally be rewarded.”
2. Perseverance. Perseverance is especially important because even when efforts don’t succeed, the ability to avoid quitting and finishing strong projects an important message to staff. “Since we become what we think of ourselves, it is imperative that you don’t quit because finishing builds confidence in yourself and gives you the best chance to succeed the next time,” says Mr. Zasa.
3. Communication. Communication becomes a second key concept to relay your vision to others and bring them onboard to work toward a common goal. “It is essentially that you get people to buy into your vision,” says Mr. Zasa. “The more you communicate and the more they understand, then the more they care, and if they care, there is no stopping them. Roll with the tide, not against.”
Key tenets for effective communication:
- Set clear and concise expectations
- Project genuine and realistic optimism
- Infuse confidence into the vision
- Be a storyteller
“People retain stories,” says Mr. Zasa. “The best speakers are those who tell stories and paint pictures with words, not PowerPoint presentations.”
4. Encouragement. When carrying out your vision, encourage others and do for them, not for you. Treat everyone fairly, but not necessarily equally because people are all different. This shows leaders care about their team and could limit conflict and bad feelings.
“Make people feel special, but do this genuinely,” says Mr. Zasa. “They must genuinely know you care about them. When they don’t want to disappoint you, you are succeeding. Additionally, don’t contradict people. They will take it emotionally and you can’t ever reason with them. It’s okay to disagree; it’s not okay to be disagreeable.”
5. Loyalty. Leadership is influencing people toward a common goal, and leaders who take the time to understand their team and express loyalty will reap the benefits. “Take up for your people. If they’re on your team, have their back and be their advocate,” says Mr. Zasa. “You must care about your people, create that connection, be accessible and constantly let them know you care about them.”
6. Respect. Emotional bonds can motivate team members toward the common vision and produce outstanding results. Respect each other by paying attention to new ideas, thoughts and life events to strengthen this bond going forward.
“The highest complement that you can pay someone is to give him or her your undivided and uninterrupted attention,” says Mr. Zasa. “Respect each others’ opinions and get input before making decisions. Your people are part of your team and a part of the process.”
7. Recruitment. Since team members play such an integral part in a strong organization, it’s important to recruit well. “Recruiting, vision and execution wins championships,” says Mr. Zasa. “Be a fisherman for the right people.”
Don’t tolerate complacency. Figure out whether employees are content or committed to the organization. “We need those who are committed and demand it,” says Mr. Zasa.
8. Empowerment. Once the right people are in place, empower them so they can build confidence and assert themselves to help the organization grow. Teach them to identify leadership and motivate others around them.
“Motivation is for a particular moment and is important, but empowerment can last a lifetime,” says Mr. Zasa. “Recruit well, give them a clear vision that they understand, and then let them do their job. Delegation is the ultimate in levering.”
9. Lead by example. If leaders set good examples for their employees and team members, they can demand others do things write and work hard as well. Additional key qualities for strong leaders include:
- Transparency — Show vulnerability and transparency to build trust.
- Love — “You can’t coach them if you don’t love them,” Eddie Robinson once said.
- Kindness — It doesn’t cost anything to be nice, but it costs a lot to break your word or be malignant.
- Honesty — Tell people the truth to show integrity
- Accountability — Recognize your mistakes and take responsibility to endear team members
“Hard work builds confidence and hones competence,” says Mr. Zasa. “Additionally, show class and humility. You are who you are, not what you do. Go about your business with class. Show your class all the time and demand it from those who rely on you.”
10. Competence. Those who rely on you should also respect you and come to you with their problems. Colin Powell once said “When people stop bringing you their problems, you are done as a leader.” Show you are competent with proficient preparation and work. Have a plan and vision and then focus on execution on the micro as well as macro level.
“Keep selling your vision but also be sure to focus on the small tasks; the daily things you need to do to win,” says Mr. Zasa. “Doing the small things right adds up to big wins and fulfillment of your vision.”
11. Focus. Mr. Zasa employs the W.I.N technique, which stands for “What’s Important Now.” Keep an open mind to change with time and strive toward success. You can barrow ideas from the best in the industry — as well as thought leaders in other industries — to guide your team as a successful whole.
12. Put the team first. When leaders realize lifting up the team becomes most important, they’ll be able to accomplish work much more effectively. “When you realize that power or influence begets responsibility for others and not personal gain, you separate yourself from other leaders and move into a select group,” says Mr. Zasa. “Do for others and enjoy watching others succeed and grow — it is so much more rewarding and enriching.”
© 2014 Becker’s ASC Review.
Reprinted with permission from Becker’s ASC Review.
What Can Football Teach Us about Surgery Center Management?
3 Essentials for ASC Improvement From Joe Zasa
By Rachel Fields
This article is reprinted from Becker’s ASC Review
“As I watched Alabama win this year’s national championship in college football as well as the national championship in 2009, it struck me how similar running a surgery center is to coaching a football team,” says Joe Zasa, co-founder of ASD Management. Mr. Zasa grew up in Birmingham and attended the University of Alabama, an institution with an abiding love of football and a storied past in the sport.
“I have had a particularly unique window with respect to the football program, and particularly the head football coaches, from Bear Bryant to the current coach, Nick Saban,” he says. “Over this time, Alabama had three very good coaches and several mediocre coaches. There are similarities between the coaches who succeeded.”
According to Mr. Zasa, the “rule of three” applies to both sports programs and to business. The most successful programs have:
1. A system. Establishing a system of operations is the core of a surgery center and a sports program, Mr. Zasa says. “The next time you watch Monday Night Football, listen to the starting lineup,” he says. “You will find that most of the players did not play on championship teams, or even the historic great college football programs. They were excellent players in mediocre systems.”
He says the system for a surgery center has three components: 1) clinical systems, 2) business office and 3) risk management. Each area of the surgery center must have a strict adherence to center culture and strategic direction in order to succeed. Mr. Zasa says when his company approaches a surgery center in need of a turnaround, the problems often lie with systematic failures. For example, the surgery center may not load their contracts into a computer system to track their accounts receivable. The supply area may look like a McKesson warehouse — full of supplies that will never be used but have already been purchased, effectively throwing money away. Employees don’t have a defined process for doing their jobs, so they end up dropping claims and forgetting to follow up on collections.
The surgery center should have a pervasive culture that touches every area of the facility, Mr. Zasa says. This doesn’t just mean purchasing and printing out generic policies and procedures for a small business; it means truly understanding how each role in the ASC contributes to profitability and advising staff members on how their tasks should be performed. Staff members should know how to answer the phone, how to drop claims and how to audit processes to track progress. Mr. Zasa says the surgery center should also have an employee bonus program in place that provides tangible financial rewards for good work. The bonus program should not be a “guessing game”: Employees should understand they will reap exactly what they sow.
2. Recruitment. According to Mr. Zasa, the Alabama football program has had a top five recruiting class for the last five years — and they have won two national championships. “This is not a coincidence, but it is a mistake to believe that recruiting players is the solution,” Mr. Zasa says. “You must have a superior system and superior execution.”
This doesn’t necessarily mean recruiting “stars” if they won’t work with the other members of the surgery center, Mr. Zasa says. “We spend a lot of time with staff members, and we have pre-screening tests to make sure they’re a good fit for the center,” he says. While a small surgery center can’t necessarily implement full-time training for each employee, Mr. Zasa says it helps to have regular on-site training and presentations about the center’s culture.
Physicians and anesthesia providers should be similarly recruited to work within the “system” of the center, he says. Anesthesia groups should be able to turn rooms quickly, choose appropriate drugs for the surgery center and have a strong interest in the quality aspects of the ASC. “You want anesthesiologists and CRNAs who have an interest in outpatient surgery,” he says. The same is true for physicians: Every physician recruited to the center should fit within the center’s strategic plan, bringing a needed specialty and an eye towards quality improvement. The physician should also get along well with the other providers at the center.
3. Execution. Execution is about completing a series of small tasks that create success in the long run, Mr. Zasa says. A football team can’t win a championship just by thinking about it; the team has to run drills during every practice and concentrate on every individual play in order to succeed. Your surgery center might have a good system and great players but fail because of poor execution, Mr. Zasa says.
He says execution comes down to what your staff does on a daily basis. The big picture is useful to keep in mind, but every staff member should primarily be focused on his or her daily tasks. If a team member is distracted by thinking about their upcoming vacation or a fight with their spouse, they will jeopardize the success of the ASC just as a football player would jeopardize the potential to win. “Every day, your staff should be thinking, ‘This is the job I need to do today,'” he says. “It’s about focusing on what’s important now.” Over time, completing those small daily tasks will add up into long-term success.
© 2012 Becker’s ASC Review.
Reprinted with permission from Becker’s ASC Review.
Strategies For a Turnaround 1
Five Steps Taken by Florida ASC to Remain Competitive
This article, which appeared in Becker’s ASC Review, outlines key initiatives taken by ASD Management to successfully turnaround the Surgical Center for Excellence in Panama City, Florida.
by Leigh Page
The Surgical Center for Excellence in Panama City, Florida, has taken several steps to keep itself on solid financial footing. Sue Glendon, administrator of the two-OR center, identifies five key steps the center has taken in the past 6-9 months.
1. Changed suppliers. The ASC identified about $53,000 in yearly savings for supplies. This involved moving from one vendor to another for a variety of supplies, such as anesthesia tubing.
2. Switched to a new GPO. By switching to a new group purchasing organization, the ASC expects to save almost $20,000 per year.
3. Began working with a reprocessor. For the first time, the ASC is contracting for reprocessing of equipment such as burrs and blades. In an arrangement with reprocessor Medisiss, the cost of reprocessing is half the cost of buying new equipment. It is still too early to estimate the savings, Ms. Glendon says.
4. Adding a procedure room. The center is in the process of getting authorization to build a procedure room for pain cases. Pain cases are currently being done in ORs, making it more difficult to schedule surgery cases there.
5. Looking to add physicians. The ASC currently hosts orthopedics, ENT, dental, podiatry and pain management. It is looking for an orthopedic surgeon or to add a new specialty. While the area has several ASCs, Ms. Glendon says her center has a competitive edge. “We have high patient and physician satisfaction,” she says. “Once physicians start working here, they want to stay.”
© 2010 Becker’s ASC Review.
Reprinted with permission from Becker’s ASC Review.
Strategies For a Turnaround 2
Five Ways Florida Surgery Center Made Itself Profitable
ASD Managements’ Surgical Center for Excellence in Panama City, Florida went from losing as much as $40,000 a week in 2008 to showing better than benchmark profits in 2009. The two-OR center hosts orthopedics, ENT, dental, podiatry and pain management. Sue Glendon, administrator of the nine-partner center, identifies five key ways it became profitable.
by Leigh Page
1. Amped up efficiency. The center began to flip-flop ORs. If a surgeon has cases throughout the day, staff sets up one room while he is finishing a case next door. This is especially helpful for orthopedic cases, which take longer to set up.
2. No holds barred on new technology. When the center introduced Olympus equipment for shoulder and knee surgery, it didn’t just buy one piece. It bought one Olympus device for each room. This gives us more flexibility in scheduling, Ms. Glendon says.
3. Well calibrated staffing. Ms. Glendon watches staffing levels very carefully so as to avoid overstaffing or paying overtime. For example, when the ASC has a 14-hour day, she brings in per diem staff and avoids overtime.
4. Improved collections. The ASC brought billing and collections in-house in 2009. “While outsourced billing is impressive, we have found that having our own dedicated billing person is a great advantage,” Ms. Glendon says. To help the center’s one in-house billing person, other business office staff members are cross-trained in billing.
5. Lean inventory. The center has cut back on inventory. This is done by placing frequent orders and using a vendor who delivers several times a week.
© 2010 Becker’s ASC Review.
Reprinted with permission from Becker’s ASC Review.
Strategies For a Turnaround 3
The following is an excerpt from 20 ASCs Performing More than 10,000 Cases Annually that appeared in Becker’s ASC Review. The excerpt outlines ASD Management’s turnaround strategies to improve the performance and profitability of Kentucky Surgery Center
by Jaimie Oh and Rob Kurtz
Kentucky Surgery Center (Lexington, Ky.)
Annual case volume: More than 10,000 cases since 2007
Specialties: Orthopedics, ENT, gastroenterology, general surgery, plastics, podiatry, dentistry, pain management, urology, vascular, colorectal, and pulmonary
Details: The Kentucky Surgery Center, which opened in December 1986 and is accredited by AAAHC and Kentucky Medicare, is a 28,000-square-foot center with seven ORs and three procedure rooms. This physician-owned facility was started by a handful of surgeons and anesthesiologists and now has more than 100 surgeons on staff.
Keys to building/maintaining volume: Administrative Director Glenda Beasley, RN, says maintaining high case volume stems from the staff and physicians jointly providing quality patient care with excellent patient outcomes. “Raising the bar with expectations of only providing care that can be parallel to none is the goal of the center on a daily basis,” she says. “Every team member must buy into the notion of bringing their top performance and positive attitude everyday to maintain success on every level.”
© 2010 Becker’s ASC Review.
Reprinted with permission from Becker’s ASC Review.
Physician-Hospital Joint Ventures, A Strategic Alternative
By Joseph Zasa, JD
Managing Partner, ASD Management
Since the first ambulatory surgery center was developed in Phoenix, Arizona in 1970, ambulatory surgery centers (ASCs) have provided an alternative to hospital based inpatient surgery for providers, payors and patients. It is generally recognized that ASCs are low cost, high quality providers of surgical services. During the 1970’s and 1980s numerous ASCs were developed primarily by physicians seeking an alternative to hospital based surgery. In the early 1980’s, the Medicare program recognized ASCs as a low cost effective delivery system and reimbursement was granted to ASCs. This fostered dramatic growth in ASCs which has continued unfettered into the 1990s with an increased awareness by physicians and hospitals to find ways in which they may work together to meet their strategic, financial and clinical goals.
I. Factors Contributing to the Development of ASC’s
The critical factors that have contributed to the development of ASCs for physicians include:
Control over the clinical operations including, among other things, hiring of staff, greater efficiencies in the operating rooms, and ease of scheduling.
Financial Participation in the project and the ability to garner a portion of the facility fee based upon the success of the surgery center.
Autonomy from the hospital and the ability to control the business affairs and the delivery of care to patients in a safe and efficient manner, negating bureaucracy typically associated with hospital based surgical units.
Lower Cost health care to patients and the community due to the fact that ASC’s, by their very nature, are lower cost deliverers of surgical care.
Some hospitals have followed suit by developing their own ASCs. Critical factors contributing to hospital based facilities include:
- Medical Staff Desire to operate in a separate facility in order to achieve the efficiencies associated with ASCs as well as the ability to financially participate.
- Competition with other hospitals to deliver lower cost health care for third party payors in order to establish a competitive advantage.
- Capacity requirements in current facility lending itself to the development of an ASC.
II. Factors Contributing to Increased Activity for Physician-Hospital Joint Ventures
Since the 1992 election whereby Bill Clinton proposed a restructuring of health care delivery systems based on provider networks, strategy for the development of ASCs and hospital based strategies have changed. While it is clear that the 1992 election and subsequent defeat of the Clinton legislation did not succeed in a mass overhaul of the health care industry, market forces moved toward an acceleration in ways in which health care services are delivered. One of the outgrowths has been a move by physicians and hospitals to align their interests and has resulted in a flux of activity toward physician-hospital joint ventures of ASCs.
Hospital Incentives to Joint Venture ASCs
Hospitals have traditionally not entered into joint ownership arrangements with physicians because of the dilution of profit that would result in a jointly owned ASC as well as other miscellaneous factors unique to each hospital. However, many hospitals, especially not-for-profit facilities, recognize that in order to keep a competitive advantage, alignment with physicians is critical to ongoing success. Some of the key considerations accelerating hospitals’ willingness to explore joint venture opportunities include:
- The federal government has been regularly increasing reimbursement to ASCs while at the same time, decreasing reimbursement to hospital based surgical units.
- Third party payors are demanding greater efficiencies and are showing greater willingness to contract with freestanding ASCs at prices below those of the hospital.
- Competitors, including hospital and health care conglomerates, are buying ASC companies and developing ASCs to augment their competitive advantage in markets.
- Hospital recognize that physicians will continue to develop ASCs without them and take profitable cases away from the hospital.
- Hospital recognize that partnering with physicians gives them a competitive advantage with third party payors and stops the development of freestanding, physician/ASC company owned facilities.
- Hospitals recognize that there are greater efficiencies achieved with an ASC; thus, the dilution of ownership interest can be negated with the efficiencies of the ASC, and the ability for the hospital to develop new outpatient programs to offset and augment the loss of revenue from the joint venture arrangement.
Physician Incentives to Joint Venture ASCs
As discussed earlier, physicians have traditionally developed ASCs as an extension of their practice, or entered into partnerships with other partners to own and operate an ASC. However, third party payors desires to enter into global contracts with hospitals for delivery of care as well as their desire to contract with health systems to reach the metropolitan population of their market, have adversely effected the ability for single, freestanding facilities to compete. In addition, many primary care specialists who refer to the surgeons owners of the ASCs have aligned themselves with hospitals through the development of PHO type arrangements which has put increased pressure on surgeon owned ASC’s to compete. Thus, the factors that contribute to the physicians desire to enter into a relationship with a hospital to develop a new ASC, or enter into an arrangement to joint venture an existing ASC include:
- Access to managed care contracts and the ability to strike a relationship with a strategic partner to capture greater market share through the use of the ASC as a vehicle for the hospital and participating surgeons to deliver lower cost, high quality care.
- The desire by physicians to keep a positive relationship with the local hospital.
- The addition of a strategic partner which can bring greater access to capital and increased awareness in the community.
III. Sample Structures to Consummate Physician/Hospital Joint Ownership Arrangements.
Based upon the factors set forth above, the key points for physicians and hospitals are control over operations of the surgery center and the amount of ownership in the surgery center. It is imperative to distinguish between control and ownership because an arrangement can be structured whereby one party to the transaction owns a majority interest in the ASC while the minority owner has significant control over day to day operations and governance.
For illustrative purposes only, the following is an example of a way to structure a successful joint venture which attempts to address the fundamental issues which are key elements for the physicians and the hospital:
This example addresses many of the issues which are key for hospitals and physicians. Specifically, the example contemplates equal ownership between the two parties which addresses the desire of both parties to own a significant interest in the project. Secondly, the example set forth above contemplates physicians having control over the operations and governance of the facility while at the same time delegating day-to-day management to a professional firm specializing in successfully operating ambulatory care facilities. This provision addresses the physician concerns over how the facility will operate, the desire to eliminate bureaucracy, and the desire for significant input regarding the business of the facility. The example also attempts to address the hospital concerns by requiring hospital consent for substantive issues which could adversely effect the hospital. Since many administrators do not have time to develop and operate freestanding ambulatory facilities, the role of professional management ensures the requisite expertise required to make the center a success is in place to ensure the delivery of high quality, low cost care.
It should be noted that each respective situation requires its own unique structure tailored for each transaction. However, examples, such as the one set forth above, attempts to address the fact that there are fundamental market forces moving physicians and hospitals together to develop ambulatory care centers.
Finally, due to the need for both parties to reposition services to better respond to third party payor incentive arrangements, alternative delivery systems, and increased competition, physicians and hospitals recognize the advantages afforded by the development and joint ownership inherent in ambulatory care facilities because it allows both physicians and hospitals to consummate strategic partnerships in order to enable them to meet their goals and long range objectives for the future.
Critical Steps Before Developing an Ambulatory Surgery Center
By Joseph Zasa, JD
Managing Partner, ASD Management
The freestanding ambulatory surgery industry has seen tremendous growth since the first dedicated freestanding outpatient center was founded in Phoenix in 1970. Today it is estimated that over 2,400 surgery centers are in operation throughout the United States. The health care industry is also experiencing growth and rapid changes effecting the delivery of care. Change in reimbursement in health care is effecting all providers which, in turn, requires ambulatory surgery centers to operate more efficiently than ever before.
This article submits that with careful and competent planning prior to actual development and construction, the risks inherent in developing a de-novo facility can be substantially minimized, greater efficiencies can be achieved and the goals of the principals developing the facility can be met and exceeded.
In the course of our practice, we see common mistakes made in the surgery center pre-development process which negatively effect the viability and purpose of an ambulatory surgery center throughout its life span. These mistakes are exceptionally difficult to undo once the center is in operation. However, regardless of whether it is a hospital or a physician, the mistakes can be easily avoided through thorough research and the engagement of competent professionals to assist the principals in meeting their goals.
Thus, the following are four critical steps which, performed and executed correctly prior to development, will augment the viability of an ambulatory surgery center project.
1. Development of a Comprehensive Business Plan
We often use the analogy of building a house when meeting with new clients. Before you build, you need to take soil samples and construct a proper foundation. The development of a business plan is the first step toward the successful development of any business, including an ambulatory surgery center. Thus, the business plan serves as the foundation for the project.
The business plan should include both micro and macro factors which will give indication as to the viability and most successful manner to structure the venture. Some macro-economic and macro-operational issues include whether there is an overabundance of competing facilities (hospitals and surgery centers) in the market, the ability for the venture to gain and retain key third party payor contracts due to pre-existing relationships in the market, the history of the development of independent for profit ventures in the market, and historic reimbursement in the market. A synopsis of some micro factors include meeting with physicians and gathering data regarding the number of cases and types of cases that will be performed at the facility, political factors singular to the market, the mix or type of cases expected to be performed at the facility, the desires of the physicians regarding the operation and day to day management of the facility, the practice patterns and supply cost patterns for the physicians, and the financial resources of the owners of the facility.
The business plan should include detailed financial data including a minimum of three (3) pro forma financial forecasts based on volume of cases performed. Included should be a projected income statement, sources and uses of funds, balance sheet, supply cost per case assumption, revenue per case assumption, staffing pattern assumption, expected payor mix as a percentage of volume, assumption regarding equipment requirements, and a debt to equity assumption. The data gathered (described above) should be used to make these assumptions. Furthermore, in concert with the architect and/or designer (see below) the developer should determine the size of the facility. A key concern is overbuilding based on over optimistic projection of cases. Similarly, in almost every instance, it is important to be able to expand the size and scope of the project based on changing needs.
The business plan should also set forth a legal and operational structure for the venture. After conferring with the client and their legal counsel (see below), a legal entity to operate the venture (limited liability company, limited partnership, limited liability partnership) should be selected which will meet the needs of the principals participating in the venture. Importantly, if the project will be joint ventured with physicians and/or a hospital, certain assumptions regarding ownership, governance, rights and duties of the owners, and overall operation of the surgery center should be set forth in the business plan. See Joint Ownership below. Lastly, if the project will be owned by more than one party, a capitalization structure must be set forth which prices the units of membership interest in correlation with the projected equity raised and debt incurred.
In summary, the development of the business plan has a threefold purpose. First, it is necessary to lay a firm foundation for the project so that the investors in the ambulatory center have a more complete understanding of the dynamics inherent to the venture’s success. Second, the business plan should also be used to secure financing and other capital required for the project since nearly all surgery center development projects utilize debt financing. Third, regardless of whether the project is begun by a hospital or by a group of physicians, if the founding party desires to enter into a joint ownership arrangement, the business plan is used as a starting point to discuss joint ownership since it includes all material factors relating to the surgery center’s development, operation and ongoing viability.
2. Joint Ownership
If there is one factor which contributes the most to the long term success of an ambulatory surgery center, it is the successful consummation of joint ownership arrangements with strategic partners prior to the development of an ambulatory surgery center. While there are many, and will continue to be many successful surgery centers owned solely by hospitals and physicians, the changing dynamics of the health care industry lends itself to provider alignment. Historic pitfalls include:
- One physician owning too much of the surgery center which creates professional jealousy.
- A hospital owning too much of the surgery center which creates resentment by physicians because they feel that they lose control and direction over patient care which is a common reason for the establishment of a surgery center by physicians.
- Control vested in the hands of too few, or one entity. The need for a mutually beneficial arrangement is of critical importance.
There are numerous tax, legal and administrative issues which must be addressed during the course of negotiations. Key factors include the balance of powers, rights, duties, and obligations as well as the division of equity in the project. These issues can be successfully addressed with competent advisors with experience in surgery center joint ventures and principals willing to make the effort to correctly structure a venture to augment its long term viability. Furthermore, it is important for the participants to acknowledge the contribution of each potential partner so that the developer and the advisors to the project can structure a mutually beneficial joint ownership arrangement which meets the strategic goals of each partner.
Too often political and personal issues impede the actualization of a joint venture; however, if a surgery center project, through either the efforts of the developer, the principals, or their advisors, can avoid the common joint ownership pitfalls listed above and enlist the support of key strategic partners in the venture, it will greatly enhance the long term success of the project.
3. The Overbuilding Phenomena – Selecting an Experienced Designer
The development of an ambulatory surgery center involves a series of complex and interrelated tasks. A surgery center is a high “fixed cost” business with the three highest expenditures during development being construction costs, land acquisition costs, and equipment costs. None of these costs vary with volume or revenue generated by the surgery center; therefore, they are deemed to be fixed. In fact, there are only two material variable costs associated with operating a surgery center: supply cost and staffing. Thus, the economic viability of a surgery center is very volume sensitive since enough cases must be performed to meet the relatively high fixed costs. However, once the volume reaches the fixed cost level, or break even point, the surgery center can experience significant economies of scale once the census exceeds the break even point. The most successful surgery centers take advantage of these economies of scale.
The key to realizing economies of scale, of course, is to build a quality facility to meet the anticipated volume, without overbuilding and adding unnecessary expense to the project. This will minimize the fixed cost and give the facility a greater chance to meet its financial and budgetary goals.
It cannot be emphasized enough that the selection of an architectural firm and/or design-build firm that has experience designing numerous ambulatory surgery centers in different states is of paramount importance since state and local regulations can vary and effect the size and scope of the project. It is strongly suggested that the participants in the surgery center venture interview firms with expertise designing and building numerous ambulatory surgery centers so that the architect and the developer work in conjunction with one another to minimize space requirements and still maintain a facility with the highest standards of care.
4. The Legal and Regulatory Hurdles – Selecting the Right Attorney
The health care industry is a highly regulated industry which requires expertise in tax, corporate/partnership, securities, and administrative law issues. Since many ambulatory surgery centers are owned by physicians and other partners (hospitals, management firms), the attorney selected must be familiar with the Stark laws, the Safe Harbor provisions, private inurement issues for not for profit hospitals, revenue rulings from the IRS, advisory opinions from the Office of Inspector General, and numerous state and federal laws governing for profit joint ventures.
There are many legal and regulatory roadblocks which must be navigated in order to consummate a successful surgery center project. It is imperative that the law firm selected has experience in all facets of health law, as well as specific experience assisting clients in the surgery center industry. Apart from the regulatory aspects, key tasks include assisting the developer in selecting an operating entity for the project, formation of the surgery center legal entity, drafting the operating agreement or limited partnership agreement, drafting the prospectus and related offering documents (if joint ventured), and working with state regulatory agencies during licensing.
The selection of a law firm that is familiar with the nuances of the laws and regulations specific to the surgery center industry and who is motivated to make the venture work for the client is invaluable to the developer and the client during and after the pre-development process.
In conclusion, the four critical factors set forth above are interrelated and can be performed simultaneously. The numerous pitfalls inherent in the pre-development process can be overcome prior to the commencement of any ambulatory project if careful planning is utilized to establish a foundation for the long term success of the venture.
The 12 Key Processes of an Effective Ambulatory Surgery Center
By Joseph Zasa, JD
Managing Partner, ASD Management
& Joan Culberson, RN
The key steps to successful ambulatory surgery center (ASC) development are a frequent topic of many articles. This is rightfully so due to the complexities inherent in the start up of a health care facility and business. While a comprehensive business plan, sound and coherent legal and operational structure, and expert equipment and architectural planning are some of key ingredients to developing a successful ASC, the operational systems post opening are equally as important. In the course of our practice, we consistently strive to hone the systems or processes to operate an ASC since they are a measure of ongoing success. This article summarizes the 12 key systems that must operate smoothly and effectively for a center to be efficient and sound. Many centers feel that the systems are in place, but rarely obtain objective measurements. This article will also attempt to highlight the benchmarks for management to ensure that the processes are functioning well.
First, a couple of caveats. The surgery center “business”, much like any business, is a people business. Put another way, it is a system of people taking care of people. Since patient care is the objective, the processes are only as good as the staff that carries out the management and patient care plan. An ASC can develop a great system, but still fall short if the right people are not in place, or the ASC does not have effective leadership. As a sportswriter in Dallas so eloquently said about Tom Landry, “the [Landry} system was great when Roger Staubach was throwing the football, but the same system wasn’t so great at the end.” In short, we all need talented people to follow the system. Notwithstanding, great people thrive in great systems. The structure must be in place to allow the staff to effectively perform their job. There is really no excuse not to develop sound and measurable processes to operate an ASC. Once developed, the trick is ensuring ongoing execution of the systems.
The second caveat centers on information systems. In order to evaluate any business, a manager/owner must have accurate information. Since there are several cost effective systems on the market that do an excellent job for ASC’s, it should be a given that an ASC is using a comprehensive MIS system to manage its business.
The scheduling function in a surgery center typically fall on one of the lowest paid, but most important employees. This employee typically has the first contact with the patient and frequent contact with the schedulers at the physicians’ offices. An effective scheduling system utilizes MIS system to coordinate equipment conflicts, block time, and has the scheduler coordinate with the nurse manager or coordinator to ascertain how late or early the case may be scheduled. Perhaps more subtlety, a sign of a proper scheduling process is the scheduler anticipating holes in the schedule and informing management. For example, if a physician is on vacation, there will be an opening on the vacation week. A proactive scheduler will anticipate this and call offices who have expressed an interest in scheduling at the center. Another element of the scheduling function is establishing a positive rapport with the surgeons’ offices. Effective schedulers develop a customer oriented view toward the offices and ask how the center may better serve their needs. Finally, since the business offices of many ASC’s are small, the task of answering the telephone, preparing medical charts (discussed later), and acting as a receptionist often falls within the job description of the scheduler. The performance measure of an effective scheduling system can be measured through monthly patient satisfaction surveys, impromptu surveys by management of satisfaction levels at the surgeons’ offices and interactions with the surgery coordinator regarding performing the tasks discussed.
2. Insurance Verification
A system for pre-certification must exist that coordinates with the surgeons’ offices, gathers insurance and demographic information from the patient, identifies co-insurance and deductibles, and ensures that the surgical procedure will be reimbursed. Collection of co-insurance and deductibles before surgery is critical to accounts receivable management because it is the best chance to collect from the patient. See Collections. Too many centers have large amounts of A/R in self pay accounts or in collections due to failing to collect these amounts on the front end prior to surgery. Similarly, the collection of key demographic data, obtaining a copy of the patient’s driver’s license, insurance card and obtaining the necessary pre-certification to perform the case is absolutely critical to a well functioning verification system. Finally, even though the MIS system frequently screens non-covered cases, we strongly suggest giving the verifiers and schedulers a “No List” of procedures that may not be performed in an ASC and are not reimbursable. It is very easy for management to review the verification process if the charts for the next day are reviewed for the pre-certification information and collection information.
Since reimbursement is tied directly to correct coding, the proper functioning of this process is critical. Interestingly, this process or function is the most susceptible to interpretation and review. For this reason, it is the area that is the most difficult to manage. Notwithstanding, we recommend the following:
- Hire certified coders, or if unable to hire a certified coder, the ASC should pay for the certification course. Included in the coders job description should be a requirement to pass the course and become certified. Further, the ASC should pay for continuing education seminars for the coders and business managers. We see constant changes in coding and this area requires constant updating and attention.
- The ASC should have regular coding audits by an unaffiliated third party entity. This will serve as a check on the staff at the ASC and highlight problem areas. See Compliance.
- Ensure that the ASC is billing for implants and using correct modifiers. See Billing.
- Ensure that the ASC is billing off the operative notes and not using a “super bill” as a crutch. While we believe that the superbill concept has merit and can be used as a guideline, the operative note is the record and it must be used to code the case.
- Coordinate with the surgeons to review if the office is coding the case the same way as the ASC.
- Use specialized coding software as an additional check and compliance measure. These software packages are relatively inexpensive and provide a check on the onsite coder.
While typically included with coding, the billing function is a separate function which deserves to be highlighted. A few essentials to a sound billing system:
- Third party contracts and rates are loaded into the MIS system so that the discount or contractual allowance is taken at the time of billing. This is extremely important because it gives a better idea of the net accounts receivable balance.
- The coder should report to the business manager each day regarding claims submissions and unbilled claims. The goal of the ASC is to drop claims within an average of less than 3 days from the date of surgery. This may not be practical for all cases due to implants or pathology reports, but is an attainable goal for the majority of the claims. Management should use the MIS system reports to obtain this information. If the billing days are above 4, the center has a systematic problem.
- Use electronic claims submission. This is one of the best ways to reduce A/R days and ensure that claims are received.
- Make sure that implants are billed properly and conform to the third party payer contracts.
- The manager should check the unbilled patient accounts each week and make that there are no unbilled accounts over 7 days.
The keys to the billing system are timely claims, electronic claim submission and ensuring that all items are billed properly (implants/modifiers). Management can use the MIS system to ensure that the system is operating within the parameters discussed above.
The collections and cash received are the fuel that drives the engine of any business. Even though this system is so integral to the fiscal health of the center, we see many mistakes executing the process typically centering on lack of follow up on claims, not collecting prior to surgery (see Insurance Verification to see how the two processes integrate), claims submission errors, coding errors, and lack of diligence on open account balances. This is an area where management should focus its attention and receive daily updates on activity and performance.
Key areas include:
- Collecting co-insurance and deductibles prior to surgery. See Insurance Verification.
- Following up on open claims after 30 days with insurance carriers.
- The use of patient assistance letters.
- Daily working claims through use of the memo tickler file in the MIS system to show the status of the claim.
- Management to analyze the A/R aging and ensure that all claims over 30 days have been addressed.
The best measure of collections is accounts receivable days, or the average number of days to collect on a claim (A/R days). It is the best barometer of a proper functioning business office because if insurance verification, front end collections, clean claim submissions, proper coding, timely billing, and insurance claim follow up are not being executed properly, A/R days will be impacted. While the benchmark is 45 days on average to collect, some centers will be lower due to the mix of patients or payers i.e. a cosmetic surgery center should average 25 days to collect. This formula is derived by dividing the net accounts receivable (after contractual allowances and bad debt) by the average daily net revenue for 60 days.
A proper functioning business office will measure collections each day, have collection goals and targets based on previous months performance and will ensure that the collection follow up process is occurring daily.
6. Accounts Payable
The ASC’s bills should be paid in a timely manner. We suggest a payables run twice a month. In order to effectively manage the A/P, the invoices should be input in each day and logged properly so that the oldest invoices are paid first. A few key components:
- A purchase order system should be in place (see below) whereby a separate employee issues the PO and a third party verifies the receipt of goods.
- All invoices should be initialed by a third party and verified for accuracy.
- The A/P clerk should be separate from the employee(s) who issues the PO.
- Management should check the A/P detail log to ensure bills are being paid in a timely manner and the center is not paying too quickly or too late. Management should spot check the office to see if bills are being placed in drawers and not logged in the system. Management should further spot check the A/P log to see if bills are input daily.
- Checks should be in sequence and the bank reconciliation reviewed by a third party each month.
- All checks should have stubs attached to paid invoices.
- All invoices should be approved by management by means of initialing the invoice.
- Checks over a specified amount should require dual signatures.
- At the risk of stating the obvious, the A/P clerk should not be allowed to sign checks.
- The month should be closed and a third party manager should password protect the month so that reverse entries cannot be made post close.
- A third party should perform the bank reconciliation each month.
7. Cash Management
It should be a goal to have three separate employees control receipts or cash/check/credit card inflows to assure effective checks and balances and reduce the possibility for fraud and graft. Checks and cash should be logged by a separate employee who opens the mail, runs a tape and initials the daily deposit log. This amount plus the daily credit card receipts should reconcile with the daily deposit and should be in a log along with copies of amounts received. A separate employee should make the deposit and a separate employee should post payments.
A sweep account or money market should be established to move excess cash into an interest bearing checking account. While rates are now at historic lows, there is still no reason not to gather interest on the cash. Further, if the A/P system is operating properly and bills are paid twice a month, the cash can be easily moved between accounts.
8. Inventory Management and Purchasing
Excess inventory reduces cash and is unproductive. Conversely, the ASC must keep sufficient drugs, supplies and implants on hand to operate. Fortunately, it is rare that a center is under supplied, rather the former is usually the case in a poorly managed ASC. Since supply costs are one of the variable costs that can be best managed, we suggest the following:
- Par levels tied to volume should be established
- When possible, items should be consigned to reduce inventory cost on hand
- While time consuming, the inventory should be input in to the MIS system in order to better track supply and drug cost per case.
- The purchase order system should ensure that employees are submitting purchase orders and checking deliveries for accuracy. Packing slips should be submitted to the A/P clerk with initials ensuring that the order is accurate. Management should spot check orders and ensure that the invoices are being delivered to the payables clerk with proper documentation.
- The ASC should use the system and the preference cards to measure supply cost per case each month.
- The ASC should also use the system to compare supply costs between physicians for similar cases. The results should be reported to the governing body of the center.
While not traditionally thought of as a system, the staffing plan for a center is critical since staffing and supplies are the two largest variable costs in an ASC setting. We suggest measuring overtime, hours worked per patient, and hours worked for the month. This data along with appropriate center benchmarks will assist management in analyzing whether the staff is working overtime due to late cases which erode margins, or if a second shift or staggered staffing is required. The staffing system can also identify problems with cross training. The center’s nurse manager and business manager should be able to clearly explain the role and function of each member of the ASC staff. The ASC should compare itself to similar centers to properly benchmark and identify material staffing discrepancies.
The ASC must have an active and ongoing compliance plan. The plan should be signed by all physicians and staff members; it should include monthly in-services for the staff and ongoing updates. The compliance plan should include outside coding audits with evidence of action taken to address any problems identified, accounting reviews and audits, operational audits to ensure that the policies and procedures are being followed and regular legal review of compliance matters including identified “hot areas” for ASCs.
11. Risk Management
Risk management is an important aspect of operating an ASC while promoting patient safety. State specific reporting requirements must be followed to comply with regulations for the reporting of certain adverse patient outcomes. There should be an ongoing evaluation of procedures, protocols and systems to accurately identify patients, planned procedures and the correct site of the procedure. The patient safety program integrates risk management, performance improvement and a review of processes, functions and services to improve safety by reducing the risk of system or process failures. Employee education encompasses all areas of risk management and promotes patient safety.
12. Medical Records
Confidential medical records management is paramount. Security and physical safety must be maintained. These records must be stored in a manner that makes them readily accessible and must have a unique identification code. The Health Insurance Portability and Accountability Act (HIPAA) must be followed to the letter. All medical records must be completed in a designated period of time and are audited for correct information and timeliness of completion. Guidelines are very specific for content and follows accreditation requirements.
All 12 functions must be operating correctly and efficiently in order for an ASC to operate effectively. The systems must be in place, the employees must be trained properly and their work must be reviewed by management on a daily basis to ensure proper execution of the system. We believe that hands on oversight and educated employees make the difference since “organizational entropy” is a constant whereby a business moves to a state a chaos as fast as possible. While a chaotic state may not typical, a less than efficient and loose organization is much more typical. With proper oversight over the key functions, a center may be able to hone its operations, increase quality of care and improve performance.
Measuring ASC Staffing Costs
We received numerous responses regarding a quote in a recent edition of this newsletter. The statement generated interesting questions and responses. A paraphrase of the quote is:
Staffing costs should be 20% of net revenue or lower. If not, it is an indicator of mismanagement.
As the author of this statement, the responses were surprising since there is at best a vague recollection of the quote and the interview. In fact, I had to research back issues of this periodical to find the quote. The whole scenario reminded me of the Jimmy Buffet song, “I Heard I was in Town.” Interestingly, at the risk of sounding like Charles Barkley who said he was misquoted in his autobiography, I do not necessarily agree with “my own” statement since it is accurate in some instances, but potentially misleading in others. In this instance, the problem may be that the statement was not expanded on in its proper context. Nevertheless, the responses are appreciated since it provides a good basis for this article and allows us to examine the very important issue of measuring staffing costs in ambulatory surgery centers.
The Inherent Dilemma
Staffing costs are the first or second highest expenditure in a surgery center and effective management of this cost is a key function of effective administration. The challenge is that staffing is not a variable cost in the traditional sense whereby the more patients at the center, the more staff are hired. Rather, the ASC industry consists of generally small businesses that we estimate, on average, perform 200 cases per month. In fact, 64% of all ASC’s have 20 or fewer employees. Source: Federated Ambulatory Surgery Association. This means that surgery centers do not initially generate significant economies of scale that lend themselves to formula driven sliding scale measures. The reason is that a center must employ a core group of staff in order to operate. As an example, a surgery center will have relatively the same number of staff to perform 100 cases per month that it will to perform 175 cases per month. This creates a measurement dilemma because staffing costs are fixed for a base level of cases, and become somewhat variable once the center performs additional cases. Thus, there is no sliding scale or easy measure that states for each additional case, staffing should be “x.” The fact remains that staffing is a “quasi-variable” cost. A core staff is required to operate a center regardless of the number of cases, but a variable element is introduced once the center meets a base level of volume each month. Using the previous example, a surgery center may have 11.0 FTEs to perform 125 cases, 12.0 FTEs for 150 cases, and 13.0 FTEs for 200 cases per month. Therefore, in this example, economies of scale begin to be derived after the initial 150 cases per month and do not play a significant part in staffing options until the center reaches 200 or more cases a month.
Slicing the Data
With this dichotomy between fixed and variable costs, how does a manager effectively measure and control this cost? We suggest that:
Staffing costs are measured based on the relative size of the ambulatory surgery center as determined by its average number of cases performed relative to its case mix, market conditions and reimbursement.
This means that surgery centers should be “sliced” based on:
- The number of cases performed per year.
- The type of cases performed by specialty, or the case mix.
- The market conditions in terms of wages paid to employees; and
- The amount of reimbursement on the cases performed by each specialty.
As discussed previously, there are few economies of scale until a center generates at least 200 cases per month, or 2,400 cases per year. These centers (less than 2,400 annual cases) should be grouped together and compared against one another since their data is significantly different than the larger centers. For example, a multi-specialty surgery center that performs 150 cases per month must have higher staffing cost per case than a center with the same mix performing 500 cases per month since there are few economies of scale generated. See above.
Second, and perhaps more importantly, centers should be grouped based on the type of cases performed. A plastic surgery center will have radically different ratios than an endoscopy center. Thus, the data must be sorted based on case mix.
Third, the common measurement tools shown below will be skewed if the market conditions are abnormal. For example, the wage paid to a registered nurse in San Francisco will be significantly different than the wage to the same nurse paid in Thibodaux, Louisiana. The annual FASA Salary Survey is a good tool to assess the relative impact of this since it is sorted by region.
Finally, payer reimbursement also radically impacts the ratio analysis. This is best illustrated by comparing a center that performs the majority of its cases at contracted rates with a center that performs a majority of its cases out of network. While being out of network impacts the number of cases, the reimbursement per case is typically higher. This will skew the ratios and must be factored into the analysis.
Dicing – Key Measurement Tools
Once the surgery center is categorized with its peers, it should be further “diced” using key measurement tools to assess staffing.
Prior to using the measuring tools, an agreed upon definition of staffing costs must be determined in order to best analyze the data. We suggest hours worked at the surgery center for the period (exclusive of bonuses, paid time off and vacations) is best for operational measures such as staffing hours per patient and staffing cost per patient. The benefits and bonuses should be separated on the income statement and measured separately using easily found benchmarks that are beyond the scope of this article. Additionally, business office staff must be included in the measure along with administrative staff. The following are key measures along with some general guidelines:
- Staffing as Percentage of Net Revenue – the total staffing cost (defined above) divided by the net revenue. Again, this should be interpreted based on the type of cases performed, the number of cases (small or large center), and the payer mix. For a large multi-specialty center, a range of between 23-25% is normal. For a high volume, high turnover center (i.e. endoscopy) this number is typically lower.
- Staffing Cost Per Patient – the total staffing cost divided by the number of patients. This is a good measure, but must be interpreted properly. Again, the type of cases performed will be the major factor in determining an appropriate benchmark. Market salary conditions are also important. For a multi-specialty center performing 3,000 cases per year in a normal market, we like to see this below $325.00 per case.
- Staffing Hours Per Patient – this is one of the best tools. It is the total hours worked divided by the number of cases. This filters salary anomalies and revenue anomalies and measures productivity. Again, it is a per-patient measure and this necessitates that the data be interpreted based on the type of cases performed i.e. a pediatric center may have a slightly higher number than a center with an adult base with the same volume. Again for a multi-specialty center, 10.0 to 11.5 hours worked per patient is reasonable.
It is important to measure staffing costs to determine if a center is being operated efficiently. Since staffing is not a static measure and is a mix of fixed and variable costs, benchmarking is the best way to assess a center. However, in order to obtain meaningful benchmark data, the surgery center must be measured against similar centers with the same or similar number of cases, payer mix, type of cases, and surgical specialties within its region. Once complete, there are several ratio measures that can be used to assess the staffing performance.
Data measurement and benchmarking provides an objective assessment of operations, but it is only one of many devices that an effective manager uses. On site assessment and in depth understanding of operations cannot be replaced. Effective managers use the data as a tool to “know where to look.” The best managers are aware that each center is unique and should not be operated off a spreadsheet. Notwithstanding, the most effective managers use the staffing data as a valuable tool to augment on-site assessment of operations and drive efficiencies at their surgery centers.
By Joseph Zasa, JD
Managing Partner, ASD Management