From 2005 to 2011, nearly 200 to 300 centers were built each year. This number has now slowed to generally 50 to 100 a year. The slowdown in growth is often attributed to there being less independent physicians than there used to be, more hospital employment and reimbursement for ASCs generally being tougher than it was at one point. Despite the slow-down, there are still significant numbers of ASC built each year. Often these are built with hospital system partners or still built, in part, to profit in a fee-for service-world.
Rome wasn't built in a day. Creating an ambulatory surgery center from scratch may seem relatively simple, but the project quickly becomes akin to building a small city. From financial planning to hiring staff, here is a step-by-step guide to opening a brand new, successful ASC.
Financial planning, building and initial assessments
1. Financial feasibility; a comprehensive feasibility study. A group of physicians (or physicians and management company or hospital) must first examine their outpatient case numbers to determine whether an ASC will be financially feasible. ASC revenue is equal to the number of procedures the group can perform at its own ASC multiplied by the expected reimbursement for these expected procedures. As a general rule, in a reasonable reimbursement market, a center focusing on higher reimbursement procedures can be profitable with as little as 2,000 procedures per year. With lower reimbursement cases, this number can jump to 3,000 to 3,500 procedures. Further, in low-reimbursement markets, a center may struggle to become profitable in some specialties at almost any case level. Financial prudence dictates that one should only begin a project with a case level that is substantially higher than the threshold or break-even amount.
2. Volume projections. A decade ago, when there were a great deal of independent physicians and some great reimbursement opportunities, experienced management companies would build centers with physicians knowing they still needed 200 or 500 more cases to succeed. Now with the shortage of physicians and reimbursement being tougher, experienced management companies won't build a center unless they know at the start that they have more than enough cases to be viable.
3. Pro forma analysis. A first step to take prior to establishing an ASC is to prepare a pro forma income statement as part of performing a feasibility study. A pro forma analysis and feasibility study should rely on sound physician data regarding projected case volumes, case mix, scheduling preferences and expected reimbursement rates. Physician involvement will not only ensure sound data, but accomplishes two other important tasks. First, it provides a chance to inform potential partners about the expectations, risks and profits. Second, it gives you a real opportunity to assess each physician's commitment to the project.
4. Case volume and reimbursement. The case volume and reimbursement rate data collected are the key assumptions upon which the revenue part of pro forma analyses are built. The greater the accuracy and certainty of these two types of information, the greater the accuracy and reliability of the final pro forma projections. In one center we helped to develop, the viability of the project itself was threatened when one or two of the key assumptions changed, thus resulting in the prospective loss of several hundred cases per year. A corollary to the statement that case volume projections should be reliable and accurate is the concept that the physician partners involved in the project should be fully committed to the project from the outset. There are few changes that will negatively impact the financial outlook for a new center as much as the departure of a core physician during the later stages of development. While a project can recover from a minor setback or challenge during the early planning stages, it is more difficult to correct severe problems that occur later in development.
5. Projections vs. reality. In one example the pro forma results were very different than actual results. "The pro formas that supported the decision of the lead physician to develop a three OR surgery center were not close to reality," says Tom Yerden, CEO of TRY Healthcare Solutions. "The revenues per case were overstated by 35 percent, volumes based on phone conversations with potential physician utilizers were too high, construction costs $155 per square foot were below real costs. Then, when operational, the results were far different than the pro forma."
6. Consider all volume discount factors. Counting cases is a crucial component of the development process. "Regardless of which specialties you develop the center around, it's critical to understand the surgical case volume represented by each," says Catherine Kowalski, executive vice president and chief operating officer of Meridian Surgical Partners. "Determine the universe of surgical case by physician and always calculate the net case transfer to the ASC, factoring in issues that discount volume including: insurance contracts, regulatory, politics, convenience, scheduling, surgeon behavior, etc. A good rule of thumb is about 50 percent of the surgical case universe for a conservative analysis."
7. Reimbursement by market differs significantly. Throughout the country, centers have had difficulty contracting with certain insurance companies. Thus, in assessing case volumes, one should discount the number of cases to a certain extent to reflect the possibility that certain insurance plans may not contract with the ASC. Moreover, certain insurance plans (and geographic regions) reimburse at levels below national standards. Hence, the center may find it financially impractical to provide services to these patients covered by such plans or in such regions. For example, a mediocre ASC located in an area with strong third-party reimbursement may do better than a great ASC in a bad reimbursement market. There is almost no way to fix a center that is built in a market with poor reimbursement from third-party payers.
8. Out-of-network concerns. In the planning stage, the center should attempt to discuss contracting with payers and obtain a real sense of whether contracts will be available and at what price. Payers have increasing power in many markets and are becoming harder to work with on an out-of-network basis. "If providers are prudent in picking and choosing the payers with which they are out-of-network, they will maximize total revenue and profits," said John Bartos, CEO of Collect RX, in a Becker's ASC Review article.
Payers and state regulatory agencies are increasingly scrutinizing out-of-network reimbursement strategies. In recent years we have seen more insurers attempting to recoup amounts they have paid on an out-of-network basis. Similarly, state agencies have been more aggressively policing this area. For example, in one recent case in New York, state auditors alleged that several surgery centers improperly waived patients' out-of-pocket payments in connection with the care they received at the centers. In all, the state alleged that about $8 million was overpaid by the state employee insurance plan, the Empire Plan, and United HealthCare, the state's insurance administrator.
OON reimbursement has gotten much more difficult as payers have clamped down on ASCs and in many cases increasingly attempt to recoup reimbursement from OON ASCs. For example, see "Insurer may pursue improper referral fraud claims against provider court rules." See Healthcare Daily Report. This case deals with Aetna seeking recoupment and damages against an OON center.
9. ASC specialty revenues. Specialty net revenues per case, according to the VMG Health's 2012 Intellimarker Ambulatory Surgical Center Financial & Operational Benchmarking Study1, can be seen for several specialties in the following chart:
Net revenue by specialty
• ENT : $1,849
• GI/endoscopy: $788
• General surgery: $1,795
• OB/GYN: $2,081
• Ophthalmology: $1,273
• Oral surgery: $1,026
• Orthopedics: $2,618
• Pain management: $840
• Plastic surgery: $1,696
• Podiatry: $1,893
• Urology: $1,788
The number can be heavily influenced by sample size, and several factors such as out-of-network considerations.
10. Joint ventures and managed care contracting. One benefit a hospital partner may add to surgery center development is the ability to jointly negotiate reimbursement rates or to include the center on the hospital's own payer agreements. However, the ability to jointly negotiate reimbursement rates in this context is often legally restricted in that it is subject to certain antitrust rules and regulations that require the hospital to have a sufficient amount of control over the venture on whose behalf it is negotiating. In many situations, the hospital will be unable to force the payers to negotiate with them on a joint basis. To further complicate matters, some hospitals fear that by seeking to negotiate the ASC’s rates with a particular payer, they will expose themselves to renegotiation of their current hospital outpatient department rates for that payer.
11. Managed care contracting. Negotiating favorable reimbursement rates is essential to ASC success. Know your ASC's market and the prominent payers. "You really have to have those numbers and evidence to show the payers it's in their best interest to work with them," said I. Naya Kehayes, MPH, managing principle and CEO of EVEIA HEALTH Consulting and Management, in a Becker's ASC Review article. "Also, if the ASC has opportunities to grow their business and their contracts do not provide adequate reimbursement to add these new services it's important that the ASC does not provide the services until their contracts are set up with appropriate reimbursement. They could potentially lose money and then it becomes more challenging to present to the payer the win-win opportunity to renegotiate the contract and enable the ASC to grow."
"The key is to thoroughly understand each individual payer contract," said LeAndra Stencel, regional operations manager –ASC with abeo, in a Becker's ASC Review article. "From reimbursement allowances on implants to multi-procedure discounts ASC leaders need to understand contracts to maximize a center's reimbursement potential."
12. CMS reimbursement. ASC reimbursement as a percentage of hospital outpatient department reimbursement has been declining for the past several years. This year, Medicare rates are 81 percent higher in HOPDs than in ASCs, according to MedPAC data.2 Here are six things to know about Medicare reimbursement for ASCs.
• In 2003, ASCs were reimbursed 87 percent of what an HOPD would receive, according to VMG Health's 2011 Mulit-Specialty ASC Intellimarker report.3
• By 2008, ASCs were reimbursed at 63 percent of what an HOPD would receive.
• The downward trend continued. In 2011, ASCs were reimbursed at 56 percent of what an HOPD would receive.
• In January, the Medicare Payment Advisory Commission approved a final recommendation for 2015 Medicare pay rates, including a recommendation that ASCs get a 0 percent pay increase.
• MedPAC also recommended that HOPDs receive a 3.25 percent increase in the absence of sequestration cuts.
• The HHS Office of Inspector General recommended that CMS lower HOPD reimbursement rates to the level of ASC reimbursement.
13. Capital requirements. The typical development of a stand-alone ASC, with tenant improvement, requires a cost of approximately $220 to $250 or more per square foot to become operational. Additionally, money is also needed for equipment. Of the total budget amount, a substantial portion of the money can be provided through debt financing without guarantees. However, a certain portion of the debt may require personal guarantees (such as tenant improvements and working capital). Moreover, a cash capital contribution of a substantial amount must also usually be contributed to an ASC venture. Typically, anywhere from $500,000 (on the low side) to $1.5 million is required as an equity cash contribution in total by the owners.
14. Price of ownership. An ASC will typically initially issue 100 ownership units. These units will be issued to members based on the amount of capital that each member contributes to the ASC. For example, if each unit costs $10,000 and a member will own 15 units, he or she will contribute $150,000. The amount of capital required depends upon the size of the project, whether the ASC will be a "tenant" or own and develop the real estate and the amount of debt to be secured. The equity plus the debt borrowed from lenders equals the total amount of money needed to develop the project. Where a single-specialty ASC, such as an endoscopy center, will lease the space in which it operates, total initial equity capital contributions are often in the area of $400,000 to $800,000. However, the members may be able to contribute less money up front if a more substantial working capital line of credit is obtained. For a multispecialty ASC that leases space rather than owns the building, initial equity capital contributions are often in the range of $700,000 to $1.2 million.
15. Cost to develop an ASC. "Although it varies based on location, the cost to develop a new ASC is approximately $1 million dollars per operating room," says Kenny Hancock, president and chief development officer of Meridian Surgical Partners. "This figure captures the costs associated with tenant improvements, equipment and working capital. A small center with two surgical suites will range from $2 million to $3 million and a larger multispecialty ASC $4 million to $6 million. Typically, the majority of the investment, including the construction cost and surgical equipment, is leveraged with debt financing. The members should plan on raising a minimum of 20 percent of the capital needed in cash to invest in the partnership. The investment typically ranges from $10,000 to $15,000 for a 1 percent ownership interest plus pro-rata guarantees of debt. The typical timeline is 18 months to 24 months from initial discussion to opening of the center."
16. ASC and real estate ownership. One option, even where all of the investors want to invest in both the surgery center and the real estate, is to have the ownership of the real estate and the ownership of the surgery center held in separate entities. This allows for additional investors to own a portion of the real estate holding company, thus making it less expensive for the investors in the surgery center entity. By separating the real estate from the operating entity that will run the ASC, investors can choose whether they would like to invest in the surgery center, the real estate or both. There are, however, significant benefits to fully congruent ownership.
17. Timing of capital contributions. The operating agreement will set forth the dates on which the capital must be contributed. Typically, all or a significant portion is contributed at the signing of the operating agreement. In some situations, part of the capital will be due at a later date, such as upon receipt of a certificate of need or perhaps six months after the initial signing. Additional capital contributions may be required of the members upon the vote of the board of managers and often a vote of the holders of a certain percentage of the units. The group will need to assess the total equity to be contributed.
18. Financing partners. Working with experienced lenders will facilitate the financing of an ASC. It can be tempting to work with a friend or a local bank, but this could be a mistake. Often with ASCs, time is of the essence and problems occur, which are normally much better handled by an experienced lender than by a friend. For the best result, look for a lender with specific ASC financing experience. There are some general costs you can use to help estimate the approximate investment necessary to build a facility.
19. Expense management. Surgery centers tend to have a level of fixed costs that generally require at least $3 million to $5 million in revenue to become significantly profitable and still cover the necessary expenses.2 Centers with $5 million to $10 million in annual revenues can, on average, expect to have an EBITDA of around 30 percent, or earn about a 30 percent operating margin before deducting interest, taxes and depreciation. 2 The three biggest costs for an ASC typically include staffing costs (about 20 percent to 30 percent of revenue), supply costs (about 20 percent of revenue) and facility costs (about 10 percent of revenue).2 With staffing costs making up the majority of an ASC's expenses, it is critical to benchmark the hours per case to those at other similar centers to ensure your staff is working efficiently.
Generally, multispecialty cases will entail between 13 hours to 15 hours per case and single-specialty cases will entail six to eight hours per case. This number is often translated in simple terms to approximately five full-time equivalents per 1,000 patients. To control staffing costs, it is imperative to use staff efficiently by cross-training where appropriate, being open only as many hours as cases require and, if possible, by sending staff home when they are not needed.
20. Supply costs. Supply costs, to a degree, may be reduced by use of a group purchasing organization or, in some cases, a hospital or management company partner that is able to aggregate expenses over a number of facilities and, as a result, benefit from volume pricing with vendors. When working with a GPO, assign a point person to ensure maximum savings are being achieved. "Are you actually capturing the savings your GPO is promising to deliver?" said Amy Gagliardi, vice president of supply chain with Regent Surgical Health, in a Becker's ASC Review article.
21. Supply standardization. Another common way to reduce supply costs is to implement standardization of certain common surgical supplies and reduce the use of non-essential supplies. "Standardization is critically important because we are in an era where we are getting reduced reimbursement from the government, so we have to become efficient," said Mike Lipomi, president and CEO of Surgical Management Professionals, in a Becker's ASC Review article. "We don't have the luxury to not be efficient."
These are both areas where a seasoned management company can help a surgery center to achieve greater operational efficiency. While staffing and supply costs can be modified over time, facility costs, once a lease has been signed or construction has commenced, are much more difficult to change. It is very important to obtain expert advice relative to these three cost items early and often.
Equity ownership, management and hospital ownership, allocating shares, safe harbor issues and specialty issues
22. Management and equity ownership. A group must determine whether or not it will have a management company as an equity partner. An experienced manager can help with myriad aspects of the project, such as financing, financial planning and analysis, Medicare certification, equipment planning, construction planning and physician recruitment. A good management company can significantly reduce the likelihood of problems in completing the project, operating the center, financing the project and ultimately prospering from the project. The majority of ASC management companies, 68 percent, prefer a 50 percent or less stake in a center, while 31 percent prefer a 51 percent to more than 75 percent stake, according to HealthCare Appraisers 2014 ASC Valuation Survey.4
23. Management company pros and cons. The key downside to having a management company as a long-term equity partner relates to the disparate quality of companies that provide services to ASCs and the profits that are shared when bringing in a management company. As a general rule, physician ownership alone, under the right circumstances, can be very attractive. However, having an experienced management team substantially lowers the risks, and, in the overwhelming majority of situations, can provide substantial benefits and actually improve profitability. Further, an equity owner/advisor often will have a much greater level of concern regarding the project's success, even when it owns only 15 percent to 30 percent of the center.
24. Operating agreement, management company split and partnership negotiation. Key items to negotiate with the management company include the percent of ownership, the management fee, the services provided, the personnel employed or provided, the length of the management contract, the board rights and the reserve or veto rights of the management company. The centers operating agreement defines such issues as board split, owner voting rights, eligibility requirements, non competition, redemption provisions and more. It is important to use an experienced lawyer to help draft the operating agreement.
"The biggest thing physicians want is microeconomic control," said Joe Zasa, in a Becker's ASC Review article. "How does the center operate on a day-to-day basis: hiring, firing, dividends, etc." A group should interview three to five management companies and talk extensively to other centers managed by the companies.
25. Management company fees and equity. Nearly half of ASC management companies, 48 percent, charge 5 percent of ASC net revenue as a management fee, according to the HealthCare Appraisers survey.4 In addition to a management fee, the leading management companies are increasingly requiring equity in the surgery center. Sixty-four percent of ASC management companies own equity in all freestanding companies that they manage, according to the HealthCare Appraisers survey.4 Before rejecting such an arrangement, evaluate how that management company compares to other management companies. A solid management company partner can also substantially improve the financing prospects of a center. Some finance companies will not finance an entity without an experienced management company being involved.
26. 13 questions to ask when choosing a management company. Here are nine questions to ask when deciding on a management company partner, according to a Becker's ASC Review article.
• How are services provided to the center?
• Are revenue cycle processes outsourced to the management company?
• How will the management company provide reports and benchmarking?
• Can the management company offer the ASC access to supply discounts?
• How will the company assist with payer contracting?
• How does the company fit with the ASC's long-term plan?
• How will division of ownership be handled
• Will the ASC achieve a higher per-unit equity value in the future?
• What do other physicians say about the management company?
• What percentage of ownership will the management company have?
• How much will the management fee be?
• What is the company's success rate with other centers?
• How many failures has the management company had?
27. An ASC can have too many physician investors. You can have too many physician partners. With too many physician investors, there is often a dilution of individual physician responsibility and ownership interests. With too little ownership, physician investors often lose their commitment to the ASC and look for other alternatives. Further, a great deal of resentment can develop between productive and less productive parties. Of course, with too few physician investors, the price of buying in will be greater, there will be more risk of case volume
losses, and the overall case volume of the center can suffer. The number of investors is a delicate balance that requires significant forethought and planning.
28. Selling shares to physicians. Here are 22 dos and don'ts of selling ASC shares to physician investors, according to a Becker's ASC Review article:
Dos
• Offer equal amounts of units per investor.
• Offer units at the same price per unit.
• Offer units at the then fair market value per unit.
• Provide investor with the current financial statements and not their potential revenues.
• Offer units to only physicians that will comply with the safe harbors — meet all tests and not just the one-third tests.
• Clarify that the hospital or management company partner does not generate referrals for the ASC.
• Review investors against compliance with the requirements of the safe harbors.
• An ASC may ask physicians why they choose not to use the ASC
Don'ts
• Do not offer less or more shares or a higher or lower price based on the number, volume or value of referrals a physician can generate.
• Do not reallocate shares based on the volume or value of referrals.
• Do not focus on individual distributions being tied to the number of patient referrals. Never make any indications that could lead a potential investor to believe that referrals or performance will determine an individual's "piece of the pie." Focus on overall distributions and profits.
• Physicians should not be allowed to invest based upon the fact that they can generate referrals for another physician who may use the center.
• Avoid providing physicians with estimates as to the amount of revenue that will be generated from their referrals or from another physician's referrals.
• Except as to compliance with the one-third tests, do not develop investor eligibility determinations based on the number of potential referrals. In evaluating physicians, examine compliance with all of the safe harbor criteria.
• Do not create "target lists" of physicians based on their ability to make high amounts of referrals.
• When creating target lists, avoid making notations indicating the potential number of referrals, the growth potential of the physician's practice, that a certain physician is a good target (based on referrals), etc.
• Avoid using age as an influencing factor when targeting physicians.
• Subject to non-discrimination rules, consider excluding Medicare and Medicaid referrals from any internal revenue and investment analysis.
• Do not offer remuneration or special treatment under various disguises, such as directorship contracts or discounted lease arrangements, in order to induce investors.
• Do not pressure a physician investor to shift their current referral patterns.
• Do not make any indications to investors that low-referring physicians will be pressured to withdraw.
• Do not try to avoid selling shares at fair market value.
29. Allocation of shares. As a general rule, shares cannot be allocated to physicians based on their volume or value of referrals or projected referrals nor be reallocated based on such referrals. Further in a start-up, all parties should contribute capital to the center pro rata and no owner should lend money to another owner to buy shares.
30. Single-specialty center. Single-specialty centers can be more efficiently staffed and built than multispecialty centers. Moreover, a single-specialty center avoids the turf wars and the level of concern regarding sharing profits and revenues with other specialties that are often present with multispecialty centers. However, changes in reimbursement can affect single-specialty centers more dramatically than multispecialty centers. For example, Medicare has instituted significant cuts in ASC reimbursement for gastroenterology, pain management and, to an extent, ophthalmologic procedures. These cuts can disproportionately impact a single-specialty GI or pain management ASC's overall revenue and financial health.
31. Multispecialty center. A multispecialty center can help reduce reimbursement reduction risk through a diversification of reimbursement sources and a mix of physicians. In addition, a multispecialty center can provide for greater staff and physical plant economics of scale, which may be needed if single-specialty volumes are insufficient. In many cases, the operating margins in single-specialty ASCs are much higher than multi-specialty ASCs.
32. Hospitals as partners. In many situations, a hospital can add value through either helping with managed care contracting, making it easier to recruit physicians or otherwise reducing physician concerns regarding being excluded from privileges or having other types of retaliatory action taken against them by the hospital. On the other hand, it is critical in surgery centers that physicians own a significant amount of the equity and that they remain interested and excited about the venture.
We have seen hospital partners own from 10 percent to 30 percent of the venture on the low end to 60 percent to 70 percent on the high end. There are a number of lawyers representing hospitals who believe that they must own 51 percent or more. In contrast, many lawyers believe that hospitals can own a smaller interest and either agree to treat the income as taxable income or otherwise have separate special powers to help assure that the venture serves exempt purposes. From a business perspective, having a hospital partner in many circumstances can prove helpful. However, it is not a panacea for surgery centers and there are a great number of surgery centers that have hospital partners that still underperform.
"Some hospital-physician joint ventures never survive the transition from a ‘spirit of negotiation’ to a 'spirit of partnership'," says Mr. Yerden. "Regardless of the strength of the projections (business plan), those joint ventures that I have seen fail (do so) due to lack of trust among the parties."
33. Safe harbor compliance. Most centers are started today to be safe harbor compliant or substantially safe harbor compliant. However, many centers are not fully safe harbor compliant. Here, where a center will not be fully safe harbor compliant, it is critical that the center adapt several protective steps to assure it polices against the conduct the government is concerned about.
There are strong arguments that it is appropriate to use safe harbors to redeem a physician who is not meeting the safe harbor due to the fact that the center wants to be safe harbor compliant. There are also evolving interesting arguments as to how to use the safe harbors lawfully and whether they are being used for the right purposes legally. Where not used for the right purposes, there is a risk in redeeming physicians, according to a Becker's ASC Review article.
34 Ophthalmology procedures can still be profitable. Do not make a blanket decision to exclude ophthalmology as a specialty. ASCs can still profit from ophthalmology procedures if the ASC has significant volumes and effective internal cost control; in other words, the ASC must run very efficiently.
"Most mature eye practices are already participating in surgery centers," says Ambulatory Surgical Centers of America CEO Luke Lambert. "When ophthalmologists start working in an ASC they never want to go back to the hospital, because the fast nature of eye cases plays to ASC's strengths."
35. Pain management. Pain management services are often provided in an office setting. Centers are increasingly concerned that physician investors will perform their pain management procedures in their own offices rather than in the ASC. Medicare's site-of-service differentials, which often pay more for in-office procedures, along with other incentives, may very well encourage physician investors to perform these procedures in their own offices. ASCs should plan accordingly and diversify services to accommodate a potential loss of pain management revenue. CMS has also implemented relatively large reductions in pain management reimbursement for ASCs.
In order to control the flight of pain cases from the surgery center to physician offices, it is necessary to engage in a frank conversation with pain physicians fairly early in the planning process to clarify which procedures will likely be performed in their offices versus those that will likely be performed in the surgery center. For financial planning, it is critical that both parties fully understand the expectations for these types of cases.
Notwithstanding these concerns, "Efficient pain specialists can be a pillar of strength in a successful ASC," says Mr. Lambert. However, "ASCOA recommends against inviting anesthesiologists to be owners in ASCs. We feel it is better to be the consumer and contractor of anesthesia services than to be partnered with them."
36. Gastroenterology can still be profitable. Gastroenterology accounts for the largest case load in ASCs with 27 percent of total case volume on average.3 Medicare has implemented decreased reimbursement for gastroenterology procedures performed in an ASC. This can hurt an ASC because GI/endoscopy centers typically rely on Medicare for about 20 percent to 40 percent of their cases. Fortunately, because these centers still generate from 60 percent to 80 percent of their gastroenterology business from outside Medicare, the specialty can still be profitable if they have significant volumes and the non-Medicare business continues to grow. "This is a specialty characterized by high volumes," says Mr. Lambert. "ASCs are important to enhancing productivity. Profits per case are low and declining but given sufficient volume it can be attractive."
37. GI and anesthesia. Gastroenterologists will increasingly have to minor in anesthesiology. Increasingly, payers will not pay physicians separately for anesthesia procedures provided in connection with gastroenterology procedures. Thus, increasingly gastroenterologists must be competent at offering all types of anesthesia procedures.
38. Plastics. In multispecialty surgery centers, plastics, particularly cosmetic procedures, often are very challenging. Here, the physician often bills globally, and the ASC and the physician are adverse to each other in that the ASC must negotiate its rates with the surgeon as opposed to charging a third-party payer."Cosmetic plastic surgery is not of benefit to most surgery centers as the facility fees paid tend to be too low for these lengthy cases," says Mr. Lambert.
39. Bariatrics is booming, but don't count on it as a long-term profit center. Bariatric procedures are growing rapidly and increasingly being performed in ASCs. Initially, ASCs will earn outsized profits from these procedures. However, as the number of bariatric providers increases and price competition evolves, the prices on these procedures will eventually normalize and become less profitable. For this reason, and because substantial concerns remain regarding the safety and risks related to bariatric programs, ASCs should use caution and proceed conservatively when developing bariatric programs.
40. Lasik. Lasik surgery, for reasons akin to why plastic surgery is problematic, is often best left to physician practices.
41. Spine. Spine procedures are also increasingly performed at ASCs as well; they remain popular and are growing in importanceSpine procedures can be increasingly performed in ASCs and are likely to remain good specialties for ASCs for a substantial period of time to come. In the best situation, the center has a base of cases from both specialties.
Despite the promise it offers, before you invest in spine services, it is important to consider the costs involved.
"Spine service costs up to $360,000 to set up; $80,000 for microscope, $80,000 for trays, $120,000 for c-arm and perhaps a Jackson table for $80,000," says Tom Mallon, CEO of Regent Surgical Health. "This should not be taken on frivolously. However, if the surgeon uses loops instead of a microscope and if you have a c-arm, the entry cost is much less: $160,000. Spine often cannot be performed on contracted patients. So in order for you to begin even a small program (five cases per month) you need at least some out-of-network patients. However, the surgeon will love the efficiency and the patients will love the facility. This will grow over time and as payers recognize the benefits, we will be able to negotiate reasonable reimbursements."
42. Orthopedics. Orthopedic procedures remain great procedures for ASCs. "How well you do with orthopedics depends a great deal on how successful you are in negotiating payer contracts," says Mr. Lambert. "Medicare's new fee schedule phase-in is making it possible to cover costs and setting a reference point that is helpful when negotiating with other payers."
On the high end, revenue per orthopedic case can be $3,520 and $1,880 on the low end, according to Avanza Healthcare Strategies.6
"One of the biggest things that needs to be considered to maintain a profitable ASC is the ability to analyze your true costs for every single case, which includes what type and how many implants are being used. You need to contain those costs," said orthopedic surgeon Michael Redler, MD, of The Orthopaedic & Sports Medicine Center in Trumball, Conn., in a Becker's ASC Review article.
43. ENT continues to be strong. Ear, nose and throat procedures continue to be a strong specialty for surgery centers. This specialty continues to be reimbursed reasonably well in many markets. As a result, says Mr. Lambert, "We see ENT as an attractive specialty if the cases in your area are not overly dependent on Medicaid. Special considerations for this specialty include requiring skilled pediatric anesthesia and having a private recovery area for children."
44. Urology. Urology can increasingly also be a real plus for ASCs. "Many procedures are short and can pay well on a time of utilization basis, of those that are longer some reimburse well," says Herb Riemenschneider, MD, founder of Knightsbridge Surgical Center. He notes that the longer procedures for urinary tract stone disease (such as extracorporal shock wave lithotripsy and ureteroscopic stone work with laser), urinary prosthetics (penile prostheses and artificial urinary sphincter), prosthetic slings for treatment of female incontinence, and the most recent addition of cryoablation for treatment of prostate cancer, have "big potential if done correctly."
"Urology can be profitable when it involves lithotripsy and female incontinence surgery," says Mr. Mallon. "Both are predominantly commercial populations. Serving Medicare men with prostate cancer can often be break-even at best."
Some ASCs are finding benefits of building a center around urology.
"The surgery center has allowed our urologists to remain more efficient doing outpatient surgery than they could be by performing the same procedures in an outpatient hospital setting," says Bill Monnig, the president of a large urology group. "The single-specialty designation allows us to gain maximum benefit of the special endoscopic equipment that urologic surgery requires and, therefore, may be more financially advantageous than a multispecialty center where this equipment may not be used as much. Our surgery center also gives us an opportunity to dovetail other ancillary services such as CT scanning, urodynamics, pathology lab, clinical lab, research programs, office-based minimally-invasive prostate surgery and clinical research programs into adjacent facilities. The number of and type of procedures that we can perform in the surgery center continues to grow each year."
More building and start-up issues
45. Do not overspend on real estate. Physicians planning centers should purchase property that is cost-appropriate. Normally, a second- or third-tier commercial property that is level, safe and accessible to your physicians and patients and has easy parking will be sufficient. Make sure that the less expensive land will not ultimately cost you more due to unknown variables. If a property has a lack of utilities, set-backs or zoning restrictions, it may ultimately cost more.
46. ASC site experts. A site should be evaluated by an experienced ASC architect to ensure that it can meet the ASC's requirements. This includes performing a thorough analysis of state and municipal codes and regulations in regards to health and zoning issues prior to purchasing the land. Do not assume, for example, that a space used for an ASC in the past is automatically qualified to fit your needs. In many cases, existing structures may not meet standard coding requirements and a change in ownership or management of the facility will trigger a need to update it to current specifications.
47. ASC site visibility. A visible, expensive parcel is often an unnecessary cost. It is not important that the ASC be visible in order to attract drive-by or foot traffic. This is significant because premier commercial lots can cost considerably more than otherwise equally appropriate, yet less visible, lots.
48. Do not overbuild. A building should meet the group's volume and specialty needs, as well as the financial parameters. The space plan should be integrated with your staffing and equipment plans. Knowing your case numbers, how many technicians, nurses, schedulers, business office and administrative staff and other staff you will need, as well as your equipment requirements, should drive your space needs.
49. Lease or build from the ground-up. A center does not need more than one operating room per 1,000 to 1,500 cases. A typical two-room ASC can be built in 7,000 to 8,000 square feet. An average size ASC is approximately 13,000 square feet. VMG Health's report3 also indicates that the median ASC includes four operating rooms and two procedure rooms. Centers can be leased from a third party or built from the ground up. Often, it is quicker and less expensive to lease space and operate as a tenant.
"We prefer to lease our ASCs' real estate because we lease without personal guarantees and avoid having to put cash/equity into real estate," says Mr. Lambert. "Surgery centers, if conceived and managed properly, can offer returns that are superior to that of the typical ASC real estate investment."
The disadvantage to this approach is that one does not ultimately own the real property nor completely control the project. At the same time, the long-term capital costs can be substantially lower.
50. Lease or own the real estate. "Many physician-owners of new ASCs lease the space for the ASC. By doing so they are missing a significant profit opportunity. Just like your house, why pay rent when you can own and enjoy the value you are creating in the real estate. The ASC real estate will be valued-based on the rent. Just as your ASC business will be worth a multiple of the profit, the ASC real estate will be valued as a multiple of the rent you pay yourself," says Jon Vick, founder and president of ASCs Inc. "If you own the ASC real estate and pay yourself a market rate rent ($25 to $30 a square foot, per year) you will find that the real estate will be worth a multiple of what you paid for it. This is an opportunity that many ASC owners miss if they lease the ASC space rather than buy the real estate."
51. Equipment budget and planning. When developing a center, you have to decide whether or not to use an equipment planner. The argument for using equipment planning is that it costs approximately $200,000 to $500,000 per OR to set up the OR. This will be one of the largest expenses you have at a surgery center. Thus, the argument is that you use an expert to help you do it, help save costs and plan more efficiently and coordinate better through design, development and construction. The counter argument is that either a center can do it itself or it could use a management or development company to do it as well. In fact, many people resent the concept of using a management or development company and then, on top of that, having to use an equipment planner. Further, there are situations where the equipment planning firm may have such close ties with industry (equipment manufacturers) that using an equipment planner might not get you some of the benefits that you expected to get from the process.
Vendors within the industry are beginning to offer ASCs financial solutions to manage the costs of new equipment. "Financial solutions used to be an afterthought, but now this is the first thought. You must have an economical way to acquire needed equipment," said Tom Sakovits, Director of Financial Services, Endoscopy Division FUJIFILM Medical Systems U.S.A., in a Becker's ASC Review report. "On the financial services side, the industry is transforming itself because it needs to."
52. IT, fluid management and anesthesia. Early in the design process, an ASC should examine how information technology systems, fluid management systems and anesthesia systems will be incorporated into design. For example, as to fluid waste management, Bill Merkle of MD Technologies notes:
"ASC design should consider fluid waste management since disposal systems require plumbing, drains and medical gas piping most easily installed during construction or remodeling. Procedure room layout should address fluid management to assure that utilities and piping are conveniently located near the patient bed as well as near medical equipment (such as an endoscopy cart with light source). System size and floor space requirements should be assessed, particularly if suctioned fluid must be transported to disposal sites. Today, most (about 80 percent) fluid management costs is for canisters, with remaining cost for waste disposal. Tremendous cost savings can be realized if both costs are eliminated. Advance planning can improve room efficiency, reduce turnaround time and minimize fluid management costs."
Leadership, licensure, technology, recruitment and more
53. Accreditation. Many states require ASCs to be licensed. In addition, ASCs should attempt to become accredited by the Joint Commission, Accreditation Association for Ambulatory Healthcare or another reputable accrediting agency such as the American Association for Accreditation of Ambulatory Surgery Facilities. Accreditation often lets ASCs be deemed Medicare-certified, to serve certain payers and to measure their services and performance against national recognized standards, thereby helping them to improve the quality of their care. The top areas AAAHC7 found ASCs to be non-compliant or partially non-compliant:
• 2.I.B.11.g (Approving and ensuring compliance of all major contracts or arrangements affecting medical care provided): 40 percent
• 8.A.2 (Organization provides evidence of compliance with applicable state and local fire prevention regulations): 30 percent
• 11.L (Organization identified and maintains a current list of look-alike or sound-alike medications): 11 percent
• 9.R (Education and training in recognition and treatment of malignant hyperthermia): 10 percent
• 12.I.D (Organization has policy in place that ensures test results are reviewed appropriately by ordering physician or another privileged provider): 10 percent
• 10.I.D (Appropriate and current health history must be added to patients' clinical records within 30 days prior to scheduled procedure): 10 percent
54. State licensure. Speak with your state health department early on in your development process to learn your state's ASC licensing requirements as each state is different. In all cases, you will want to speak with them very early in the process to access state requirements and processes, and to help avoid unexpected delays in licensure requirements. "Be sure to use a consultant who has a proven track record in managing through this process. Each state is unique — hire someone who is well versed in the state licensure process," says Marcy Sasso, CASC, co-chair and founder of the Surgery Center Coalition and director ASC consulting company Sasso Consulting.
55. Hire strong leadership. High-quality management is critical to an ASC's success. Many management companies offer superior services. However, many are of little value. All management companies are not equal. For this reason, it is important to work with an experienced management company that has a proven track record of successes. Working with a low-quality, inexperienced company will do more harm than good. "The first step is to hire an experienced consultant or company that will direct/manage the project. Large ASC management companies can be an easy option but small management companies or experienced consultants can be a strong viable option and a long term cost effective solution. ASC owners must do their homework before selecting an ASC management company. An inexperienced individual can delay an ASC opening by months," says Ms. Sasso.
56. Administrator and DON. You will need to start by hiring an administrator and director of nursing. It is far better to overpay the employee a bit to hire outstanding help as a great staff is crucial to an efficient and profitable ASC. You need not necessarily employ your staff full-time. However, you are best off paying your staff well and attempting to obtain the highest quality staff — even if highly paid on an hourly basis. It is also critical that you treat the staff extremely well so that you are able to recruit and retain the best possible staff. Finding and retaining an experienced and competent staff can prove challenging.
Registered nurses can make superior administrators. Experienced RNs often make great ASC administrators. The RN must study and be interested in the business side of ASCs. Generally, RNs are trained to be disciplined and dedicated workers; a work ethic that carries over to the administrator position. As such, RNs are often vibrant and willing to contribute in many ways to improve the surgery center. An administrator should typically be hired four to six months before a center intends to become operational.
57. Wages and salary. Typical wages and salary for ASC administrators and staff 3:
• Nurse staff: $33.24 per hour
• Tech staff: $21.03 per hour
• Administrative staff: $22.91 per hour
• Administrator: $108,014 per year
58. Typical problems for surgery centers. The number one problem for most ASCs is the inability to effectively recruit the right number of physicians and cases or the inability to obtain appropriate commitments from their physician partners. The most successful centers are increasingly built around a core group of physicians. This approach lessens certain risks related to the center and clarifies the level of physician commitment.
59. Shallow physician pool. Over time, an evolving risk in many markets relates to the actual number of independent physicians available for recruitment.
Here is what different types of physicians think about hospital integration, according to the Deloitte's Physician Perspectives Survey5:
• 73 percent of surgical specialists feel they are likely or very likely to integrate
• 71 percent of primary care physicians feel they are likely or very likely to integrate
• 71 percent of other physicians feel they are likely or very likely to integrate
• 61 percent of non-surgical specialists feel they are likely or very likely to integrate
60. Physician recruitment tactics. To successfully recruit physicians into ASCs, Surgical Care Affiliates' Winborne Macphail recommended in a Becker's ASC Review article that leadership teams implement the following action items to ensure success:
1. Perform a market assessment to identify all surgeons in their market and their affiliations.
2. Develop a recruitment plan by dedicating time with their leadership team to determine service and specialty offerings and create a profile for what their facility's "ideal" physician might look like.
3. Perform due diligence on their physician prospect list by utilizing their facility team and current physicians to narrow the list to those most suited for their facility and seek ways to gain warm introductions.
4. Develop a value statement for each introduction that is customized to each physician and focused on why they should consider your facility.
61. Overestimating necessary staff and space. A second set of core risks includes overstaffing an ASC and building a facility that is too big. The desire of partners to have the latest and greatest technology and equipment can quickly kill a budget. It is often useful to have third-party input in these decisions to help inject some rational, efficiency-minded thought into the process.
62. ASC failure. Despite their growth throughout the country a substantial number of ASCs still fail; between 2007 and 2012 there were 514 exiting Medicare-certified ASCs, according to MedPAC data2. The failures occur mostly due to bad management, low-volume of cases, poor reimbursement or overbuilding. Knowing the risks involved in developing an ASC can help to ensure that your ASC will prosper and not fail. Working with experienced managers in developing a center can also help prevent failures.
63. Cost containment challenges. Many centers also face significant risks related to reimbursement, managed care exclusion, poor billing and collection practices and failing to contain supply and equipment costs. In essence, because the reimbursement for procedures is becoming less predictable, there is an extensive need to assure that the project is well-managed and well-thought out. A failure to do either of these can lead to significant financial problems for the entity. Four top areas of ASC cost containment, according to a Becker's ASC Review article, include:
• Supply chain management
• Schedulcing
• Office supplies
• Waste elimination
One of keys to understanding and controlling ASC expenses is case costing. "If you don't know what it costs to do a case, you don't know if you're making money or if your payer contracts are covering the cost of doing the case. It allows the administrator to control supply and staff costs and to make the center as efficient as possible," said Ann B. Geier, MS, RN, CNOR, CASC, vice president, clinical informatics and surgery at SourceMedical, in a Becker's ASC Review article.
64. Turnarounds. "You must change the thinking of the partners and staff," says Mr. Mallon. "They need to be open to doing things differently. True insanity is doing the same thing over and over and expecting different results. We must understand how we make money and how we lose it. Every center has losing cases, but they must be performed judiciously. Do a losing case in a lineup of profitable cases — that is OK. Do losing cases that have small supply costs and no implant — that is OK. Avoid high-cost implants and surgeons who only bring losing cases based on fully loaded cost analysis."
65. Advisors, management, architects, builders and lawyers. Given that more than 5,500 ASCs now exist, we strongly advise that ASCs utilize experienced advisors. "The development of an ASC is a very complex, time consuming project and many costly mistakes can be made along the way, from design to construction, from certification to personnel to operations to contracting, etc. It is far less expensive and time consuming to hire experts to guide you through the minefield of developing a new ASC," says Mr. Vick. "Lots of very smart people think they can do everything better than anyone else. Developing an ASC isn't brain surgery, but why reinvent the wheel when there are lots of people who have made the mistakes and learned from them and are willing to help you avoid the same mistakes."
66. Establish MIS systems early. An ASC should establish its management information system and other operational systems, such as billing, materials management and marketing. You should set up your MIS as early as three months prior to your ASC's opening. The MIS is a critical part of an ASC’s organizational backbone and can support the effective management of the ASC. If established early and populated with appropriate information, upon opening, your clinicians, front office and management will have immediate efficiencies scheduling surgeries, billing, performing collections, case-costing and taking inventory, among many other tasks.
Issues to take into account when establishing a MIS include:
• Projected case volume
• Inventory management
• Staffing
• Financial management
67. Clinical MIS concerns. "As for the clinical side, an MIS may assist the clinician in delivering care with things such as patient health information, prior surgical interventions, pre-existing conditions, allergies and current medications; all this to optimize patient outcomes and reduce risk," says Mauro Cecchetti, an administrator with Constitution Surgery Centers.
"However, the MIS is not the final answer, finding the balance between a good implemented system and a valuable management team executing the mission of the healthcare facility is the true answer," he says.
68. Billing system. Billing is an essential ASC function."At a new center without a management company partner, I would start building the billing system no later than four months before going live, but ideally the process would begin six months out," says Michael Orseno, director of revenue cycle with Regent Surgical Health. "The cost of training and implementation usually runs between $5,000 and $10,000 for a cloud-based model, but if an ASC plans to buy a server the cost can run into the tens of thousands."
69. In-house vs. outsourced billing. Depending on the ASC, outsourced billing may make more sense than an in-house system. "In high-cost real estate markets, such as New York City or San Francisco, ASC owners may not want to devote space to a business office; outsourcing makes sense," says Mr. Orseno. "If there is a shallow talent pool, then yes absolutely outsourcing makes sense."
70. EMR. Though not all ASCs have adopted EMR, a new center that chooses that route must prepared for associated time and costs. Start building the EMR and office system around four to six months before opening the center and include information such as:
• Preoperative order sets
• Postoperative order sets
• Operative notes
• Physician preference cards
"Once you have all that, it will make customizing your record much easier and more efficient," Kerri Ubaldi, RN, MBA, CPHRM, vice president of operations for Merritt Healthcare. The beauty of the system, however, is that you can develop it over time if your timeline is shorter for implementation. As you onboard the staff, it is an excellent tool to teach the staff the workings of the system when they enter the customizations themselves."
71. EMR cost. EMR typically cost around $100,000 for a three-room, multispecialty center. This estimate includes the system and hardware cost. Total costs are variable depending on the center's specialties, number of operating rooms and the type of hardware implemented.
Foot notes
1 VMG Health. "2012 ambulatory surgical center financial & operational benchmarking study. 2012. Available online here: http://www.vmghealth.com/
2 MedPAC. "Ambulatory surgical center services." 2014. Available online here: http://www.medpac.gov/documents/reports/mar14_ch05.pdf?sfvrsn=0
3 VMG Health. "2011 Mulit-Specialty ASC Intellimarker report. 2011. Available online here: http://www.vmghealth.com/publications/
4 HealthCare Appraisers. 2014 ASC Valuation Survey. 2014. Available online here: http://www.healthcareappraisers.com/ASC_Survey.html
5 Deloitte. "Deloitte 2013 survey of U.S. physicians: Physician perspectives about healthcare reform and the future of the medical profession." 2013. Available online here: http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_chs_2013SurveyofUSPhysicians_031813.pdf
6 Avanza Healthcare Strategies. "Operational benchmarks: Ambulatory surgery centers." 2014. Available online here: http://avanzastrategies.com/asc-benchmarks/
7 AAAHC. "AAAHC AENEID report 2013." 2013. Available online at: http://www.aaahc.org/Global/pdfs/AAAHC%20Institute%20content/aaahc_aeneid_report_FINAL.pdf
Rome wasn't built in a day. Creating an ambulatory surgery center from scratch may seem relatively simple, but the project quickly becomes akin to building a small city. From financial planning to hiring staff, here is a step-by-step guide to opening a brand new, successful ASC.
Financial planning, building and initial assessments
1. Financial feasibility; a comprehensive feasibility study. A group of physicians (or physicians and management company or hospital) must first examine their outpatient case numbers to determine whether an ASC will be financially feasible. ASC revenue is equal to the number of procedures the group can perform at its own ASC multiplied by the expected reimbursement for these expected procedures. As a general rule, in a reasonable reimbursement market, a center focusing on higher reimbursement procedures can be profitable with as little as 2,000 procedures per year. With lower reimbursement cases, this number can jump to 3,000 to 3,500 procedures. Further, in low-reimbursement markets, a center may struggle to become profitable in some specialties at almost any case level. Financial prudence dictates that one should only begin a project with a case level that is substantially higher than the threshold or break-even amount.
2. Volume projections. A decade ago, when there were a great deal of independent physicians and some great reimbursement opportunities, experienced management companies would build centers with physicians knowing they still needed 200 or 500 more cases to succeed. Now with the shortage of physicians and reimbursement being tougher, experienced management companies won't build a center unless they know at the start that they have more than enough cases to be viable.
3. Pro forma analysis. A first step to take prior to establishing an ASC is to prepare a pro forma income statement as part of performing a feasibility study. A pro forma analysis and feasibility study should rely on sound physician data regarding projected case volumes, case mix, scheduling preferences and expected reimbursement rates. Physician involvement will not only ensure sound data, but accomplishes two other important tasks. First, it provides a chance to inform potential partners about the expectations, risks and profits. Second, it gives you a real opportunity to assess each physician's commitment to the project.
4. Case volume and reimbursement. The case volume and reimbursement rate data collected are the key assumptions upon which the revenue part of pro forma analyses are built. The greater the accuracy and certainty of these two types of information, the greater the accuracy and reliability of the final pro forma projections. In one center we helped to develop, the viability of the project itself was threatened when one or two of the key assumptions changed, thus resulting in the prospective loss of several hundred cases per year. A corollary to the statement that case volume projections should be reliable and accurate is the concept that the physician partners involved in the project should be fully committed to the project from the outset. There are few changes that will negatively impact the financial outlook for a new center as much as the departure of a core physician during the later stages of development. While a project can recover from a minor setback or challenge during the early planning stages, it is more difficult to correct severe problems that occur later in development.
5. Projections vs. reality. In one example the pro forma results were very different than actual results. "The pro formas that supported the decision of the lead physician to develop a three OR surgery center were not close to reality," says Tom Yerden, CEO of TRY Healthcare Solutions. "The revenues per case were overstated by 35 percent, volumes based on phone conversations with potential physician utilizers were too high, construction costs $155 per square foot were below real costs. Then, when operational, the results were far different than the pro forma."
6. Consider all volume discount factors. Counting cases is a crucial component of the development process. "Regardless of which specialties you develop the center around, it's critical to understand the surgical case volume represented by each," says Catherine Kowalski, executive vice president and chief operating officer of Meridian Surgical Partners. "Determine the universe of surgical case by physician and always calculate the net case transfer to the ASC, factoring in issues that discount volume including: insurance contracts, regulatory, politics, convenience, scheduling, surgeon behavior, etc. A good rule of thumb is about 50 percent of the surgical case universe for a conservative analysis."
7. Reimbursement by market differs significantly. Throughout the country, centers have had difficulty contracting with certain insurance companies. Thus, in assessing case volumes, one should discount the number of cases to a certain extent to reflect the possibility that certain insurance plans may not contract with the ASC. Moreover, certain insurance plans (and geographic regions) reimburse at levels below national standards. Hence, the center may find it financially impractical to provide services to these patients covered by such plans or in such regions. For example, a mediocre ASC located in an area with strong third-party reimbursement may do better than a great ASC in a bad reimbursement market. There is almost no way to fix a center that is built in a market with poor reimbursement from third-party payers.
8. Out-of-network concerns. In the planning stage, the center should attempt to discuss contracting with payers and obtain a real sense of whether contracts will be available and at what price. Payers have increasing power in many markets and are becoming harder to work with on an out-of-network basis. "If providers are prudent in picking and choosing the payers with which they are out-of-network, they will maximize total revenue and profits," said John Bartos, CEO of Collect RX, in a Becker's ASC Review article.
Payers and state regulatory agencies are increasingly scrutinizing out-of-network reimbursement strategies. In recent years we have seen more insurers attempting to recoup amounts they have paid on an out-of-network basis. Similarly, state agencies have been more aggressively policing this area. For example, in one recent case in New York, state auditors alleged that several surgery centers improperly waived patients' out-of-pocket payments in connection with the care they received at the centers. In all, the state alleged that about $8 million was overpaid by the state employee insurance plan, the Empire Plan, and United HealthCare, the state's insurance administrator.
OON reimbursement has gotten much more difficult as payers have clamped down on ASCs and in many cases increasingly attempt to recoup reimbursement from OON ASCs. For example, see "Insurer may pursue improper referral fraud claims against provider court rules." See Healthcare Daily Report. This case deals with Aetna seeking recoupment and damages against an OON center.
9. ASC specialty revenues. Specialty net revenues per case, according to the VMG Health's 2012 Intellimarker Ambulatory Surgical Center Financial & Operational Benchmarking Study1, can be seen for several specialties in the following chart:
Net revenue by specialty
• ENT : $1,849
• GI/endoscopy: $788
• General surgery: $1,795
• OB/GYN: $2,081
• Ophthalmology: $1,273
• Oral surgery: $1,026
• Orthopedics: $2,618
• Pain management: $840
• Plastic surgery: $1,696
• Podiatry: $1,893
• Urology: $1,788
The number can be heavily influenced by sample size, and several factors such as out-of-network considerations.
10. Joint ventures and managed care contracting. One benefit a hospital partner may add to surgery center development is the ability to jointly negotiate reimbursement rates or to include the center on the hospital's own payer agreements. However, the ability to jointly negotiate reimbursement rates in this context is often legally restricted in that it is subject to certain antitrust rules and regulations that require the hospital to have a sufficient amount of control over the venture on whose behalf it is negotiating. In many situations, the hospital will be unable to force the payers to negotiate with them on a joint basis. To further complicate matters, some hospitals fear that by seeking to negotiate the ASC’s rates with a particular payer, they will expose themselves to renegotiation of their current hospital outpatient department rates for that payer.
11. Managed care contracting. Negotiating favorable reimbursement rates is essential to ASC success. Know your ASC's market and the prominent payers. "You really have to have those numbers and evidence to show the payers it's in their best interest to work with them," said I. Naya Kehayes, MPH, managing principle and CEO of EVEIA HEALTH Consulting and Management, in a Becker's ASC Review article. "Also, if the ASC has opportunities to grow their business and their contracts do not provide adequate reimbursement to add these new services it's important that the ASC does not provide the services until their contracts are set up with appropriate reimbursement. They could potentially lose money and then it becomes more challenging to present to the payer the win-win opportunity to renegotiate the contract and enable the ASC to grow."
"The key is to thoroughly understand each individual payer contract," said LeAndra Stencel, regional operations manager –ASC with abeo, in a Becker's ASC Review article. "From reimbursement allowances on implants to multi-procedure discounts ASC leaders need to understand contracts to maximize a center's reimbursement potential."
12. CMS reimbursement. ASC reimbursement as a percentage of hospital outpatient department reimbursement has been declining for the past several years. This year, Medicare rates are 81 percent higher in HOPDs than in ASCs, according to MedPAC data.2 Here are six things to know about Medicare reimbursement for ASCs.
• In 2003, ASCs were reimbursed 87 percent of what an HOPD would receive, according to VMG Health's 2011 Mulit-Specialty ASC Intellimarker report.3
• By 2008, ASCs were reimbursed at 63 percent of what an HOPD would receive.
• The downward trend continued. In 2011, ASCs were reimbursed at 56 percent of what an HOPD would receive.
• In January, the Medicare Payment Advisory Commission approved a final recommendation for 2015 Medicare pay rates, including a recommendation that ASCs get a 0 percent pay increase.
• MedPAC also recommended that HOPDs receive a 3.25 percent increase in the absence of sequestration cuts.
• The HHS Office of Inspector General recommended that CMS lower HOPD reimbursement rates to the level of ASC reimbursement.
13. Capital requirements. The typical development of a stand-alone ASC, with tenant improvement, requires a cost of approximately $220 to $250 or more per square foot to become operational. Additionally, money is also needed for equipment. Of the total budget amount, a substantial portion of the money can be provided through debt financing without guarantees. However, a certain portion of the debt may require personal guarantees (such as tenant improvements and working capital). Moreover, a cash capital contribution of a substantial amount must also usually be contributed to an ASC venture. Typically, anywhere from $500,000 (on the low side) to $1.5 million is required as an equity cash contribution in total by the owners.
14. Price of ownership. An ASC will typically initially issue 100 ownership units. These units will be issued to members based on the amount of capital that each member contributes to the ASC. For example, if each unit costs $10,000 and a member will own 15 units, he or she will contribute $150,000. The amount of capital required depends upon the size of the project, whether the ASC will be a "tenant" or own and develop the real estate and the amount of debt to be secured. The equity plus the debt borrowed from lenders equals the total amount of money needed to develop the project. Where a single-specialty ASC, such as an endoscopy center, will lease the space in which it operates, total initial equity capital contributions are often in the area of $400,000 to $800,000. However, the members may be able to contribute less money up front if a more substantial working capital line of credit is obtained. For a multispecialty ASC that leases space rather than owns the building, initial equity capital contributions are often in the range of $700,000 to $1.2 million.
15. Cost to develop an ASC. "Although it varies based on location, the cost to develop a new ASC is approximately $1 million dollars per operating room," says Kenny Hancock, president and chief development officer of Meridian Surgical Partners. "This figure captures the costs associated with tenant improvements, equipment and working capital. A small center with two surgical suites will range from $2 million to $3 million and a larger multispecialty ASC $4 million to $6 million. Typically, the majority of the investment, including the construction cost and surgical equipment, is leveraged with debt financing. The members should plan on raising a minimum of 20 percent of the capital needed in cash to invest in the partnership. The investment typically ranges from $10,000 to $15,000 for a 1 percent ownership interest plus pro-rata guarantees of debt. The typical timeline is 18 months to 24 months from initial discussion to opening of the center."
16. ASC and real estate ownership. One option, even where all of the investors want to invest in both the surgery center and the real estate, is to have the ownership of the real estate and the ownership of the surgery center held in separate entities. This allows for additional investors to own a portion of the real estate holding company, thus making it less expensive for the investors in the surgery center entity. By separating the real estate from the operating entity that will run the ASC, investors can choose whether they would like to invest in the surgery center, the real estate or both. There are, however, significant benefits to fully congruent ownership.
17. Timing of capital contributions. The operating agreement will set forth the dates on which the capital must be contributed. Typically, all or a significant portion is contributed at the signing of the operating agreement. In some situations, part of the capital will be due at a later date, such as upon receipt of a certificate of need or perhaps six months after the initial signing. Additional capital contributions may be required of the members upon the vote of the board of managers and often a vote of the holders of a certain percentage of the units. The group will need to assess the total equity to be contributed.
18. Financing partners. Working with experienced lenders will facilitate the financing of an ASC. It can be tempting to work with a friend or a local bank, but this could be a mistake. Often with ASCs, time is of the essence and problems occur, which are normally much better handled by an experienced lender than by a friend. For the best result, look for a lender with specific ASC financing experience. There are some general costs you can use to help estimate the approximate investment necessary to build a facility.
19. Expense management. Surgery centers tend to have a level of fixed costs that generally require at least $3 million to $5 million in revenue to become significantly profitable and still cover the necessary expenses.2 Centers with $5 million to $10 million in annual revenues can, on average, expect to have an EBITDA of around 30 percent, or earn about a 30 percent operating margin before deducting interest, taxes and depreciation. 2 The three biggest costs for an ASC typically include staffing costs (about 20 percent to 30 percent of revenue), supply costs (about 20 percent of revenue) and facility costs (about 10 percent of revenue).2 With staffing costs making up the majority of an ASC's expenses, it is critical to benchmark the hours per case to those at other similar centers to ensure your staff is working efficiently.
Generally, multispecialty cases will entail between 13 hours to 15 hours per case and single-specialty cases will entail six to eight hours per case. This number is often translated in simple terms to approximately five full-time equivalents per 1,000 patients. To control staffing costs, it is imperative to use staff efficiently by cross-training where appropriate, being open only as many hours as cases require and, if possible, by sending staff home when they are not needed.
20. Supply costs. Supply costs, to a degree, may be reduced by use of a group purchasing organization or, in some cases, a hospital or management company partner that is able to aggregate expenses over a number of facilities and, as a result, benefit from volume pricing with vendors. When working with a GPO, assign a point person to ensure maximum savings are being achieved. "Are you actually capturing the savings your GPO is promising to deliver?" said Amy Gagliardi, vice president of supply chain with Regent Surgical Health, in a Becker's ASC Review article.
21. Supply standardization. Another common way to reduce supply costs is to implement standardization of certain common surgical supplies and reduce the use of non-essential supplies. "Standardization is critically important because we are in an era where we are getting reduced reimbursement from the government, so we have to become efficient," said Mike Lipomi, president and CEO of Surgical Management Professionals, in a Becker's ASC Review article. "We don't have the luxury to not be efficient."
These are both areas where a seasoned management company can help a surgery center to achieve greater operational efficiency. While staffing and supply costs can be modified over time, facility costs, once a lease has been signed or construction has commenced, are much more difficult to change. It is very important to obtain expert advice relative to these three cost items early and often.
Equity ownership, management and hospital ownership, allocating shares, safe harbor issues and specialty issues
22. Management and equity ownership. A group must determine whether or not it will have a management company as an equity partner. An experienced manager can help with myriad aspects of the project, such as financing, financial planning and analysis, Medicare certification, equipment planning, construction planning and physician recruitment. A good management company can significantly reduce the likelihood of problems in completing the project, operating the center, financing the project and ultimately prospering from the project. The majority of ASC management companies, 68 percent, prefer a 50 percent or less stake in a center, while 31 percent prefer a 51 percent to more than 75 percent stake, according to HealthCare Appraisers 2014 ASC Valuation Survey.4
23. Management company pros and cons. The key downside to having a management company as a long-term equity partner relates to the disparate quality of companies that provide services to ASCs and the profits that are shared when bringing in a management company. As a general rule, physician ownership alone, under the right circumstances, can be very attractive. However, having an experienced management team substantially lowers the risks, and, in the overwhelming majority of situations, can provide substantial benefits and actually improve profitability. Further, an equity owner/advisor often will have a much greater level of concern regarding the project's success, even when it owns only 15 percent to 30 percent of the center.
24. Operating agreement, management company split and partnership negotiation. Key items to negotiate with the management company include the percent of ownership, the management fee, the services provided, the personnel employed or provided, the length of the management contract, the board rights and the reserve or veto rights of the management company. The centers operating agreement defines such issues as board split, owner voting rights, eligibility requirements, non competition, redemption provisions and more. It is important to use an experienced lawyer to help draft the operating agreement.
"The biggest thing physicians want is microeconomic control," said Joe Zasa, in a Becker's ASC Review article. "How does the center operate on a day-to-day basis: hiring, firing, dividends, etc." A group should interview three to five management companies and talk extensively to other centers managed by the companies.
25. Management company fees and equity. Nearly half of ASC management companies, 48 percent, charge 5 percent of ASC net revenue as a management fee, according to the HealthCare Appraisers survey.4 In addition to a management fee, the leading management companies are increasingly requiring equity in the surgery center. Sixty-four percent of ASC management companies own equity in all freestanding companies that they manage, according to the HealthCare Appraisers survey.4 Before rejecting such an arrangement, evaluate how that management company compares to other management companies. A solid management company partner can also substantially improve the financing prospects of a center. Some finance companies will not finance an entity without an experienced management company being involved.
26. 13 questions to ask when choosing a management company. Here are nine questions to ask when deciding on a management company partner, according to a Becker's ASC Review article.
• How are services provided to the center?
• Are revenue cycle processes outsourced to the management company?
• How will the management company provide reports and benchmarking?
• Can the management company offer the ASC access to supply discounts?
• How will the company assist with payer contracting?
• How does the company fit with the ASC's long-term plan?
• How will division of ownership be handled
• Will the ASC achieve a higher per-unit equity value in the future?
• What do other physicians say about the management company?
• What percentage of ownership will the management company have?
• How much will the management fee be?
• What is the company's success rate with other centers?
• How many failures has the management company had?
27. An ASC can have too many physician investors. You can have too many physician partners. With too many physician investors, there is often a dilution of individual physician responsibility and ownership interests. With too little ownership, physician investors often lose their commitment to the ASC and look for other alternatives. Further, a great deal of resentment can develop between productive and less productive parties. Of course, with too few physician investors, the price of buying in will be greater, there will be more risk of case volume
losses, and the overall case volume of the center can suffer. The number of investors is a delicate balance that requires significant forethought and planning.
28. Selling shares to physicians. Here are 22 dos and don'ts of selling ASC shares to physician investors, according to a Becker's ASC Review article:
Dos
• Offer equal amounts of units per investor.
• Offer units at the same price per unit.
• Offer units at the then fair market value per unit.
• Provide investor with the current financial statements and not their potential revenues.
• Offer units to only physicians that will comply with the safe harbors — meet all tests and not just the one-third tests.
• Clarify that the hospital or management company partner does not generate referrals for the ASC.
• Review investors against compliance with the requirements of the safe harbors.
• An ASC may ask physicians why they choose not to use the ASC
Don'ts
• Do not offer less or more shares or a higher or lower price based on the number, volume or value of referrals a physician can generate.
• Do not reallocate shares based on the volume or value of referrals.
• Do not focus on individual distributions being tied to the number of patient referrals. Never make any indications that could lead a potential investor to believe that referrals or performance will determine an individual's "piece of the pie." Focus on overall distributions and profits.
• Physicians should not be allowed to invest based upon the fact that they can generate referrals for another physician who may use the center.
• Avoid providing physicians with estimates as to the amount of revenue that will be generated from their referrals or from another physician's referrals.
• Except as to compliance with the one-third tests, do not develop investor eligibility determinations based on the number of potential referrals. In evaluating physicians, examine compliance with all of the safe harbor criteria.
• Do not create "target lists" of physicians based on their ability to make high amounts of referrals.
• When creating target lists, avoid making notations indicating the potential number of referrals, the growth potential of the physician's practice, that a certain physician is a good target (based on referrals), etc.
• Avoid using age as an influencing factor when targeting physicians.
• Subject to non-discrimination rules, consider excluding Medicare and Medicaid referrals from any internal revenue and investment analysis.
• Do not offer remuneration or special treatment under various disguises, such as directorship contracts or discounted lease arrangements, in order to induce investors.
• Do not pressure a physician investor to shift their current referral patterns.
• Do not make any indications to investors that low-referring physicians will be pressured to withdraw.
• Do not try to avoid selling shares at fair market value.
29. Allocation of shares. As a general rule, shares cannot be allocated to physicians based on their volume or value of referrals or projected referrals nor be reallocated based on such referrals. Further in a start-up, all parties should contribute capital to the center pro rata and no owner should lend money to another owner to buy shares.
30. Single-specialty center. Single-specialty centers can be more efficiently staffed and built than multispecialty centers. Moreover, a single-specialty center avoids the turf wars and the level of concern regarding sharing profits and revenues with other specialties that are often present with multispecialty centers. However, changes in reimbursement can affect single-specialty centers more dramatically than multispecialty centers. For example, Medicare has instituted significant cuts in ASC reimbursement for gastroenterology, pain management and, to an extent, ophthalmologic procedures. These cuts can disproportionately impact a single-specialty GI or pain management ASC's overall revenue and financial health.
31. Multispecialty center. A multispecialty center can help reduce reimbursement reduction risk through a diversification of reimbursement sources and a mix of physicians. In addition, a multispecialty center can provide for greater staff and physical plant economics of scale, which may be needed if single-specialty volumes are insufficient. In many cases, the operating margins in single-specialty ASCs are much higher than multi-specialty ASCs.
32. Hospitals as partners. In many situations, a hospital can add value through either helping with managed care contracting, making it easier to recruit physicians or otherwise reducing physician concerns regarding being excluded from privileges or having other types of retaliatory action taken against them by the hospital. On the other hand, it is critical in surgery centers that physicians own a significant amount of the equity and that they remain interested and excited about the venture.
We have seen hospital partners own from 10 percent to 30 percent of the venture on the low end to 60 percent to 70 percent on the high end. There are a number of lawyers representing hospitals who believe that they must own 51 percent or more. In contrast, many lawyers believe that hospitals can own a smaller interest and either agree to treat the income as taxable income or otherwise have separate special powers to help assure that the venture serves exempt purposes. From a business perspective, having a hospital partner in many circumstances can prove helpful. However, it is not a panacea for surgery centers and there are a great number of surgery centers that have hospital partners that still underperform.
"Some hospital-physician joint ventures never survive the transition from a ‘spirit of negotiation’ to a 'spirit of partnership'," says Mr. Yerden. "Regardless of the strength of the projections (business plan), those joint ventures that I have seen fail (do so) due to lack of trust among the parties."
33. Safe harbor compliance. Most centers are started today to be safe harbor compliant or substantially safe harbor compliant. However, many centers are not fully safe harbor compliant. Here, where a center will not be fully safe harbor compliant, it is critical that the center adapt several protective steps to assure it polices against the conduct the government is concerned about.
There are strong arguments that it is appropriate to use safe harbors to redeem a physician who is not meeting the safe harbor due to the fact that the center wants to be safe harbor compliant. There are also evolving interesting arguments as to how to use the safe harbors lawfully and whether they are being used for the right purposes legally. Where not used for the right purposes, there is a risk in redeeming physicians, according to a Becker's ASC Review article.
34 Ophthalmology procedures can still be profitable. Do not make a blanket decision to exclude ophthalmology as a specialty. ASCs can still profit from ophthalmology procedures if the ASC has significant volumes and effective internal cost control; in other words, the ASC must run very efficiently.
"Most mature eye practices are already participating in surgery centers," says Ambulatory Surgical Centers of America CEO Luke Lambert. "When ophthalmologists start working in an ASC they never want to go back to the hospital, because the fast nature of eye cases plays to ASC's strengths."
35. Pain management. Pain management services are often provided in an office setting. Centers are increasingly concerned that physician investors will perform their pain management procedures in their own offices rather than in the ASC. Medicare's site-of-service differentials, which often pay more for in-office procedures, along with other incentives, may very well encourage physician investors to perform these procedures in their own offices. ASCs should plan accordingly and diversify services to accommodate a potential loss of pain management revenue. CMS has also implemented relatively large reductions in pain management reimbursement for ASCs.
In order to control the flight of pain cases from the surgery center to physician offices, it is necessary to engage in a frank conversation with pain physicians fairly early in the planning process to clarify which procedures will likely be performed in their offices versus those that will likely be performed in the surgery center. For financial planning, it is critical that both parties fully understand the expectations for these types of cases.
Notwithstanding these concerns, "Efficient pain specialists can be a pillar of strength in a successful ASC," says Mr. Lambert. However, "ASCOA recommends against inviting anesthesiologists to be owners in ASCs. We feel it is better to be the consumer and contractor of anesthesia services than to be partnered with them."
36. Gastroenterology can still be profitable. Gastroenterology accounts for the largest case load in ASCs with 27 percent of total case volume on average.3 Medicare has implemented decreased reimbursement for gastroenterology procedures performed in an ASC. This can hurt an ASC because GI/endoscopy centers typically rely on Medicare for about 20 percent to 40 percent of their cases. Fortunately, because these centers still generate from 60 percent to 80 percent of their gastroenterology business from outside Medicare, the specialty can still be profitable if they have significant volumes and the non-Medicare business continues to grow. "This is a specialty characterized by high volumes," says Mr. Lambert. "ASCs are important to enhancing productivity. Profits per case are low and declining but given sufficient volume it can be attractive."
37. GI and anesthesia. Gastroenterologists will increasingly have to minor in anesthesiology. Increasingly, payers will not pay physicians separately for anesthesia procedures provided in connection with gastroenterology procedures. Thus, increasingly gastroenterologists must be competent at offering all types of anesthesia procedures.
38. Plastics. In multispecialty surgery centers, plastics, particularly cosmetic procedures, often are very challenging. Here, the physician often bills globally, and the ASC and the physician are adverse to each other in that the ASC must negotiate its rates with the surgeon as opposed to charging a third-party payer."Cosmetic plastic surgery is not of benefit to most surgery centers as the facility fees paid tend to be too low for these lengthy cases," says Mr. Lambert.
39. Bariatrics is booming, but don't count on it as a long-term profit center. Bariatric procedures are growing rapidly and increasingly being performed in ASCs. Initially, ASCs will earn outsized profits from these procedures. However, as the number of bariatric providers increases and price competition evolves, the prices on these procedures will eventually normalize and become less profitable. For this reason, and because substantial concerns remain regarding the safety and risks related to bariatric programs, ASCs should use caution and proceed conservatively when developing bariatric programs.
40. Lasik. Lasik surgery, for reasons akin to why plastic surgery is problematic, is often best left to physician practices.
41. Spine. Spine procedures are also increasingly performed at ASCs as well; they remain popular and are growing in importanceSpine procedures can be increasingly performed in ASCs and are likely to remain good specialties for ASCs for a substantial period of time to come. In the best situation, the center has a base of cases from both specialties.
Despite the promise it offers, before you invest in spine services, it is important to consider the costs involved.
"Spine service costs up to $360,000 to set up; $80,000 for microscope, $80,000 for trays, $120,000 for c-arm and perhaps a Jackson table for $80,000," says Tom Mallon, CEO of Regent Surgical Health. "This should not be taken on frivolously. However, if the surgeon uses loops instead of a microscope and if you have a c-arm, the entry cost is much less: $160,000. Spine often cannot be performed on contracted patients. So in order for you to begin even a small program (five cases per month) you need at least some out-of-network patients. However, the surgeon will love the efficiency and the patients will love the facility. This will grow over time and as payers recognize the benefits, we will be able to negotiate reasonable reimbursements."
42. Orthopedics. Orthopedic procedures remain great procedures for ASCs. "How well you do with orthopedics depends a great deal on how successful you are in negotiating payer contracts," says Mr. Lambert. "Medicare's new fee schedule phase-in is making it possible to cover costs and setting a reference point that is helpful when negotiating with other payers."
On the high end, revenue per orthopedic case can be $3,520 and $1,880 on the low end, according to Avanza Healthcare Strategies.6
"One of the biggest things that needs to be considered to maintain a profitable ASC is the ability to analyze your true costs for every single case, which includes what type and how many implants are being used. You need to contain those costs," said orthopedic surgeon Michael Redler, MD, of The Orthopaedic & Sports Medicine Center in Trumball, Conn., in a Becker's ASC Review article.
43. ENT continues to be strong. Ear, nose and throat procedures continue to be a strong specialty for surgery centers. This specialty continues to be reimbursed reasonably well in many markets. As a result, says Mr. Lambert, "We see ENT as an attractive specialty if the cases in your area are not overly dependent on Medicaid. Special considerations for this specialty include requiring skilled pediatric anesthesia and having a private recovery area for children."
44. Urology. Urology can increasingly also be a real plus for ASCs. "Many procedures are short and can pay well on a time of utilization basis, of those that are longer some reimburse well," says Herb Riemenschneider, MD, founder of Knightsbridge Surgical Center. He notes that the longer procedures for urinary tract stone disease (such as extracorporal shock wave lithotripsy and ureteroscopic stone work with laser), urinary prosthetics (penile prostheses and artificial urinary sphincter), prosthetic slings for treatment of female incontinence, and the most recent addition of cryoablation for treatment of prostate cancer, have "big potential if done correctly."
"Urology can be profitable when it involves lithotripsy and female incontinence surgery," says Mr. Mallon. "Both are predominantly commercial populations. Serving Medicare men with prostate cancer can often be break-even at best."
Some ASCs are finding benefits of building a center around urology.
"The surgery center has allowed our urologists to remain more efficient doing outpatient surgery than they could be by performing the same procedures in an outpatient hospital setting," says Bill Monnig, the president of a large urology group. "The single-specialty designation allows us to gain maximum benefit of the special endoscopic equipment that urologic surgery requires and, therefore, may be more financially advantageous than a multispecialty center where this equipment may not be used as much. Our surgery center also gives us an opportunity to dovetail other ancillary services such as CT scanning, urodynamics, pathology lab, clinical lab, research programs, office-based minimally-invasive prostate surgery and clinical research programs into adjacent facilities. The number of and type of procedures that we can perform in the surgery center continues to grow each year."
More building and start-up issues
45. Do not overspend on real estate. Physicians planning centers should purchase property that is cost-appropriate. Normally, a second- or third-tier commercial property that is level, safe and accessible to your physicians and patients and has easy parking will be sufficient. Make sure that the less expensive land will not ultimately cost you more due to unknown variables. If a property has a lack of utilities, set-backs or zoning restrictions, it may ultimately cost more.
46. ASC site experts. A site should be evaluated by an experienced ASC architect to ensure that it can meet the ASC's requirements. This includes performing a thorough analysis of state and municipal codes and regulations in regards to health and zoning issues prior to purchasing the land. Do not assume, for example, that a space used for an ASC in the past is automatically qualified to fit your needs. In many cases, existing structures may not meet standard coding requirements and a change in ownership or management of the facility will trigger a need to update it to current specifications.
47. ASC site visibility. A visible, expensive parcel is often an unnecessary cost. It is not important that the ASC be visible in order to attract drive-by or foot traffic. This is significant because premier commercial lots can cost considerably more than otherwise equally appropriate, yet less visible, lots.
48. Do not overbuild. A building should meet the group's volume and specialty needs, as well as the financial parameters. The space plan should be integrated with your staffing and equipment plans. Knowing your case numbers, how many technicians, nurses, schedulers, business office and administrative staff and other staff you will need, as well as your equipment requirements, should drive your space needs.
49. Lease or build from the ground-up. A center does not need more than one operating room per 1,000 to 1,500 cases. A typical two-room ASC can be built in 7,000 to 8,000 square feet. An average size ASC is approximately 13,000 square feet. VMG Health's report3 also indicates that the median ASC includes four operating rooms and two procedure rooms. Centers can be leased from a third party or built from the ground up. Often, it is quicker and less expensive to lease space and operate as a tenant.
"We prefer to lease our ASCs' real estate because we lease without personal guarantees and avoid having to put cash/equity into real estate," says Mr. Lambert. "Surgery centers, if conceived and managed properly, can offer returns that are superior to that of the typical ASC real estate investment."
The disadvantage to this approach is that one does not ultimately own the real property nor completely control the project. At the same time, the long-term capital costs can be substantially lower.
50. Lease or own the real estate. "Many physician-owners of new ASCs lease the space for the ASC. By doing so they are missing a significant profit opportunity. Just like your house, why pay rent when you can own and enjoy the value you are creating in the real estate. The ASC real estate will be valued-based on the rent. Just as your ASC business will be worth a multiple of the profit, the ASC real estate will be valued as a multiple of the rent you pay yourself," says Jon Vick, founder and president of ASCs Inc. "If you own the ASC real estate and pay yourself a market rate rent ($25 to $30 a square foot, per year) you will find that the real estate will be worth a multiple of what you paid for it. This is an opportunity that many ASC owners miss if they lease the ASC space rather than buy the real estate."
51. Equipment budget and planning. When developing a center, you have to decide whether or not to use an equipment planner. The argument for using equipment planning is that it costs approximately $200,000 to $500,000 per OR to set up the OR. This will be one of the largest expenses you have at a surgery center. Thus, the argument is that you use an expert to help you do it, help save costs and plan more efficiently and coordinate better through design, development and construction. The counter argument is that either a center can do it itself or it could use a management or development company to do it as well. In fact, many people resent the concept of using a management or development company and then, on top of that, having to use an equipment planner. Further, there are situations where the equipment planning firm may have such close ties with industry (equipment manufacturers) that using an equipment planner might not get you some of the benefits that you expected to get from the process.
Vendors within the industry are beginning to offer ASCs financial solutions to manage the costs of new equipment. "Financial solutions used to be an afterthought, but now this is the first thought. You must have an economical way to acquire needed equipment," said Tom Sakovits, Director of Financial Services, Endoscopy Division FUJIFILM Medical Systems U.S.A., in a Becker's ASC Review report. "On the financial services side, the industry is transforming itself because it needs to."
52. IT, fluid management and anesthesia. Early in the design process, an ASC should examine how information technology systems, fluid management systems and anesthesia systems will be incorporated into design. For example, as to fluid waste management, Bill Merkle of MD Technologies notes:
"ASC design should consider fluid waste management since disposal systems require plumbing, drains and medical gas piping most easily installed during construction or remodeling. Procedure room layout should address fluid management to assure that utilities and piping are conveniently located near the patient bed as well as near medical equipment (such as an endoscopy cart with light source). System size and floor space requirements should be assessed, particularly if suctioned fluid must be transported to disposal sites. Today, most (about 80 percent) fluid management costs is for canisters, with remaining cost for waste disposal. Tremendous cost savings can be realized if both costs are eliminated. Advance planning can improve room efficiency, reduce turnaround time and minimize fluid management costs."
Leadership, licensure, technology, recruitment and more
53. Accreditation. Many states require ASCs to be licensed. In addition, ASCs should attempt to become accredited by the Joint Commission, Accreditation Association for Ambulatory Healthcare or another reputable accrediting agency such as the American Association for Accreditation of Ambulatory Surgery Facilities. Accreditation often lets ASCs be deemed Medicare-certified, to serve certain payers and to measure their services and performance against national recognized standards, thereby helping them to improve the quality of their care. The top areas AAAHC7 found ASCs to be non-compliant or partially non-compliant:
• 2.I.B.11.g (Approving and ensuring compliance of all major contracts or arrangements affecting medical care provided): 40 percent
• 8.A.2 (Organization provides evidence of compliance with applicable state and local fire prevention regulations): 30 percent
• 11.L (Organization identified and maintains a current list of look-alike or sound-alike medications): 11 percent
• 9.R (Education and training in recognition and treatment of malignant hyperthermia): 10 percent
• 12.I.D (Organization has policy in place that ensures test results are reviewed appropriately by ordering physician or another privileged provider): 10 percent
• 10.I.D (Appropriate and current health history must be added to patients' clinical records within 30 days prior to scheduled procedure): 10 percent
54. State licensure. Speak with your state health department early on in your development process to learn your state's ASC licensing requirements as each state is different. In all cases, you will want to speak with them very early in the process to access state requirements and processes, and to help avoid unexpected delays in licensure requirements. "Be sure to use a consultant who has a proven track record in managing through this process. Each state is unique — hire someone who is well versed in the state licensure process," says Marcy Sasso, CASC, co-chair and founder of the Surgery Center Coalition and director ASC consulting company Sasso Consulting.
55. Hire strong leadership. High-quality management is critical to an ASC's success. Many management companies offer superior services. However, many are of little value. All management companies are not equal. For this reason, it is important to work with an experienced management company that has a proven track record of successes. Working with a low-quality, inexperienced company will do more harm than good. "The first step is to hire an experienced consultant or company that will direct/manage the project. Large ASC management companies can be an easy option but small management companies or experienced consultants can be a strong viable option and a long term cost effective solution. ASC owners must do their homework before selecting an ASC management company. An inexperienced individual can delay an ASC opening by months," says Ms. Sasso.
56. Administrator and DON. You will need to start by hiring an administrator and director of nursing. It is far better to overpay the employee a bit to hire outstanding help as a great staff is crucial to an efficient and profitable ASC. You need not necessarily employ your staff full-time. However, you are best off paying your staff well and attempting to obtain the highest quality staff — even if highly paid on an hourly basis. It is also critical that you treat the staff extremely well so that you are able to recruit and retain the best possible staff. Finding and retaining an experienced and competent staff can prove challenging.
Registered nurses can make superior administrators. Experienced RNs often make great ASC administrators. The RN must study and be interested in the business side of ASCs. Generally, RNs are trained to be disciplined and dedicated workers; a work ethic that carries over to the administrator position. As such, RNs are often vibrant and willing to contribute in many ways to improve the surgery center. An administrator should typically be hired four to six months before a center intends to become operational.
57. Wages and salary. Typical wages and salary for ASC administrators and staff 3:
• Nurse staff: $33.24 per hour
• Tech staff: $21.03 per hour
• Administrative staff: $22.91 per hour
• Administrator: $108,014 per year
58. Typical problems for surgery centers. The number one problem for most ASCs is the inability to effectively recruit the right number of physicians and cases or the inability to obtain appropriate commitments from their physician partners. The most successful centers are increasingly built around a core group of physicians. This approach lessens certain risks related to the center and clarifies the level of physician commitment.
59. Shallow physician pool. Over time, an evolving risk in many markets relates to the actual number of independent physicians available for recruitment.
Here is what different types of physicians think about hospital integration, according to the Deloitte's Physician Perspectives Survey5:
• 73 percent of surgical specialists feel they are likely or very likely to integrate
• 71 percent of primary care physicians feel they are likely or very likely to integrate
• 71 percent of other physicians feel they are likely or very likely to integrate
• 61 percent of non-surgical specialists feel they are likely or very likely to integrate
60. Physician recruitment tactics. To successfully recruit physicians into ASCs, Surgical Care Affiliates' Winborne Macphail recommended in a Becker's ASC Review article that leadership teams implement the following action items to ensure success:
1. Perform a market assessment to identify all surgeons in their market and their affiliations.
2. Develop a recruitment plan by dedicating time with their leadership team to determine service and specialty offerings and create a profile for what their facility's "ideal" physician might look like.
3. Perform due diligence on their physician prospect list by utilizing their facility team and current physicians to narrow the list to those most suited for their facility and seek ways to gain warm introductions.
4. Develop a value statement for each introduction that is customized to each physician and focused on why they should consider your facility.
61. Overestimating necessary staff and space. A second set of core risks includes overstaffing an ASC and building a facility that is too big. The desire of partners to have the latest and greatest technology and equipment can quickly kill a budget. It is often useful to have third-party input in these decisions to help inject some rational, efficiency-minded thought into the process.
62. ASC failure. Despite their growth throughout the country a substantial number of ASCs still fail; between 2007 and 2012 there were 514 exiting Medicare-certified ASCs, according to MedPAC data2. The failures occur mostly due to bad management, low-volume of cases, poor reimbursement or overbuilding. Knowing the risks involved in developing an ASC can help to ensure that your ASC will prosper and not fail. Working with experienced managers in developing a center can also help prevent failures.
63. Cost containment challenges. Many centers also face significant risks related to reimbursement, managed care exclusion, poor billing and collection practices and failing to contain supply and equipment costs. In essence, because the reimbursement for procedures is becoming less predictable, there is an extensive need to assure that the project is well-managed and well-thought out. A failure to do either of these can lead to significant financial problems for the entity. Four top areas of ASC cost containment, according to a Becker's ASC Review article, include:
• Supply chain management
• Schedulcing
• Office supplies
• Waste elimination
One of keys to understanding and controlling ASC expenses is case costing. "If you don't know what it costs to do a case, you don't know if you're making money or if your payer contracts are covering the cost of doing the case. It allows the administrator to control supply and staff costs and to make the center as efficient as possible," said Ann B. Geier, MS, RN, CNOR, CASC, vice president, clinical informatics and surgery at SourceMedical, in a Becker's ASC Review article.
64. Turnarounds. "You must change the thinking of the partners and staff," says Mr. Mallon. "They need to be open to doing things differently. True insanity is doing the same thing over and over and expecting different results. We must understand how we make money and how we lose it. Every center has losing cases, but they must be performed judiciously. Do a losing case in a lineup of profitable cases — that is OK. Do losing cases that have small supply costs and no implant — that is OK. Avoid high-cost implants and surgeons who only bring losing cases based on fully loaded cost analysis."
65. Advisors, management, architects, builders and lawyers. Given that more than 5,500 ASCs now exist, we strongly advise that ASCs utilize experienced advisors. "The development of an ASC is a very complex, time consuming project and many costly mistakes can be made along the way, from design to construction, from certification to personnel to operations to contracting, etc. It is far less expensive and time consuming to hire experts to guide you through the minefield of developing a new ASC," says Mr. Vick. "Lots of very smart people think they can do everything better than anyone else. Developing an ASC isn't brain surgery, but why reinvent the wheel when there are lots of people who have made the mistakes and learned from them and are willing to help you avoid the same mistakes."
66. Establish MIS systems early. An ASC should establish its management information system and other operational systems, such as billing, materials management and marketing. You should set up your MIS as early as three months prior to your ASC's opening. The MIS is a critical part of an ASC’s organizational backbone and can support the effective management of the ASC. If established early and populated with appropriate information, upon opening, your clinicians, front office and management will have immediate efficiencies scheduling surgeries, billing, performing collections, case-costing and taking inventory, among many other tasks.
Issues to take into account when establishing a MIS include:
• Projected case volume
• Inventory management
• Staffing
• Financial management
67. Clinical MIS concerns. "As for the clinical side, an MIS may assist the clinician in delivering care with things such as patient health information, prior surgical interventions, pre-existing conditions, allergies and current medications; all this to optimize patient outcomes and reduce risk," says Mauro Cecchetti, an administrator with Constitution Surgery Centers.
"However, the MIS is not the final answer, finding the balance between a good implemented system and a valuable management team executing the mission of the healthcare facility is the true answer," he says.
68. Billing system. Billing is an essential ASC function."At a new center without a management company partner, I would start building the billing system no later than four months before going live, but ideally the process would begin six months out," says Michael Orseno, director of revenue cycle with Regent Surgical Health. "The cost of training and implementation usually runs between $5,000 and $10,000 for a cloud-based model, but if an ASC plans to buy a server the cost can run into the tens of thousands."
69. In-house vs. outsourced billing. Depending on the ASC, outsourced billing may make more sense than an in-house system. "In high-cost real estate markets, such as New York City or San Francisco, ASC owners may not want to devote space to a business office; outsourcing makes sense," says Mr. Orseno. "If there is a shallow talent pool, then yes absolutely outsourcing makes sense."
70. EMR. Though not all ASCs have adopted EMR, a new center that chooses that route must prepared for associated time and costs. Start building the EMR and office system around four to six months before opening the center and include information such as:
• Preoperative order sets
• Postoperative order sets
• Operative notes
• Physician preference cards
"Once you have all that, it will make customizing your record much easier and more efficient," Kerri Ubaldi, RN, MBA, CPHRM, vice president of operations for Merritt Healthcare. The beauty of the system, however, is that you can develop it over time if your timeline is shorter for implementation. As you onboard the staff, it is an excellent tool to teach the staff the workings of the system when they enter the customizations themselves."
71. EMR cost. EMR typically cost around $100,000 for a three-room, multispecialty center. This estimate includes the system and hardware cost. Total costs are variable depending on the center's specialties, number of operating rooms and the type of hardware implemented.
Foot notes
1 VMG Health. "2012 ambulatory surgical center financial & operational benchmarking study. 2012. Available online here: http://www.vmghealth.com/
2 MedPAC. "Ambulatory surgical center services." 2014. Available online here: http://www.medpac.gov/documents/reports/mar14_ch05.pdf?sfvrsn=0
3 VMG Health. "2011 Mulit-Specialty ASC Intellimarker report. 2011. Available online here: http://www.vmghealth.com/publications/
4 HealthCare Appraisers. 2014 ASC Valuation Survey. 2014. Available online here: http://www.healthcareappraisers.com/ASC_Survey.html
5 Deloitte. "Deloitte 2013 survey of U.S. physicians: Physician perspectives about healthcare reform and the future of the medical profession." 2013. Available online here: http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Documents/us_chs_2013SurveyofUSPhysicians_031813.pdf
6 Avanza Healthcare Strategies. "Operational benchmarks: Ambulatory surgery centers." 2014. Available online here: http://avanzastrategies.com/asc-benchmarks/
7 AAAHC. "AAAHC AENEID report 2013." 2013. Available online at: http://www.aaahc.org/Global/pdfs/AAAHC%20Institute%20content/aaahc_aeneid_report_FINAL.pdf