Jon Vick, president of ASCs Inc., discusses 10 signs that your surgery center is in trouble.
1. Your profit margin is less than 40 percent. Mr. Vick says centers fall into three categories: profitable surgery centers, with profit margins that exceed 40 percent; mediocre centers, with profit margins between 20 and 40 percent; and underperforming surgery centers, with profit margins under 20 percent. "The nature of this business is such that a well-run, well-managed center that's doing everything right has a profit margin of 40 percent or better," he says. "Anything below that means there's room for improvement."
He says ASCs with a profit margin over 40 percent will be attractive to management companies looking to acquire a well-run, cash-flowing center. Those with profit margins under 40 percent will be more attractive to management companies seeking turnaround opportunities. He says the most common reasons for low profit margins include poor contracts, high costs, inadequate volume for the center's size and expense level and time-consuming cases such as plastics.
2. Your physician partners aren't bringing all their outpatient cases to your center. If your physician partners are taking ASC-appropriate cases to other centers or to the local hospital, you have a problem, Mr. Vick says. Your physician partners should be entirely committed to your center, meaning all their outpatient cases should come to your center. Mr. Vick says surgery centers are generally developed based on a projection of case volume, which factors in the outpatient cases expected from each physician partner.
If partners stop bringing their projected cases to the center, the center will not achieve its projected goals. "Go back to the original pro forma, and look at the number the doctors gave you about how many outpatient cases they are doing," Mr. Vick says. "A center should keep track of those cases, and if the physician isn't bringing that number, that should prompt a discussion about where the cases are going."
3. Some of your physician partners have ownership interest in more than one ASC. Every surgery center should have a non-compete agreement, Mr. Vick says. "The non-compete agreement should require that physician partners have ownership in only one center in a certain geographical area," Mr. Vick says. "If a doctor is splitting his cases between more than one center, he's obviously not bringing all the cases that he could bring."
He says this policy should not create a serious problem for recruitment. Instead, potential physician investors will simply have to make a choice whether to invest in your center over another center. "It narrows the recruitment pool to the doctors that are more likely to bring all their cases to your center," Mr. Vick says. "The non-compete agreement should be a screening device to eliminate doctors who have interest in a competing center."
4. Your payor contracts pay Medicare rates or lower. Mr. Vick says many centers have poor payor contracts because they lack the negotiating skill to attain profitable reimbursement rates. "Insurance companies have high-powered negotiators, and a lot of centers send their administrators out to contract when they've never done it before," he says. "That's one of the big reasons that corporate partners can come in and benefit a center — because they have people experienced in contracting." He says no center should have commercial payor contracts equal to or less than Medicare rates. Instead, contracts should be at least 150 percent or 200 percent of Medicare. "Medicare is really the lowest a surgery center should accept, and those rates should only be accepted from Medicare," he says.
5. You don't have profitable contracts with the biggest payors. Identify the "800-pound gorilla" payors in your community, and make sure you have profitable contracts with those insurance companies, Mr. Vick says. If you don't have profitable contracts with a payor that monopolizes the beneficiaries in your community, your ASC will suffer as it will be forced to turn away cases from your potential patient base.
6. Your ASC is more than 50 percent out-of-network — and you are not moving in-network. The days of a profitable out-of-network strategy are coming to an end, Mr. Vick says. "If a center is heavily out-of-network, it puts them at a real disadvantage because the out-of-network strategy is disappearing," he says. "There's a lot of pressure against it, and if those out-of-network centers don't have contracts, they're going to begin to suffer as cases are driven away from them to centers that are in-network."
If your center relies heavily on out-of-network reimbursement, Mr. Vick says you should do three things. First, help your center business staff understand why out-of-network will be a problem for your ASC in the future. Read industry articles and look at states around the country where centers have been driven in-network. Second, look for high-paying in-network procedures, such as spine or bariatric procedures, and contract to perform those. These high-paying procedures will give your center some cushion as you transition to in-network contracts, which may be less profitable for your center initially. Third, make sure you have a strategic plan to move from out-of-network to in-network without taking a significant hit to profitability. In this case, a corporate partner can be helpful in negotiating profitable in-network contracts so the transition isn't too damaging.
7. Your partners are all over 50 years old, and you have no replacement plans. If a physician has a successful practice, he should be thinking about bringing in a younger associate to buy the practice when he retires, Mr. Vick says. The same holds true for ASC investment: A physician planning to retire should plan on transitioning ASC ownership to a younger physician who can contribute case volume.
If your center has a high percentage of older physicians and no replacement strategy, your case volume will take a hit when those physicians retire — and management companies will be less interested in purchasing your center. "The center may be making a lot of money, but they can't extract value from it because companies aren't interested in buying an interest in the center if the doctors are about to retire," he says.
8. You don't have a target list of new surgeons to recruit. Even if your physicians are not nearing retirement, you should still have a list of potential new surgeons for recruitment, Mr. Vick says. "Part of an ASC's strategic plan should be to have a continually updated target list of new procedures, high-paying procedures and physicians that are coming into the community," he says. "There should be a continual recruitment process that brings in new procedures and new physicians."
He says some physicians are good at identifying available colleagues but not that good at recruiting. Physician partners should follow up with new physicians on a regular basis to remind them of the opportunity for investment at the ASC and invite them to talk with current center physicians. The leading corporate partners are also skilled at recruiting new physician partners.
9. You aren't continually adding new cases or procedures. Your surgery center should consistently add new procedures to ensure a steady stream of cases and increasing distributions. "As time goes on, new procedures become more attractive for surgery centers," Mr. Vick says. "Some of the older procedures become less attractive, and it's really a matter of updating your strategic plan and updating your operations so you are continually on the leading edge of why surgery centers exist in the first place."
For example, as technological advances increase the popularity of minimally invasive procedures, your surgery center might consider minimally invasive techniques that are new to the outpatient setting.
10. Your revenues have leveled off — or your profits are declining. When you look at a five-year history of your center, you should see that revenues have increased and profits have continued to grow each year. "If, on the other hand, revenues level off, profits will probably start to decline because expenses are always decreasing," Mr. Vick says. "The cycle of static revenues and decreasing profits is a sign of a dying center."
He says center leaders should never blame the economy for declining profits. "That's an excuse that owners use because they are not taking steps to correct the problems." He says the economy may have some impact on certain procedures, such as elective plastics, but other than that it should have very little impact.
Learn more about ASCs Inc.
Related Articles Featuring Jon Vick:
6 Ways to Position ASCs for Success
4 Questions to Ask Hospital Leaders Before Entering Into a Joint Venture
5 Points on Calculating Impact of Out-of-Network on Valuation Multiples
1. Your profit margin is less than 40 percent. Mr. Vick says centers fall into three categories: profitable surgery centers, with profit margins that exceed 40 percent; mediocre centers, with profit margins between 20 and 40 percent; and underperforming surgery centers, with profit margins under 20 percent. "The nature of this business is such that a well-run, well-managed center that's doing everything right has a profit margin of 40 percent or better," he says. "Anything below that means there's room for improvement."
He says ASCs with a profit margin over 40 percent will be attractive to management companies looking to acquire a well-run, cash-flowing center. Those with profit margins under 40 percent will be more attractive to management companies seeking turnaround opportunities. He says the most common reasons for low profit margins include poor contracts, high costs, inadequate volume for the center's size and expense level and time-consuming cases such as plastics.
2. Your physician partners aren't bringing all their outpatient cases to your center. If your physician partners are taking ASC-appropriate cases to other centers or to the local hospital, you have a problem, Mr. Vick says. Your physician partners should be entirely committed to your center, meaning all their outpatient cases should come to your center. Mr. Vick says surgery centers are generally developed based on a projection of case volume, which factors in the outpatient cases expected from each physician partner.
If partners stop bringing their projected cases to the center, the center will not achieve its projected goals. "Go back to the original pro forma, and look at the number the doctors gave you about how many outpatient cases they are doing," Mr. Vick says. "A center should keep track of those cases, and if the physician isn't bringing that number, that should prompt a discussion about where the cases are going."
3. Some of your physician partners have ownership interest in more than one ASC. Every surgery center should have a non-compete agreement, Mr. Vick says. "The non-compete agreement should require that physician partners have ownership in only one center in a certain geographical area," Mr. Vick says. "If a doctor is splitting his cases between more than one center, he's obviously not bringing all the cases that he could bring."
He says this policy should not create a serious problem for recruitment. Instead, potential physician investors will simply have to make a choice whether to invest in your center over another center. "It narrows the recruitment pool to the doctors that are more likely to bring all their cases to your center," Mr. Vick says. "The non-compete agreement should be a screening device to eliminate doctors who have interest in a competing center."
4. Your payor contracts pay Medicare rates or lower. Mr. Vick says many centers have poor payor contracts because they lack the negotiating skill to attain profitable reimbursement rates. "Insurance companies have high-powered negotiators, and a lot of centers send their administrators out to contract when they've never done it before," he says. "That's one of the big reasons that corporate partners can come in and benefit a center — because they have people experienced in contracting." He says no center should have commercial payor contracts equal to or less than Medicare rates. Instead, contracts should be at least 150 percent or 200 percent of Medicare. "Medicare is really the lowest a surgery center should accept, and those rates should only be accepted from Medicare," he says.
5. You don't have profitable contracts with the biggest payors. Identify the "800-pound gorilla" payors in your community, and make sure you have profitable contracts with those insurance companies, Mr. Vick says. If you don't have profitable contracts with a payor that monopolizes the beneficiaries in your community, your ASC will suffer as it will be forced to turn away cases from your potential patient base.
6. Your ASC is more than 50 percent out-of-network — and you are not moving in-network. The days of a profitable out-of-network strategy are coming to an end, Mr. Vick says. "If a center is heavily out-of-network, it puts them at a real disadvantage because the out-of-network strategy is disappearing," he says. "There's a lot of pressure against it, and if those out-of-network centers don't have contracts, they're going to begin to suffer as cases are driven away from them to centers that are in-network."
If your center relies heavily on out-of-network reimbursement, Mr. Vick says you should do three things. First, help your center business staff understand why out-of-network will be a problem for your ASC in the future. Read industry articles and look at states around the country where centers have been driven in-network. Second, look for high-paying in-network procedures, such as spine or bariatric procedures, and contract to perform those. These high-paying procedures will give your center some cushion as you transition to in-network contracts, which may be less profitable for your center initially. Third, make sure you have a strategic plan to move from out-of-network to in-network without taking a significant hit to profitability. In this case, a corporate partner can be helpful in negotiating profitable in-network contracts so the transition isn't too damaging.
7. Your partners are all over 50 years old, and you have no replacement plans. If a physician has a successful practice, he should be thinking about bringing in a younger associate to buy the practice when he retires, Mr. Vick says. The same holds true for ASC investment: A physician planning to retire should plan on transitioning ASC ownership to a younger physician who can contribute case volume.
If your center has a high percentage of older physicians and no replacement strategy, your case volume will take a hit when those physicians retire — and management companies will be less interested in purchasing your center. "The center may be making a lot of money, but they can't extract value from it because companies aren't interested in buying an interest in the center if the doctors are about to retire," he says.
8. You don't have a target list of new surgeons to recruit. Even if your physicians are not nearing retirement, you should still have a list of potential new surgeons for recruitment, Mr. Vick says. "Part of an ASC's strategic plan should be to have a continually updated target list of new procedures, high-paying procedures and physicians that are coming into the community," he says. "There should be a continual recruitment process that brings in new procedures and new physicians."
He says some physicians are good at identifying available colleagues but not that good at recruiting. Physician partners should follow up with new physicians on a regular basis to remind them of the opportunity for investment at the ASC and invite them to talk with current center physicians. The leading corporate partners are also skilled at recruiting new physician partners.
9. You aren't continually adding new cases or procedures. Your surgery center should consistently add new procedures to ensure a steady stream of cases and increasing distributions. "As time goes on, new procedures become more attractive for surgery centers," Mr. Vick says. "Some of the older procedures become less attractive, and it's really a matter of updating your strategic plan and updating your operations so you are continually on the leading edge of why surgery centers exist in the first place."
For example, as technological advances increase the popularity of minimally invasive procedures, your surgery center might consider minimally invasive techniques that are new to the outpatient setting.
10. Your revenues have leveled off — or your profits are declining. When you look at a five-year history of your center, you should see that revenues have increased and profits have continued to grow each year. "If, on the other hand, revenues level off, profits will probably start to decline because expenses are always decreasing," Mr. Vick says. "The cycle of static revenues and decreasing profits is a sign of a dying center."
He says center leaders should never blame the economy for declining profits. "That's an excuse that owners use because they are not taking steps to correct the problems." He says the economy may have some impact on certain procedures, such as elective plastics, but other than that it should have very little impact.
Learn more about ASCs Inc.
Related Articles Featuring Jon Vick:
6 Ways to Position ASCs for Success
4 Questions to Ask Hospital Leaders Before Entering Into a Joint Venture
5 Points on Calculating Impact of Out-of-Network on Valuation Multiples