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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. BeckersASC.com


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. BeckersASC.com


Growing Your ASC, Q&A With Robert Zasa

By Renee Tomcanin Q: Solid business fundamentals are essential to the success of ASCs. What can centers do to ensure their processes are running as effectively and efficiently as possible? Robert Zasa: Case costing remains as important as ever. At our centers, we are currently running some spring housekeeping to see where we can reduce items we buy. For example, we may see a reduction in reimbursement from HMOs when it comes to surgical implants. In this case, we go back to the payor and try to renegotiate rates. We will be honest with the payors and explain that we can't afford to do the cases at the current rates, which will, in turn, force them to go back to the hospitals and pay a higher rate. Often, we will be able to negotiate a new rate. Aside from reviewing case costs and reimbursement rates, we look at all areas of the practice, including staffing costs, suppliers, etc., to see what we can do to get better pricing. Recently, we've been able to work with our GPO to contract for more items on more of discount. We've also shopped distributors to see if we can get better pricing. Overall, though, staffing and supplies account for the biggest variable costs in an ASC, and we make sure we are reviewing these areas. Q: ASCs continue to have concerns over falling reimbursements, as they have in the past. How can ASCs make sure that they are receiving adequate reimbursement on their cases and what should be done to improve these rates? RZ: As with case costing, ASCs should review their reimbursements per case. At our centers, we review one specialty every month so that it becomes a routine practice. We also perform a retroactive contract analysis of the top 20 or so procedures at our ASCs by CPT code. The top 20 codes will typically represent 80 percent of your business at your ASC. Using these codes, we perform a payor breakdown, including case volume per payor, so we can track any disparities among the rates. You want to make sure you have a good sense of what you are doing per payor. For example, you might discover you are doing 200 cases for Cigna at $100 and 300 for Blue Cross at $50. This way you can see what insurers are more profitable for your center and which ones it may be necessary to renegotiate with. ASCs should also receive annual notification of changes in reimbursement from payors, so that they can prepare for significant changes. Q: What opportunities for growth exist for ASCs currently? Are there any new developments or procedures beneficial to service lines in ASCs? RZ: One opportunity we've taken is to go back to our existing physicians to make sure that they are maximizing the use of the center. We have also examined CMS's list of newly approved procedures for ASCs and ask our physicians what they are willing to or want to learn. For example, we had a general surgeon say he was interested in learning new endoscopic procedures. We already had the equipment for other specialties, so it was worthwhile to have the surgeon train on the new techniques and add them to the ASC. Keeping constant communication open with your investors will help you to gauge the interest of your surgeons. Spine and retina also remain popular new areas for growth, and, again, we add these specialties according to physician interest. Retina is now paid by Medicare, so it can be a profitable addition for ASCs. We've had outside surgeons from other ASCs come in and demo these areas for our surgeons, and if there is interest we look into adding the procedure. Q: Reports have shown that more new physicians are choosing the hospital setting over private practice. How can this effect the ability of ASCs to recruit new physicians? RZ: Hospital employment can be good for ASCs that are in joint ventures with hospitals as it means new physicians will continuously be added on to the center. ASCs can also benefit in entering into joint ventures with hospitals, as the recruiting office will see the surgery center as key to attracting new surgeons. For instance, a hospital may be attracted to a new orthopedic surgeon, and the ASC can help bring the surgeon in because it can offer a place where he or she can work and have ownership. © 2010 Becker’s ASC Review. Reprinted with permission from Becker’s ASC Review. BeckersASC.com


Ambulatory Surgery, Critical Management Indicators

By Robert Zasa, MSHHA, FACMPE Managing Partner, ASD Management STATISTICAL ELABORATION TABLE 1. SURGICENTER MONTHLY PERFORMANCE REVIEW In highly technical aspects of society, such as a health care system, it is easy to become focused on the esoteric elements of the field or the system one is trying to manage. Intellectual curiosity leads to a desire to understand all elements of the system in an attempt to master the subject. However, this often leads to focusing on the parts that capture our attention versus the basic substance of the system: the hold instead of the doughnut. The hold captures one's attention, but the substance of the product is what surrounds it. CRITICAL SUCCESS FACTORS To avoid such problems in management, a concept termed critical success factors (CSF) was developed as a management tool. In the 1960s, the basic ideas of management by objectives appeared in the literature (Blake & Mouton, 1964; Herzberg, 1968; Likert, 1961; McGregor, 1960; Odiorne, 1965). Deegan (1977) brought the concept further and coined the phrase "key result areas." The basic precept of CSF is to concentrate on the fundamentals: the elements critical to the success of delivering the product or service. The concept emphasizes delineating the factors that are critical and understanding the fundamental factors that will help the business achieve success in areas of quality, financial performance, personnel, and any other factor that contributes to the success of that business. By focusing on these fundamentals, CSF allow managers to measure consistently the execution of the business plan, evaluate the outcomes, identify problem areas or areas in which management intervention is appropriate, and adjust for any variances in order to execute the game plan of the business consistently. Managers can then ascertain the factors that they believe are critical for that business. Important is that those factors, once identified, are constantly measured. Also, they are measured over periods of time when trends can be observed for those data. Each business has its own CSF. Many hospitals have incorporated CSF into their quality assurance program. CSF has a broad application and is a power tool when the following criteria are met: CSF must be quantified. CSF must be validated. CSF must be tried and fine-tuned, both from internal resources as well as external (consumers of the service). CSF must be consistently measured. CSF must be empirically derived. Ambulatory Systems Development has found in over the past 10 years and in operating more than 40 surgery centers, both hospital-based and free-standing, 16 critical success factors as being the most critical to the financial viability and high-quality delivery of surgical services. These indicators, with actual data from a surgery center, are shown in Table 1. Many of the factors are used in combination with one another, and some are used as free-standing statistics. The data act as a laboratory test does for a physician when trying to diagnose a problem with a patient. The data can indicate a particular problem if the statistic falls outside the normal range. The trained manager can draw several conclusions about what may cause that data to be outside the norm. The manager then may refer to other specific resource data to validate the problem and make necessary management interventions to correct it. Ambulatory care businesses are typically small in terms of gross revenues and profit. Their margins can be quite high, and need to be, to deliver adequate return to the institution or owners. For this reason, constant monitoring of such a business is imperative. Most ambulatory care businesses, such as an ambulatory surgery center, are volume sensitive. STATISTICAL ELABORATION The first statistic in Table 1 deals with the total number of patients; the third statistic deals with the total number of procedures performed. These are two different data. Many times a patient has multiple procedures performed on him or her during one surgery. These two data combine to assist in assessing the average supply cost per case as well as the staffing required for the center. The second CSF is the average number of patients per day. This is a statistic that is typically used for financial analysis. Break-even costs are typically calculated on number of patients per day. This is also critical for staffing. Room utilization is also related to this particular piece of data. It is commonly thought that five outpatient surgeries per room per day are the norm. However, the author's experience suggests that most of the efficiently run surgery centers typically average seven to eight cases per day, depending on the mix of services using the surgery center. These data are based on a multispecialty surgery center rather than a single-specialty center. Many single-specialty centers that are dedicated to short procedures, such as gastrointestinal and eye centers, can average more cases per day due to the proficiency of the surgeon not having to change equipment in the room and the short time taken by these procedures. The number of patients per day statistic is also significant when looking at the scheduling. This number is typically augmented by reviewing the cases per day by day of the week. The surgery center has heavy days and many times the average can be skewed by a particularly heavy day, followed by a particularly light day. For these reasons, the statistic is looked at very critically. Staffing and supply costs are major factors to control in a surgery center, as is true with most ambulatory businesses. Instructions for completing numbers: 1. Includes all revenue derived from surgical charges, laboratory charges, and revenues from other sources. 7. Total hours worked in month divided by 173.3 hours. 8. Total hours worked in month including overtime divided by number of patients. 10. Includes expenses incurred for the purchase of medical, pharmaceutical, anesthetic, supplies, excluding intraocular lenses and other implants. 13. Average daily net revenue for past 2 months divided into accounts receivable. 16. Pre-tax net income from financials divided by net revenue (#5). *Includes quarterly MD distribution and employee profit-sharing accrual. Reprinted with permission from Zasa, R.J. (1989, March/April). Critical success management of ambulatory surgery. Medical Group Management Journal, 33. The fourth factor (Table 1) deals with gross revenues, per case revenues, and contractual allowance and bad debts. These statistics are reported both in aggregate dollar amounts as well as an average revenue per case. This indicator often is an excellent measurement of the case mix occurring in the center. It is also used in financial analysis, particularly in regard to the aggregate net profit per patient. Factors 5 and 6 deal with net revenues and are obviously used for financial purposes. The contractual allowance figure above also assists in measuring the mix of health maintenance organization (HMO), preferred provider organization (PPO), and other contract cases. It allows the manager a quick way of measuring the payer mix of the center. Factors 7, 8, and 9 deal with staffing. They are typically used in combination with the number of procedures and total number of patients (factors 3 and 1). Though normative trends show that there is a very narrow range of acceptable staff-hours per patient, this can drastically be affected by the case mix (many times shown between the ratio of patients to procedures performed) and the total number of cases. To have a facility that is staffed safely, it must have a specific minimum number of staff members in the facility. These are considered fixed staffing costs. In ambulatory businesses, once this particular fixed cost is covered, the profitability increases exponentially. Staffing and supply costs are major factors that must be controlled in a surgery center, as is true with most ambulatory businesses. For this reason, 5 of the 16 indicators deal with staffing. These staff-hours per patient can be altered significantly by using permanent part-time and as-needed staff. The part-time personnel in a surgery center are critical to its staffing pattern. These people may work 3 or 4 days per week for a set number of hours, but they are as familiar with the center's operations as are the full-time staff members. The staffing CSF allow the manager a quick view of how well these part-time personnel are used. Factors 10 and 11 deal with critical operating expenses. Lenses and implants are typically excluded from this statistic, because usually they are expensive and represent wide-ranging costs due to the various types of lenses and implants used in centers. For this reason, these costs skew the data dramatically. Heretofore, these supplies have been billed separately; now the lenses are incorporated into the Medicare cataract with intraocular lens implant (IOL) fee, However, on most income statements for surgery centers, lenses and implants are reported separately as revenue and as expenses. The rest of the medical supplies include all disposable items, all anesthesia drugs, all medical gases, and all supplies for providing the basic laboratory tests (typically a dip stick urine test and a hematocrit). Using this statistic allows the manager to look into one of the five major causes of supply costs being too high: (1) price, (2) amount of supplies on the tray, (3) amount of time the supplies are reused safely, (4) use of generic drugs or multi-dose utilization of certain drugs, and (5) inventory control. Factor 12, total expenses per patient, is calculated and typically subtracted from the net revenue per patient (factor 6) to gain a quick idea of profitability. The data (Table 1) show quarterly physician distributions and employee profit-sharing accruals in this particular expense. It is important that this factor include all expenses. If the outpatient center is hospital-based, there are typically other overhead items included as well as inter-company allocations usually associated with for-profit hospital chains. The important issue is that this factor reflect the total expense per patient of the facility. Factor 13, regarding accounts receivable days uncollected, is critical to the success of an outpatient business. Due to the small revenues as compared to inpatient revenues, collections in outpatient businesses must be monitored closely. Typically, payment is made within 60 days or less in most ambulatory surgery centers. This number can be significantly less than 60 days depending on the number of HMO or PPO contacts one has, because these institutions typically pay surgery centers between 30 and 45 days. Factors 14, 15, and 16 deal with the profitability of the facility and are self-explanatory. The purpose of the data is to give managers an overview of the critical factors for the success of their centers. The CSF can be used in setting goals and objectives for the center staff who have the most impact on the individual factors. Typically, directors of nursing have their performance goals tied to the cost per case and staffing goals. Business managers usually have their goals tied to the accounts receivable days, medical supply costs, and total expenses per patient. In an ambulatory surgery center, everyone is in sales, and often there is profit-sharing with the employees based on the number of cases performed and the profitability of those cases. Total profitability and the number of cases become a tangible indicator and an incentive for all of the employees. When the CSF are measured each month, everyone can see how he or she is doing regarding the profit-sharing plan, much like following the stock price of an investment in the newspaper. When this is done, individuals tend to focus not only on what they do but the success of the business as a whole. The decision to use CSFs can be a powerful management tool. CSFs can assist in helping the manager monitor the business very closely and make appropriate adjustments. The factors do not tell the manager the answer, but tell the manager where to look. Focusing on critical factors for the success of the business allows the manager to address the fundamentals of that business, to build a consensus among the staff on which goals are important and to assist them with executing these goals consistently.


Avoiding Pitfalls When Developing Ambulatory Surgery Facilities

By Robert Zasa, MSHHA, FACMPE, Managing Partner, ASD Management The process of developing a surgery center is a complicated one; there are many obstacles to avoid. This article highlights some of the pitfalls that have been experienced in developing multiple centers throughout the United States. Most importantly, its purpose is to share information on the timing and decisions that should be made, which will result in a more successful center. This article should answer the questions of where to start, how to proceed, and when to bring in the proper consulting expertise to assist in successfully developing an ambulatory center. It is often the case that a physician group or a hospital wishing to do a joint venture with its local physicians will first contact an attorney or an architect (or even worse, buy a piece of property) as the very first step. This is one of the most common mistakes in developing a center because these professionals cannot offer great assistance in this phase of the project. Indeed, they will ultimately be critical to the success of the project. But, the issue of when to use certain types of expertise is critical and they must be used in a cost-effective way. There have been enormous sums of money paid to professionals prior to the time that they are needed, when they mush be carried by the ensuring surgery center. In short, there are preconstruction issues that need to be resolved. First, there should be a critical attitude taken toward whether or not the project should even be initiated. Before deciding to build, the project's financial feasibility should be determined by someone who is familiar with the development and operation of such facilities. This should be done in conjunction with a physicians group with specific data for that specific area, such as land costs, rent costs, actual case mix of the services to be provided in the center, local areas fees, and numerous other critical data. A variety of financial scenarios should be run, based on a multiple volumes of projected caseloads, rather than a typical five-year projection. In other words, the group should see the various levels of the patient volume and the economic effect that each of these patient volumes will bring upon the group. It's very easy to see if the project will economically pencil-out if case volumes and case mix is present. it is also easy to see and determine if the project is a stretch project, or one that should be deferred until further volumes are gained by the committee group. Population demographics often have nothing to do with the success or failure of a surgery center. A center's success relies more heavily on those individuals committed to making the center prosper. It is assumed that someone competent to do such projections would be hired by the group to guide it in an objective way. When selecting that individual, the hospital or physician group should ask how many projects the candidate has previously found unfeasible and has advised against. Objectivity is important, particularly at this critical phase of the project. Second, the organizational structure will be critical to the project's success and the achievement of its goals. Though this sounds elementary, the point is often overlooked by groups developing centers. Specifically, it must be decided whether the main purpose of the center is to reap economic benefit for the group or physicians putting the center together. Or, whether its main function is to provide surgeons with the opportunity to be more productive in the way they schedule their cases and allow more office time to see new patients, or even to have ore leisure time. Is the purpose of the center to have only the physicians in the group use the facility, or to have it attractive to outside physicians? All of these issues have enormous ramifications on the physical design, the capital needs of the facility, particularly in regard to equipment and space, and staffing. They also have a critical impact on financial projections. The medical politics of the situation are very important when considering whether or not shares should be given to all on an equal basis, or if a paid board should be instituted in addition to equal shares, or if shares should be given in percentages of current volume of practice. In short, before contacting attorneys or architects, or purchasing land or equipment, these issues need to be addressed and discussed thoroughly by the group with an outside third-party objective individual. There must be consensus on these issues in order to proceed in a logical and efficient way. Finally, assuming that all of these issues can be resolved, a team should be assembled made up of an architect who has had experience doing such projects; a corporate attorney who has experience in health law, health regulation, and setting up structures and syndications; a business developer who will guide the project, make sure it gets built on time, and ensure that all operational considerations are performed, and that the facility is licensed and certified within a set period of time; and an accountant who is familiar with the group's financial status, financial strength, and can work as a critical part of the team on an ongoing basis. Once the critical questions are addressed and the team is assembled, location requirements regarding the facility should then be addressed. Again, it is a waste of time to line up a piece of land, or even put opinion money down if the group does not know the direction in which it is going. The land must be totally responsive to the structure of the group and questions about it will be answered when the critical questions above are addressed. Location requirements will include a physical location in a medical office building if the center is to be located there. Should the center provide access to all of the physicians in the building, or will the center be located in a particular physician's suite? It is now common to have the center open onto a common corridor since there are a great number of facilities that were once single-specialty facilities, now being converted for multispecialty use. The alter-market for such centers is great, and a physician who has set one up for his own office can now often times sell out some of his shares to others and gain financial appreciation for such an investment. The location of the facility is therefore critical if used by others is being considered. Just as critical to a medical group or group of physicians putting together a surgical center is the location of a freestanding center. Traffic count, the proper side of the road, access from traffic lights, are all critical factors in selecting a location. The facility's accessibility to women patients is also critical importance since women account for the largest share of patient volume, particularly in outpatient services. Extensive market research throughout the health care field has shown that women themselves are heavy users, as are their children in their early years. Many times they will help select physicians for their husbands. Therefore, access to this important referral group is critical. Access to a hospital is also critical, particularly for a freestanding center. The proper amount of land and the way it is laid out, the grading of the land, and the zoning of the land are also critical factors. In other words, this is a major decision to be reviewed carefully, usually in conjunction with the architect and business developer. A common pitfall is that a surgeon who is integral to the group owns a piece of land, and the group tries to fit the project on this piece of land. It should, however, be an objective decision for the benefit of all. Once the project is deemed feasible, the goals are set, the purpose is determined, and the team is assembled, there needs to be agreement on the floor plan, as well as the specialties that will be house in the center. The structure of the deal and the investment will be critical, and issues concerning whether physicians will just be able to buy into the facility, need to be resolved. It must be decided which specialties will be included, based on their impact on the architectural design. Second, it must be determined whether or not the facility will be built only for Medicare specifications, or to the state's licensure standards. There are advantages and disadvantages to each side of this decision. In California and Florida, there are extensive architectural and construction cost consequences of deciding to be licensed. Costs for state licensure can run between $50,000 and $150,000 more for the construction costs than for a facility that is merely Medicare licensed. This greatly depends on the type of building in which the center is located, and/or if the facility is a free-standing facility. On the other side, the positive aspects of licensing is that the facility is able to serve PPOs and HMOs, which now often require the facility to be licensed. Furthermore, the facility can be syndicated and sold at some later point. Generally, it is worthwhile to go through the trouble of licensing the facility. If the architect is one who has past experience in these facilities, many efficiencies can be achieved from the original plans. This will keep the additional costs to a minimum, yet meet all the standards required. There are also equipment concerns to be considered when deciding whether to license or just build to Medicare standards. Empirically, it is well worth the effort to seek licensure for the above-mentioned reasons. However, this point needs to be decided by the group and will be dictated by the scope and purpose of the project. Third, the decision of what to include in fixed equipment in designing the center for multispecialty groups will be critical. It is obviously much more complicated to buy a variety of equipment for various specialties. There are numerous purchasing sources. In addition, it should be determined if economies of scale can be made in utilizing the same type of microscopes, for example, for ENT and OB-GYN. These equipment considerations are critical because they will represent a large fixed cost for the facility. As most operators of facilities are aware, the two largest variable costs are staffing and supplies. They are also among the top four total costs of the center. The two largest fixed costs will be the rent and, typically, the equipment lease, or loan to service the start-up costs, which sometimes includes the equipment. The equipment is critical in a surgery center and again, will be dictated by the scope of the project. For instance, fixed equipment, such as sterilizers, will be dependent on the specialties using the facility. In addition, the type of lights and other critical items regarding equipment that will actually be installed in the center, not the movable equipment, will be factors for consideration. It is critical that these issues be addressed early on. The process is much like a game of dominos. When one falls, all the others should fall behind it. If something gets out of sequence, it can have negative consequences for the project. Others will touch on architectural considerations. However, it is important, again, for the purpose and specialties to be decided, in order to determine, for example, if the facility will have piped nitrogen for orthopedic surgeons, or if the caseload will be small enough to use portable tanks. Recovery room bed ratios will be determined on the basis of whether heavy ENT or children's use of the facility is anticipated. Many times facilities have co-utilized their preoperative area when space is restricted, and when there will be a significant amount of ENT volume in the facility. Also scheduling becomes a major critical factor in anticipating patient volumes so that staffing can be properly organized prior to opening. In other words, two ENT physicians should not be coming in at 7:30 on the same day and totally absorbing all recovery room space in the facility. It is better if they can be scheduled for different days and the caseload can be mixed. This is commonly done in well-organized and managed facilities to assist in ensuring that the physical facility lends itself to high-touch and high-quality patient care, rather than just doing a volume of cases every month. The architectural ramifications of such decisions are significant. Further examples are plumbing for Yag lasers for ophthalmologists, and special recovery areas for children as necessary. These issues emphasize the importance of contracting with architect who has designed surgery centers prior to designing other facilities. It is a complicated business, and it is not something for a residential architect to tackle. Finally, several issues should be considered regarding conversion of existing ambulatory surgery centers. Today, many existing single-specialty ASCs are being converted to multispecialty ones, and in these situations, state licensure and architectural considerations come into play. To use a facility for only one practice puts the ASC into one category. To allow it to be used for others often requires that the facility be licensed by the state. As stated earlier, there are significant construction and architectural issues related to this. An analysis should be performed of whether it would be better to leave the facility in its current location or move to a new location. Typically, schematics have been developed by architects for both scenarios and pricing has occurred on a big basis with local contractors. The group can then objectively look at the financial implications of both scenarios. The same issues described earlier regarding equipment and design based on the specialties anticipated also apply for the conversion of an existing ASC. Also, many facilities are located in a medical office building. It is very common for facilities to have a joint waiting room that serves various ambulatory services. It is not uncommon to try to gain efficiencies of space in co-utilizing the waiting room, registration desk, electrical and mechanical rooms, and storage space. Strong consideration should be given to separate entrances with new signs and a new name on the facility, particularly if it is going to be used by multiple physicians.


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.


Trends in the Development of Ambulatory Care Centers

By Robert Zasa, MSHHA, FACMPE Managing Partner, ASD Management Over the last twenty years, there has been significant change in the delivery of ambulatory surgery and ambulatory care services. Many of the initial surgery centers struggled between 1972 and 1982 with challenges such as reimbursement, establishing themselves as perceived, high quality facilities, and establishing the trend that a facility could be run on a profitable basis and still provide good quality of care. These early pioneers laid a solid foundation for many of us who have been involved in the surgery center movement for the last twenty-five years. After 1982 and the approval of Medicare reimbursement for surgery centers, there has been a significant growth in the number of centers. This growth has occurred both in single speciality centers such as ophthalmology, plastic, and gastroenterology centers as well as multi speciality centers. Today there are well over twenty-five hundred ambulatory surgery centers (ASCs) throughout the United States. However, in the most recent three years there has been significant change in reimbursement, competition, and in the delivery of ambulatory surgery services. These changes have had a profound effect on ASC operations. These trends have a profound impact on the way that the facilities will be developed, built, and operated in the future. The purpose of this article is to highlight some of the ambulatory care trends that are occurring within the United States and to note some of the solutions being developed to respond to these trends as they relate to ambulatory surgery. The first trend is there are fewer free standing surgery centers being built and more centers built within a larger facility that offers a wider array of ambulatory care services. Many health organizations such as large group practices, health care systems, and some HMO's are developing multiple facilities within a thirty to forty mile radius of their primary facility. ASCs are being opened within such facilities. Such facilities help healthcare organizations solidify or gain market share. The trend of garnering market share continues to be a strong one in the US. Having a strong market share converts to a stronger position when negotiating with managed care payers. It certainly allows a facility to grow at a faster pace and secure its future in the increasingly competitive health care market. Those who do not gain a strong market share are experiencing either merger or acquisition and will certainly be faced with dwindling revenues in the near future. To avoid that trend, many health organizations have purchased individual physician practices. Many have paid too much for these practices. Many have too many locations and the logistics to service all of the locations has become problematic. In a zealous effort to gain market share, many health care organizations have too many locations and are looking for economies to scale. There are several reasons for this. The first is to develop more of a regional center that is still convenient to patients but at the same time allows providers to gain economies of scale in staffing, supply costs, and group purchasing. Secondly, regionalized facilities provide one attractive location that can serve as a gathering place for all of the professionals. This results in more referrals between the professionals as well as use of ancillary services that are now available due to the fact that there is critical mass within the facility to support them. There tends to be a more sophisticated group of ancillary services available in the regional facilities than can typically be economically supported in the individual's physician's office. Thirdly, consolidation of real estate for health care providers becomes a great incentive to sell off small individual offices and consolidate the providers into a smaller number of larger regional facilities. What we are seeing in health care is basically a regional mall concept being implemented with smaller individual physician office practices being closed. This consolidation is being done still keeping in mind the convenience factor for patients. This trend is certainly mitigated by specific market conditions whereas in some areas this single office will remain due to its critical importance to servicing a particular community. However, this will be more an exception in the future than the norm. These regional centers create more visual presence and have a tendency to be more attractive to patients. They typically have an "architectural signature" that reminds the patient that the facility is affiliated with a particular health care organization. Many health care organizations try to develop four to five major sites within a community depending upon the size of the market and the number of counties serviced. Our firm calls these facilities Big MACC's (Multiple-service Ambulatory Care Centers). Big MACC's typically have the critical mass to support multiple services such as ambulatory surgery centers. Enclosed is a list of common services found in a Big MACC. Most Big MACC's are located in secondary markets and are at least twenty to thirty minutes away from the host facility. They typically include a number of rotating offices for specialists as well as permanent offices for primary care physicians including family practice, internal medicine, pediatrics. Due to the fact that many health care organizations are developing or purchasing multiple sites and an ambulatory care is reimbursed less than hospital outpatient services, the sites need to be developed very efficiently, not oversized, and planned to be expanded in phases. It is very critical to not over build, or over spec these facilities from an architectural standpoint. The facilities should not be over equipped either. If the facility is over equipped, built too large, or built at standards way above the norm and need for ambulatory care services, the fixed costs to be covered by the lesser amounts of ambulatory care reimbursement become prohibitive. These are very specialized buildings that need to be developed in a very cost effective way and equipped similarly. These are facilities different than hospital facilities. These Big MACC's require excellent traffic flow because of the ambulatory care nature of their purpose and they require a significant amount of parking due to the large volume of in and out traffic which occurs within facilities such as these. The facilities should be functional, efficient, with good design and nicely finished. There is nothing inconsistent with having a high quality, cost effective facility and delivering good ambulatory care. In fact the two are complimentary and are necessary given the lower reimbursement which is experienced for ambulatory care than hospital care. For that reason, many health care organizations are now turning to ambulatory care design-build and architectural firms that specialize in such buildings due to their proven expertise to deliver such buildings in a cost effective, functional, and high quality, architecturally designed manner. The second trend is the trend of building smaller, single speciality Ambulatory Surgery Centers (ASCs). There has been an explosion in the number of Plastic, GI, Eye, and Urology centers that have been built over the last several years. Physician practice management companies are also driving this. They want an ASC in their multi-speciality clinic. Many of the companies are building surgery centers within their medical clinics for the specialities as mentioned above, or are consolidating these surgeries with others to form larger multi-speciality surgery centers. This trend is being fueled by the growth needed by the physician management companies which is mostly coming out of ancillary service growth. In addition, as these companies develop more capitated rates for a variety of services, capturing the profits and controlling the costs from out-patient surgery will be more important to them in the future. Other areas they are looking at are birthing centers, diagnostic centers and other types of services that can be legally owned by the group under the group practice exemption of the Stark I and II regulations. The third trend is that Ambulatory Surgery Centers are being built "leaner and meaner". Over the last three years reimbursement for outpatient surgery has dropped 25%. This is due to the HMOs, PPOs and other managed care players gaining larger discounts from ASCs. Medicare has had a freeze on rate increases in surgery centers over the last two years as well. Lower reimbursement means ASCs have to lower cost and one means of doing so is to reduce initial capital costs such as building smaller, more efficient space for ASCs. Another trend is helping ASCs refine space. "Just in time" inventory reduces the bulk storage requirements of surgery centers which has also tended to reduce some of the storage problems that in the past many surgical nurses have complained about in surgery centers. The amount of storage space is simply not needed as it was three years ago before this very cost effective management tool was implemented. Operating room size is now being revisited. Many architects are down sizing the operating rooms or building one very large room for orthopedics or other specialties that need a lot of equipment. Another trend is to put the table on an angle using the deep corners of the room for additional storage space rather than having the table parallel to the back wall. This is an innovative technique and allows equipment to be stored in the room safely, but clearly out of the way of the operating room personnel, anesthesiologist, and surgeon. Additionally, there are better anesthesia drugs available that now allow for patients to be semi-awake while they're being wheeled out of the operating rooms. Since this aides in significant increasing the output of the operating room, ASCs require more recovery room spaces per facility. We are now encouraging our clients to develop four recovery spaces per O.R. This is also due to the fact that there are many other procedures being done in an outpatient surgery center that heretofore had been done in a hospital. The mix of services also has a great deal to do with the number of recovery room spaces necessary. If a lot of children are having ear tubes or tonsillectomies done, theses cases are done in a relatively short time within the operating room and have the tendency to easily impact a recovery room in a short period of time. Likewise, if there is a heavy cataract or GI caseload being done on a particular day, these patients are done quickly in the procedure area and then are in the recovery room in a very short period of time. If a facility is planning to have heavy caseloads in these speciality areas, they need more recovery space than a normal surgery center. In short, the nature of outpatient surgery has changed radically over the last three years in many ways and this is impacting the design of the centers. With reduced reimbursement it is important that the facilities not be built too small, however they be built much more efficiently than in the past. The construction, build out, and equipment costs are heavy fixed costs for a facility. Though they are amortized over a long period of time, they form a large amount of money that needs to be paid each month and raised as start-up capital. If these costs can be controlled properly and appropriately on the front end, it helps insure the success of the surgery center and financial return to the owners. The fourth trend is that Birthing Centers are becoming more and more popular on a free-standing basis. There is an increasing trend of developing labor delivery rooms with post partum rooms physically next to surgery centers particularly in Big MACC's. Prenatal screening is typically done in a Birthing Center now much more than it has ever been done in the past. This has significantly reduced the risk of having a problem with the mother during delivery. There is an accreditation association for Birthing Centers with formal criteria for such facilities. They have done a great deal to help standardize and raise the level of service and design related to such facilities. Typically such facilities are developed with three or four 72-hour beds. These beds allow the patient to stay if it is necessary and/or appropriate for the mother's physical well-being. The operating rooms of the surgery center can be used in case of severe emergency. The ASC can serve as a backup for this particular service when they are both found in a multi-service Ambulatory Care Center (MACC). The fifth trend is the trend of developing Big MACCs as replacement hospitals. There is a large number of small facilities in rural areas that have been built in the past that currently cannot be converted to meet fire safety code requirements. There is a trend to use these older facilities and convert them to nursing homes or assisted living facilities. In addition, there is a trend to build a new facility that has primarily an ambulatory care focus but has have some 72-hour observation and recovery beds available. Typical services in such facilities would include urgent care and extended hours or a full blown emergency department, CT and other diagnostic X-ray services, mammography, ultrasound, a phase I laboratory, a surgery center, four to six medical observation 72-hour beds, a birthing center with post partum backup (using the 72-hour beds). These facilities typically also have permanent offices for Primary Care Physicians, time share space for specialists, EKG stress testing and cardiac diagnostic areas, a small pharmacy, optical area for refractions and glasses, dental space, and typically some type of physical therapy, wellness or cardiac rehab area in the building. Geriatric psych programs, behavioral programs for clinical depression, and alcohol and substance abuse are also popular services to include in such facilities. The services are very market specific. They depend upon the distance between the main provider's facility and the location, the population and physician demographics of the area, as well as competition in the area. A greater number of healthcare organizations are refining their market assessment to understand which ambulatory services are feasible and necessary to deliver to these specific market areas. Population demographics, physician demographics, utilization for outpatient services are typically being analyzed by healthcare organizations to develop specific plans for servicing the medical needs of these secondary markets. Location is very critical for these facilities. The traffic count must be in the sixty to eighty thousand range per day and the location must be easily accessible to interstates and other major thoroughfares within the area. The new ambulatory care facilities basically house "retail" healthcare services. They have many of the attributes of a mall. In fact, many of them are located next to a mall, a Wendy's, McDonalds or other fast food restaurants that have significant traffic. Such market assessment and good financial projects are critical before developing Big MACCs on campus or in secondary markets. It is imperative to know which services in a given market area have the best chance of succeeding, and what is the expected economic return for the services if established. Once the market assessment is completed, a business plan should be developed which includes financial projections for both the development and operations of the facility and all services to be located within it. The projections should include profit/loss projections, cash flows, total source and use of proceeds, projections of equipment and all construction costs, land costs and soft costs for developing the project. It is important these are done. A financial projection also should be done for each service contemplated in the facility. Staffing models, revenue and cost per type of procedure and profit and loss statements are essential for proper planning for these types of services and facilities. This is particularly true for surgery centers being developed off of the campus of the main hospital. Surgery centers are typically not a primary care service or one that flourishes in a satellite clinic. Unless there is a significant critical mass of surgeons, the surgery center is not a good service to put into a satellite clinic. However, if there are significant number of rotating specialists and the Primary Care Physicians are properly trained to do appropriate gastroenterology procedures (that are typically done by a GI physician) and there are existing surgeons in the secondary market that will now utilize the surgery center if one is available, the surgery center may in fact be feasible. It is imperative that an accurate case count be performed and projected before developing a surgery center in such a facility. Many other ambulatory care services leave similar specific requirements that need to be met for them to be financially successful. Good experience in development, joint venturing and managing facilities is required by the individual performing such projections. Surgery centers and many other ambulatory care services are very volume sensitive businesses. It is imperative that projections be done accurately and are operationally sound. For that reason, it is good to have somebody that has experience in operating these facilities and managing them to review or prepare the projections to assure that the cases are not either overstated nor the expenses understated. Planning such ambulatory care facilities also requires those who have had extensive experience in the development of the newer model, cost effective facilities. Significant cost savings in land, construction, design, and equipment costs can be gained by using such a firm for planning, and design/build functions. Many of the same recommendations apply for the planning and development of Birthing Centers. Participation by key obstetric care givers is also essential. Use of specialized design-build firms or architects that specialize in ambulatory care facilities is a growing response to the trends in specialized surgery/ambulatory care services and "leaner and meaner" facilities. Many of these firms are spending significant internal time and resources to further refine their ambulatory care facility space programs, patient flow pattern, clinical spaces, building specifications, and building costs.   In Summary There has been a significant amount of change in the health care landscape over the last three years that particularly impacts Ambulatory Surgery and Ambulatory Care services and facilities; feasibility, development, construction, design, and operations. Health care organizations are moving quickly to capture the ambulatory care market share within secondary markets surrounding their facilities. It is imperative that they do so in order to sustain strong future growth, and continue to obtain key managed care contracts that are important in the future. However as they do so, they must implement their plans, keeping in mind the new trends with the ambulatory care field in order to successfully implement such strategies.


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.   Background 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.   Conclusion 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.


10 Key Factors to Improve in the Operations of Surgery Centers

By Robert Zasa, MSHHA, FACMPE Managing Partner, ASD Management The officers both have extensive experience in operating ambulatory surgery centers throughout the United States. The purpose of this article is to delineate the 10 most important factors to improve the operating results of surgery centers. The following will assist the administrator in a surgery center to focus on the 10 critical factors for the success of a center and prioritize key objectives for the physician owners.   1. Establish measurable Critical "Success Factors" and use routinely. Attached to this article is a list of critical success factors that are used to measure the key results in a surgery center. The MGMA, Ambulatory Surgery Management Society has developed a survey that helps measure these. This survey is available to all those that are in the Ambulatory Surgery Management Society and other members within MGMA. The critical success factors, deal with staffing, pricing strategy, cost per case, and other factors, which need to be measured on a routine basis. The first recommendation of this article is to define measurable key success factors for one's own individual surgery center and compare those with the national survey results. This should be done on a routine basis with results reported to the management committee of the Ambulatory Surgery Center (ASC) and physician owners.   2. Assure Debt Financing is at the lowest possible rates with good terms. Usually there are three sets of financing. The first is the financing related to the real estate and property. The second is the financing related to the equipment; and, the third is financing related to working capital. This may be represented as a credit line at the bank. It is important that all of the existing financing is reviewed on a relatively routine basis (at least every three years). Many times, non-recourse financing is available for equipment and/or some portion of the working capital. Non-recourse scenarios enable the physicians and other owners of the facility to obtain a loan or lease without requiring them to personally guarantee the funds. This type of financing is typically available for a slightly higher interest rate. In many cases, it behooves the physicians to sign a loan like this, rather than further indebt themselves to the center. It is also important to avoid long-term debt on equipment with fair market values at the end of the term. Preferably, the lease should be capitalized. This is accomplished by structuring the lease terms so that the equipment can be purchased by the facility for one dollar. This strategy precludes the center from paying further consulting fees for valuation of the equipment as well as the 10-15% fair market value for the equipment's residual value. Most of the equipment may very well change in terms of the technology; and, the center should not be in the position of purchasing equipment at fair market value when the technology is already obsolete. Investigate "synthetic" real estate financing by using assets of the clinic to create a loan for the construction of the facility and land financing. There are several specialize in this type of financing. Financing should never be signed with joint and severable terms nor should documents be signed with spouses' signatures (unless this is a requirement of the State). There are many financing companies and opportunities available outside of local banks that will not require joint and severable terms. In looking at the various financing companies, you must deal with established players. These are firms that have been around for over 15 to 20 years and have an extensive list of heath care clients, which they have served in the past.   3. Establish an ongoing, Managed Care Contract Review process. It is imperative to continually review the revenue derived from HMO's and PPO's. Comparisons should be made on the discounts given to each payer by CPT Code. Compare the most common terms of the contracts among all payers. If a contract does not make sense after a comparative review, don't be afraid to re-negotiate or cancel the contract especially if the center is unable to get appropriate terms from the individual payers. Use the comparison terms to compare the contract among each of the payers and correct any deficiencies seen in each payer's contract. Let the payer know none of the other players in the market are requiring such demands. This has been a successful negotiation tool at many centers. Sometimes, the institution of a non-participating provider status can be helpful. It may be more profitable to institute this strategy rather than sign up for all the contracts in an area specifically, when the payers submit contracts to the surgery center at rates, which are close to the cost of performing the case, or very close to Medicare. It is not worth adding volume to the center for no increase in Net Income. In this instance, the contract may simply cause the facility to extend hours with no additional profitability. Rather, it would behoove the center to be a non-participating (non-contracted) provider. Many surgery centers finally decided to cancel contracts after review of the volumes that they received from certain payors for the significant discounts that were given. In short, an ASC may see half the number of patient's for over twice the fees and not have to worry about such large contractual allowances. It is important that an ongoing review of contracts is done routinely. The reimbursement and comparisons of reimbursements by CPT Code or by the new APC Codes (once they become instituted) should also be rviewed at the center at least every three months. This is part of the ASC's pricing strategy. A good manager can control the net revenue per case, outside of the mix of services that it offers by clearly watching the discounts given and contracts signed with various payors.   4. Assure Organizational and Ownership Structures that are fair and current. It is important for the administrators to stay current with state and federal regulations and statutes. Each year, a brief review of the National and State health care statutes and should be performed by the center's healthcare attorney, to make sure that the ASC is in compliance with all regulations and statutes. In addition, if there are any significant changes within the federal regulation statutes that may assist or hinder the center from practicing in a certain manner, these are reviewed as well. Investigate whether there are any beneficial changes in the law. For example, in certain states it is beneficial to change limited liability corporations (LLC's) to LLP's because of the state tax codes. Also, it is important to "prune" the ownership using buy-out provisions in the operating agreement to make room for new physicians before offering new units or shares to existing physicians. This practice is employed to avoid dilution of existing partners and/or LLC unit members. Often times, physicians are retiring and they wish to liquidate their shares. These are excellent units to sell to additional physicians joining an existing partner's practice or new surgeons in the community that would be able to benefit from using the surgery center. Strongly avoid overly aggressive partner and non-partner compensation formulas. Some surgery centers have very strong patterns of over compensating partners; and, the cash reserves of the center are depleted due to distributions, where as the non-partners are still continuous users of the center and need to have equipment and other kinds of investments by the surgery center. If the cash is all taken out at the end of the year, non-partners, as well as partners, will not have enough cash reserves to continue the business in an appropriate way. It is also important to rotate the membership of the medical advisory committee and the governing board to gain fresh ideas and to broaden participation. This occurs every year in most well run surgery centers. It is important that the units in the surgery center or partnership shares, are not sold to groups but sold to individual physicians. The composition of group practices is fragile. Often times, the surgeon who was a key user of the center may leave. If the group owns the share rather than the surgeon, the group retains the unit despite the fact that it has no participants in the surgery center. This may cause legal problems with Stark Laws as well as other kinds of problems. Additionally, there may be arguments to regarding who the share belongs to - the group or the individual physician who allowed the group to participate in the first place. Thus, it is easier for the center to buy and sell shares if individual surgeons own the shares, rather than group practices. However, this scenario is not true if the surgery center is owned solely by the Group Practice on its site. Inc this case, the unit(s) should remain with the group.   5. Establish the center's "Distinctive Competence" to create a marketing edge. The "distinctive competence" is something that the surgery center is known for within the community. It is important that the center administrator identifies "holes" in the ambulatory care market and tries to fill those holes within the ambulatory surgery center. The surgery center will probably be known for two or maybe three good specialties, such as an excellence in Orthopedics or GYN. This will be a reflection of the quality of the physicians using the surgery center. It is important to identify specific specialties and market the specialties to create a position in the community's collective mind that the center has particular expertise in a defined area of medicine. For example, the center may have a number of orthopedic surgeons who like to work in the sport's medicine area. There may be a large number of knee and joint and foot surgery procedures performed in the surgery center that would give it distinctive competence in sports medicine. That could be emphasized by holding clinics for runners, having lectures by the surgeons about sports medicine, and the center sponsoring a run or another sports medicine type of event in conjunction with the local YMCA or athletic club or football team. The center may have a contract with several sports teams in the area or high schools that would further distinguish itself in sports medicine. In short, the surgery center manager should define two or three areas where it is clear that the center has a "distinctive competence". This definition creates a magnet for the surgery center in these services.   6. Establish an ongoing review of Pricing Strategy. At least twice a year, a comprehensive review of the ASC fee schedule should be conducted. At a minimum, the cost per case on a procedure basis should be verified; and, prices should be reset so that the facility's Net Income margins are achievable. To determine the maximum fee that the market will bear in an effort to exceed these goals, comparisons to the competitors' pricing should be made. Finally, the percentage by which the facility fee schedule exceeds the major payers' reimbursement schedule should be studied. These comparisons can be achieved by researching multiple sources of information. However, three of the most productive avenues are to: 1) Buy bills from local patients by running an advertisement in the local newspaper and offering to pay patients for any competitor bills or Explanation of Benefits (EOB's); 2) Have your surgeons ask their patients to bring them their bills or EOB's; and 3) Study the contractual trends and the Usual and Customary allowables (UCA's) from your top 10 payers. When purchasing bills and EOB's through an ad, it is important to specify that the surgery should have been performed within the last (6) months to ensure the data is current enough for use in the study. Secondly, specify the type of procedures which you are interested in purchasing. You should establish your top 20 types of cases prior to the study and purchase only bills and EOB's that fall into this category. Note: typically, the top 20 procedures will represent 80 percent of the total volume of the center. This method of acquiring data is surprisingly successful if the patient is given the proper incentive. Payments of $25 to $40 per bill are usually sufficient and will generate 20 to 30 responses within a month long ad campaign in a metropolitan area. The surgeons in a facility are also a great source of data for fee analysis. Their patients are the ASC's patients. Particularly when an ASC is set up as a physician partnership, the surgeons are more willing to get involved in the operations of the facility than is true in other settings. Make sure that specific procedures are tracked and the preferred dates are specified so that the data obtained is usable. The payers are often reluctant to share data with the facility; since, their objective is to bring the required reimbursement rates down as low as possible. However, by tracking the contractual trends among the ASC's 10 top payers and building payer profiles into the center's computer system, a determination of how much the fee changes will impact your net revenue can be made. Once the data collection phase is complete, compare the competition's data and the contractual trends to the fee schedule employed at the facility. When looking at the bills, the guiding principal should be to stay 20 to 30 percent below the fees of the competing hospitals and within 10 percent above or below the competing ASC rates. With the contract study, the key is to track the trends. Obviously, if most of the contracts are on a discount from fee type of basis, an increase to the fee schedule will impact the Net Revenue of the center significantly. On the other hand, if most of the contracts are based on Medicare groupers or a flat fee per case, raising fees won't make much of a difference. Moreover, if the Usual and Customary allowables are close to the facility charges, the ASC's fees are too low. The industry standard for write-offs is around 40 percent. Thus, The ASC's fees should be at least 45 percent above the UCA's in your area.   7. Establish and utilize proper Employee and Physician Incentives. Aligning employees' and physicians' goals with those of the center is crucial in achieving ultimate success. A profit sharing plan for employees is a sure way to keep them focused on the goals of the center particularly if the plan is tied to specified goals, which show the staff how each parameter impacts the "bottom line". Employees should be educated on the Profit Plan for the center and should be updated monthly on how their performance compares to this plan. Examples of such goals are: Man Hours per Patient Staffing as a % of Net Collections Supply Cost per Case below what is used in the Profit Plan Phones answered in less than 3 rings A/R Days at 45 or less Inventory less than a certain $ amount per month Net Revenue per Case above a benchmark Contractual Allowance and Bad Debt less than the budgeted percentage Pre tax Net Income greater than the Profit Plan   8. By employing clinical and business criteria such as those listed above, the specified goals lead to the achieved Profit. These goals, however, are more tangible and show the employees how they can impact the profitability of the facility (i.e., the Net Income are more likely be reached if the explicit goals are being met). Profit Plan formulas vary from one center to the next. In those centers experiencing $200,000 or more in Profit, incentive pools of 2 to 5 percent of Net Income are common. Distributions are typically handled at any time other than Christmas. The employees should know that the reward is something they earned, not a gift. Most profit plans are distributed at the discretion of the Board of Managers who have the authority to change the plan to reflect changes in the actual achievement of the goals, which may be outside of the employees' control. A center that has lost its license or accreditation is usually disqualified from profit sharing. Motivating physicians is an important part of ensuring success. The more they feel like part of the facility team, the more they will bond with the center. Forming a physician Partnership is an obvious way of achieving this goal. However, be careful in the way the partnership is structured. Make sure that the partnership is not set up in a way that would cause inducement of cases (i.e., never make payments tied to number of cases the surgeon performs at the center). Rather, distribute any cash based on the pro-rata share of the total investment that the surgeon contributed for his ownership in the center. Whether or not a partnership is in place, it is important to make the surgeon part of the decision team. While the limited liability of a surgeon partner precluded he or she from participating in the day-to-day management of the facility, there are many areas where they can participate particularly in problem solving. Getting a physician to participate in the formation of a solution to a problem ensures that he or she is motivated to see the solution work. Additionally, it is very important to ask the physicians what their needs are; measure how well the center is addressing these needs; and then, report these results back to them. A final encouragement for physicians is to make them feel important while they are at the Center. Personalized lockers and scrubs, breakfast and lunches with their favorite foods, and personalized music go a long way in making a surgeons feel "at home" and keep them coming back.   9. Continually conduct market assessments to Establish New Services. It is important to stay up to date on the latest trends and developments in surgical technology as well as the changes in the standards of care in the area where the facility is located. Conducting market assessments on a routine basis, will enable the center to identify procedures which have been: 1) historically performed only on an inpatient basis but are now performed in an ASC setting; 2) newly enhanced as a result of advances in technology; and 3) newly created categories of treatment as a result of medical research. Over the past several years, there has been a constant shift of surgery from the inpatient hospital Operating Rooms to the ASC's. This fact is true for many reasons. The predominant change is occurring in the Community Standard of Care around the country because of improvements in anesthetic agents and the availability of quality home care. An illustration of concept is the movement of T&A's, Knee and Shoulder Arthroscopies, and most recently Discectomies. When these procedures are routinely being performed on an outpatient basis in the center's community, they should be brought before the Medical Advisory Committee (MAC) for review and potential addition to the Delineation of Privileges for qualified surgeons. Additionally, the healthcare technology industry is one of the fastest growing in the nation. There are new advances in technology being marketed to the surgeons on a daily basis. Many of these new enhancements allow the physicians to perform treatments on their patients with totally new methodologies. An obvious example is laparoscopy, which opened up a whole new arena of outpatient surgery. The growth of the use of lasers in surgery is another example. Most recently, a substantial portion of the Female Stress Urinary Incontinence (SUI) market has moved into the minimally invasive category through development of a tension free vaginal tape, which can be placed into the pelvis via tiny incisions. These advances are continually presenting the surgeon and the center with new and improved ways to deliver care in a less invasive manner; and should be monitored and incorporated into the center's scope of services as soon as possible. Another important area of market assessment for the center is in newly created categories of surgery. Dermatologists, Oral Surgeons, Neurosurgeons and Pulmonary physicians were not typically part of the utilizing surgeon list in the past. However, with the onset of: 1) varicose vein stripping, 2) new types of dermabrasion, 3)"rubberbanding" instead of wiring in jaw osteotomies, 4) advances in broncho-dialation and other new procedures, we are seeing more and more of these specialists working at ASC's. When considering the addition of new services to the facility, be careful to check out what reimbursement (if any) the insurance carriers in the area are willing to pay for these services. Because of the nature of these new procedures, there may not be a payment category established for the procedure; and, the facility may get caught "holding the bag" if this issue is not address up front. However, since these most of these services represent somewhat complicated cases, they are usually reimbursed at relatively higher rates. Finally, prior to allowing the surgeon to perform the case, make sure that the MAC and Governing Body of the center grant approval for the procedure and the physician. Likewise, this information should be documented in the Physicians' application file. The physician should have similar privileges at a local hospital, and have the appropriate medical education and proctoring to perform the new procedure.   10. Implement Flexible Staffing and Group Purchasing with "Just in Time" Inventory. Very few surgery centers guarantee their employees 40 hours per week or offer preset shifts. It is important that this expectation be clearly communicated to the staff of the facility prior to hiring so that the expectations of the employee are appropriate. Employees should know up front that when case volumes are low, they will be asked to go home early even this means working less than a 40 hour week. Additionally, the traditional 8 hour day may not always be an option in an ASC. Many employees work four, 10 hour days or have schedules that vary even greater. While most employees have a set clock-in time, this time is typically not the same for all employees. For example, the pre-op staff may come in at 5:30 am while the OR staff doesn't arrive until 7:00 am. The business office staff should have varying arrival times as well so that there is always someone available to greet the patient upon arrival at 5:30 am as well as schedule cases from the surgeons' offices as late as 5:00 pm. Group purchasing is another operating guideline that lends the center significant cost savings. If the center is free-standing (i.e., not affiliated with a hospital) it is imperative that some type of leverage be gained with the vendors by participating in a buying group. Amerinet is an excellent purchasing group which is ASC friendly. Groups like Amerinet typically charge a per month membership fees in exchange for guaranteeing maximum costs that can be charged by a host of vendors. If the center has the volume to justify costs lower than the standard purchasing group rate, it is usually permissible to strike a deal with the local/regional sales rep and lower the price beneath the contracted rate. Savings of 10 to 40 percent are typical when participating in a group purchasing program. Another major cost saving tool is to ensure that the center only has the minimum amount of supplies necessary on the shelves. Inventory should be counted quarterly to ensure that the accounting methodologies employed for cost per case are accurate. At this time, it is wise to inventory what is on the shelves that need not be; and, get rid of it. Expired drugs can be sent to charities; and, those which are still good can be shipped to other OR's for cash or traded for items with other centers and the local hospital. A rule of thumb is to maintain less than 1.5 months worth of total supplies on your shelves. On those items, which can be ordered "just in time" keep no more than a seven day supply. Also, keep as much inventory on consignment as possible. Items such as IOL's, breast implants, and orthopedic screws and plates are commonly offered as consignable items from the manufacturers or distributors. Moreover, the center should maintain par levels (i.e., maximum and minimum levels of inventory) and ensure that the volumes of each item stay within these parameters. If the center does not have par levels established on routine items such as syringes and gauze, a simple way to set these levels is to determine what the average supply usage of each item is by analyzing the utilization amount over a three month period and dividing this number the number of days in the three month period (i.e., 90 days). Next, determine what the lead-time between ordering the item and receiving it from the vendor is. If it takes one day to receive the item, order only a one day supply. If it takes 5 days, order a five day supply. This is your minimum. The maximum amount in "just in time inventory" management will match the minimum amount except in those circumstances where the item cannot be ordered as a single. In instances when the item must be ordered by the case, the case amount is the maximum. Obviously, there will be many items that are not routine and are needed only for a given case. These items should be ordered to arrive "just in time" for the case. This goal can be easily accomplish once the lead-time analysis has been conducted and the distributor is making daily deliveries to the center. Review and Revise Service Contracts. All surgery centers have a multitude of service contracts in place due to the limited staff employed at this type of facility. These agreements cover services such as housekeeping, preventative maintenance and bio-medical , pharmacy, laundry and linen, hazardous waste removal, landscaping, ambulance, blood bank and the like. Most contractual obligations require a minimum of a one year commitment. For this reason, it is a good idea to go through all of the contracts in place at the facility on an annual basis and determine: 1) Was this a good relationship? 2) Was this service truly needed; and, did it properly cover the services it was set up for? 3) Could I get the same level of service from another source at a better rate? 4) Is there language that should be changed to enhance the service, And, 5) Have there been any changes to the service requirements implemented by the State or Federal licensing regulations or the accreditation standards? Reviewing these contracts routinely will ensure that the center is in full compliance with all regulating bodies and that the center is receiving the proper level of service at the best price.


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.   1. Scheduling 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.   3. Coding 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.     4. Billing 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.   5. Collections 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.   9. Staffing 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.   10. Compliance 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. Summary 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. Summary 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


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