In the era of healthcare acquisitions and mergers, more surgery centers are choosing to partner with a management company to cut costs, increase profits and take some administrative burden off staff members. A management company can be a valuable ally in negotiating profitable payor contracts, providing group purchasing discounts and benchmarking against other centers — but how to choose? In the most recent VMG Health survey, the 44 biggest management and development companies in the United States managed a total of 1,312 centers between them, with numbers ranging from 208 centers to two centers per company. And company strategies differ tremendously, based on whether they desire majority or minority interest, turnarounds versus well-performing centers, and outsourced services versus in-house support.
Here John Poisson, executive vice president and strategic partnerships officer for Physicians Endoscopy, discusses 10 crucial questions that will help ASCs evaluate potential partners.
1. How are deliverables provided to the center? Mr. Poisson says management companies differ in how they offer services to surgery centers. Some companies have a fixed set of deliverables that they provide to every surgery center, while others offer an "a la carte" menu that the ASC can pick from. Either way, he says the deliverables should be clearly outlined in the management agreement.
He says the physician-owners should also think carefully about whether they want a management company to own part of the center and provide services, or whether they want the company to provide oversight and advice without a stake in the business.
"Within the industry, there tend to be two types of management relationships: consulting companies that sign a management agreement with a defined set of deliverables, and companies like ours that, along with the management agreement, would take a minority equity stake in the center itself," he says. Another way to say this is that some physicians are seeking a vendor and others a partner. Some physicians may not be willing to give up stake in the surgery center and will just want a few on-site personnel to oversee processes.
2. Are revenue cycle processes outsourced to the management company? Mr. Poisson says most management companies provide assistance with revenue cycle processes, though that may mean different things to different companies. He says this assistance generally falls into two buckets. In the first, revenue cycle processes are the responsibility of ASC staff members, and the management company provides oversight by periodically reviewing and critiquing their work. In the second, the management company performs revenue cycle processes at their headquarters as part of the service fee.
He says the second option can benefit surgery centers that otherwise lack a system of "checks and balances" in the revenue cycle process. "When billing is done in-house at the ASC, it's often the same person who sends out the bills, collects the money, posts the accounts and does the write-offs," he says. "That may appear efficient on the surface, but it means mistakes can be made without anyone realizing." He says most management companies that provide billing services have designated teams that provide the various components of the billing and collections process, and those people are physically separate from the ASC.
3. How will the management company provide reports and benchmarking to physicians? Mr. Poisson says physicians should expect regular financial and operational updates from the management company. "I think it would be wise for the physicians to ask for a sample monthly report of what they could expect to see from the management organization — not just in terms of financial information, but in terms of operational and clinical benchmarking," he says.
He says benchmarking should be a 'huge piece' of the management company's services, and the ASC should benefit from being in a network of similar centers. "A management relationship should help the ASC determine how they perform against their peers," he says.
4. Will the change require the ASC to let go of staff? In some cases, bringing on a management company means parting ways with some ASC staff members. This is something the physicians and ASC leadership should know going into the agreement. "The vast majority of the time, there aren't any initial significant changes in clinical staff," Mr. Poisson says. "We're really talking about the administrative and business services. If the management company provides billing, the billing personnel may not have a role at the surgery center anymore."
He says the physicians must recognize this, because while the change rarely affects more than a few employees, those lives are still significant. "Unless [billing staff] can be relocated to other open positions in the surgery center, it's more than likely they wouldn't be needed if the management company provides billing services," he says.
5. Can the management company provide the ASC with supply discounts? Mr. Poisson says the management company should be able to use group purchasing discounts to achieve lower prices for ASC supplies. He says the company should also know exactly what you're spending, in order to make changes that save you money. "If the management company has a metrics-based philosophy, they should know what the cost per procedure is for all the various line items in your ASC budget," he says.
For example, in the GI service line, supplies and medications on average per procedure should run about $35, he says. Frequently, his company performs an analysis and finds that ASCs are paying as much as an average of $50 or $60. "There should be a benefit of having a relationship with the management company in terms of supplies and equipment, so that the overall cost per procedure drops," he says.
6. How will the company assist the ASC with payor contracting? "They absolutely should assist you with negotiations," Mr. Poisson says. "They should be good at it, and it's an important element in today's market." He says ASC reimbursements have been ratcheted down to the point that a terrific revenue cycle process cannot save an ASC with poor payor contracts.
He says on average, a good management company should be able to increase reimbursement rates for commercial third-party payors. He says that his company has conducted outside studies by independent organizations and found that the presence of their management company increases reimbursement by an average of 15 percent compared to other GI centers in similar markets. That being said, once base contracts have been established, it is going to be difficult to quickly capture substantial changes.
7. How does the company fit with the ASC's long-term strategic plan? Mr. Poisson says before an ASC executes a relationship with a management company, they must understand their long-term plan and how they plan to fit into the local delivery network. "If the ASC feels at some point that they'll need a hospital partner, there are a lot of management companies out there that will pay large multiples for 51 percent equity — but certain ASC management companies must always remain at 51 percent equity and can never dilute," he says. "That means the ASC will forevermore be a competitor with all the hospitals in the area." There is simply not enough room within the remaining 40 percent ownership to accommodate appropriate incentives for a hospital and the physician owners.
He believes that as healthcare reform initiatives play out, hospitals and healthcare institutions will become increasingly stronger and exert more power over healthcare funds, so it is important to be in a position to foster an economic relationship with the right hospital at the right time.
8. How often will ASC leadership and management company leadership communicate? At the staff level, Mr. Poisson says ASC leaders should expect to be in contact with the management organization multiple times a day to discuss revenue issues, HR issues and other day-to-day operational matters. "There should be an expectation that your center has access to those resources daily — typically multiple times a day," he says.
At the governance level, the board of managers should expect easy access to the management company board member. He says the most critical aspect of selecting a management company is the relationship between the company and the ASC. "As a management company, you're buying into a culture and into a relationship, and that relationship itself is the most important element of the entire acquisition process," he says. He says the culture of the management company should fit with the ASC, and that culture depends significantly on how the company is financed, whether they're public or private, how much they're controlled by senior management, and other factors.
9. How will divisions within the physician group over price be handled? There will be divisions within the physician group in every acquisition or transaction, Mr. Poisson says. "You've got the younger physicians who have a pretty long career ahead of them and want the most possible equity and the highest possible distributions in the future," he says. "Then you have the more senior physicians, who took all the risks and built the center — and now want cash."
Those two desires are diametrically opposed, so the center needs someone within the physician leadership group to serve as a liaison. He says the two sides may not be able to come to a compromise, and one side may lose out, but the important thing is to have a respectful discussion and a mediator who can look at the situation without bias.
10. Will the ASC achieve a higher per-unit equity value in the future? "All sellers want the same thing: The highest possible price, and the valuable services," Mr. Poisson says. "As a buyer, you want to pay a reasonable price but also have a pathway to bring improvements to the facility, which will drive down your effective price."
He says if a buyer is paying a 7x multiple of EBITDA, they will want to implement growth and efficiency pathways that drive the multiple back down to 5x or 4x EBITDA. He says this strategy is also good for the seller, because it means the value of their equity on a per-unit basis increases over time. "It's definitely a win-win, if the right seller and the right buyer are married together," he says.
Learn more about Physicians Endoscopy.
Related Articles on Surgery Center Turnarounds:
15 Surgery Centers With Physical Therapy Programs
15 Statistics on Surgery Center EBITDA
8 Steps to Cut Cost Per Case in Surgery Centers
Here John Poisson, executive vice president and strategic partnerships officer for Physicians Endoscopy, discusses 10 crucial questions that will help ASCs evaluate potential partners.
1. How are deliverables provided to the center? Mr. Poisson says management companies differ in how they offer services to surgery centers. Some companies have a fixed set of deliverables that they provide to every surgery center, while others offer an "a la carte" menu that the ASC can pick from. Either way, he says the deliverables should be clearly outlined in the management agreement.
He says the physician-owners should also think carefully about whether they want a management company to own part of the center and provide services, or whether they want the company to provide oversight and advice without a stake in the business.
"Within the industry, there tend to be two types of management relationships: consulting companies that sign a management agreement with a defined set of deliverables, and companies like ours that, along with the management agreement, would take a minority equity stake in the center itself," he says. Another way to say this is that some physicians are seeking a vendor and others a partner. Some physicians may not be willing to give up stake in the surgery center and will just want a few on-site personnel to oversee processes.
2. Are revenue cycle processes outsourced to the management company? Mr. Poisson says most management companies provide assistance with revenue cycle processes, though that may mean different things to different companies. He says this assistance generally falls into two buckets. In the first, revenue cycle processes are the responsibility of ASC staff members, and the management company provides oversight by periodically reviewing and critiquing their work. In the second, the management company performs revenue cycle processes at their headquarters as part of the service fee.
He says the second option can benefit surgery centers that otherwise lack a system of "checks and balances" in the revenue cycle process. "When billing is done in-house at the ASC, it's often the same person who sends out the bills, collects the money, posts the accounts and does the write-offs," he says. "That may appear efficient on the surface, but it means mistakes can be made without anyone realizing." He says most management companies that provide billing services have designated teams that provide the various components of the billing and collections process, and those people are physically separate from the ASC.
3. How will the management company provide reports and benchmarking to physicians? Mr. Poisson says physicians should expect regular financial and operational updates from the management company. "I think it would be wise for the physicians to ask for a sample monthly report of what they could expect to see from the management organization — not just in terms of financial information, but in terms of operational and clinical benchmarking," he says.
He says benchmarking should be a 'huge piece' of the management company's services, and the ASC should benefit from being in a network of similar centers. "A management relationship should help the ASC determine how they perform against their peers," he says.
4. Will the change require the ASC to let go of staff? In some cases, bringing on a management company means parting ways with some ASC staff members. This is something the physicians and ASC leadership should know going into the agreement. "The vast majority of the time, there aren't any initial significant changes in clinical staff," Mr. Poisson says. "We're really talking about the administrative and business services. If the management company provides billing, the billing personnel may not have a role at the surgery center anymore."
He says the physicians must recognize this, because while the change rarely affects more than a few employees, those lives are still significant. "Unless [billing staff] can be relocated to other open positions in the surgery center, it's more than likely they wouldn't be needed if the management company provides billing services," he says.
5. Can the management company provide the ASC with supply discounts? Mr. Poisson says the management company should be able to use group purchasing discounts to achieve lower prices for ASC supplies. He says the company should also know exactly what you're spending, in order to make changes that save you money. "If the management company has a metrics-based philosophy, they should know what the cost per procedure is for all the various line items in your ASC budget," he says.
For example, in the GI service line, supplies and medications on average per procedure should run about $35, he says. Frequently, his company performs an analysis and finds that ASCs are paying as much as an average of $50 or $60. "There should be a benefit of having a relationship with the management company in terms of supplies and equipment, so that the overall cost per procedure drops," he says.
6. How will the company assist the ASC with payor contracting? "They absolutely should assist you with negotiations," Mr. Poisson says. "They should be good at it, and it's an important element in today's market." He says ASC reimbursements have been ratcheted down to the point that a terrific revenue cycle process cannot save an ASC with poor payor contracts.
He says on average, a good management company should be able to increase reimbursement rates for commercial third-party payors. He says that his company has conducted outside studies by independent organizations and found that the presence of their management company increases reimbursement by an average of 15 percent compared to other GI centers in similar markets. That being said, once base contracts have been established, it is going to be difficult to quickly capture substantial changes.
7. How does the company fit with the ASC's long-term strategic plan? Mr. Poisson says before an ASC executes a relationship with a management company, they must understand their long-term plan and how they plan to fit into the local delivery network. "If the ASC feels at some point that they'll need a hospital partner, there are a lot of management companies out there that will pay large multiples for 51 percent equity — but certain ASC management companies must always remain at 51 percent equity and can never dilute," he says. "That means the ASC will forevermore be a competitor with all the hospitals in the area." There is simply not enough room within the remaining 40 percent ownership to accommodate appropriate incentives for a hospital and the physician owners.
He believes that as healthcare reform initiatives play out, hospitals and healthcare institutions will become increasingly stronger and exert more power over healthcare funds, so it is important to be in a position to foster an economic relationship with the right hospital at the right time.
8. How often will ASC leadership and management company leadership communicate? At the staff level, Mr. Poisson says ASC leaders should expect to be in contact with the management organization multiple times a day to discuss revenue issues, HR issues and other day-to-day operational matters. "There should be an expectation that your center has access to those resources daily — typically multiple times a day," he says.
At the governance level, the board of managers should expect easy access to the management company board member. He says the most critical aspect of selecting a management company is the relationship between the company and the ASC. "As a management company, you're buying into a culture and into a relationship, and that relationship itself is the most important element of the entire acquisition process," he says. He says the culture of the management company should fit with the ASC, and that culture depends significantly on how the company is financed, whether they're public or private, how much they're controlled by senior management, and other factors.
9. How will divisions within the physician group over price be handled? There will be divisions within the physician group in every acquisition or transaction, Mr. Poisson says. "You've got the younger physicians who have a pretty long career ahead of them and want the most possible equity and the highest possible distributions in the future," he says. "Then you have the more senior physicians, who took all the risks and built the center — and now want cash."
Those two desires are diametrically opposed, so the center needs someone within the physician leadership group to serve as a liaison. He says the two sides may not be able to come to a compromise, and one side may lose out, but the important thing is to have a respectful discussion and a mediator who can look at the situation without bias.
10. Will the ASC achieve a higher per-unit equity value in the future? "All sellers want the same thing: The highest possible price, and the valuable services," Mr. Poisson says. "As a buyer, you want to pay a reasonable price but also have a pathway to bring improvements to the facility, which will drive down your effective price."
He says if a buyer is paying a 7x multiple of EBITDA, they will want to implement growth and efficiency pathways that drive the multiple back down to 5x or 4x EBITDA. He says this strategy is also good for the seller, because it means the value of their equity on a per-unit basis increases over time. "It's definitely a win-win, if the right seller and the right buyer are married together," he says.
Learn more about Physicians Endoscopy.
Related Articles on Surgery Center Turnarounds:
15 Surgery Centers With Physical Therapy Programs
15 Statistics on Surgery Center EBITDA
8 Steps to Cut Cost Per Case in Surgery Centers