We received a call in the summer of 2007 from a former client in a CON state who had invested in a surgery center. Here's a short profile of the center:
The multi-specialty ASC was performing approximately 10,000 cases per year.
The specialty mix consisted primarily of orthopedics, otolaryngology, pain management and endoscopy.
The payor contracts focusing heavily on Blue Cross and commercial carriers.
The center had moved to a new location earlier in the year in order to handle the expansion of its business and higher volumes.
The administrator had recently left the center, while it was posting a significant loss, nearly bankrupt, and had not paid dividends in two years.
The bank was considering foreclosing on the centers loans.
How could a center of this size and volume be losing money? I agreed to fly to the center at the request of the surgery centers governing body to assess the situation. Here are the steps taken for one of the most remarkable turnarounds I've been involved in.
Element 1: The Diagnostic
The first thing you must do is perform a financial diagnostic and benchmark against other centers to identify areas of concern. This means gathering financial and operational information including a staffing analysis, inventory analysis, and collection and accounts receivable reports.
We used this data to benchmark the center against similar surgery centers using our database as well as other widely available benchmark information. The results were surprising: Staffing and supply costs were excellent, and well within acceptable standards.
However, we did find several issues:
1. Revenue per case was very low based on the mix of cases and the payor mix.
2. Accounts receivable were not accurate because the center was transitioning from cash accounting to accrual accounting.
3. Expenses in certain categories looked very high (more detail would be needed to determine what, if any, rationale was behind this).
4. The center was unable to determine its accounts payable situation since it did not keep a traditional general ledger, but rather used an unusual accounting system that only the former administrator understood.
5. With the centers current debt, it would be unable to pay dividends with current bank loan covenants in place.
Element 2: The On-Site Assessment
You cannot run a surgery center from a spreadsheet alone. You must meet with the staff, physicians and those in management positions to understand the issues impacting the center; you must conduct physician interviews to obtain feedback on the staff and their impressions of the center. As you undertake these tasks, focus on assessing the following areas:
Business office functions collections, billing, coding, cash management, accounts payable, fee schedule, payer contracts, staff understanding of the MIS system.
Clinical functions inventory, turnaround times, policies and procedures, staffing, and adherence to a sound quality assurance and risk management program.
Accounting and financial reporting general ledger system utilization, presentation of the financials and physician understanding.
Legal and operations structure identifying structure used and completing updates as needed.
On-site managers abilities of the nursing director and the business office manager.
In our case study, we already knew that inventory and staffing levels were good. Over the course of the site visit, we also realized that staff and management were excellent and had firm grasps on the fundamentals of their jobs.
However, the center lacked administrative leadership and direction, and as a result, bickering amongst the physicians was rampant. The former administrator had not paid bills (the facility had no cash to do so), resulting in vendors' placing accounts on hold, and had not funded the 401(k). The Internal Revenue Service intended to assess penalties and audit the surgery center.
In the business office, we noted several critical problems. First, the center's contracts with the two largest payors paid for initial procedures only and no multiple procedures (especially difficult because the center performs a high volume of ENT and orthopedic cases). This was the source of the revenue-per-case problem. Second, the facility did not have sufficient staff to work collections and denials. Third, payor contracts were not loaded into the coding and billing system, making it difficult for the staff to have a good handle on accounts receivable. Fourth, the center did not collect all co-insurance before surgery. Finally, according to the general ledger system invoices were logged but not released for payment by the former administrator.
Element 3: The Analysis
Perform a line-item analysis of all expenses. In our case study, because the accounting was in a flux and the investors did not receive actual financial statements, accurate numbers became a challenge. Nevertheless, a line item analysis of all expenses was performed. Several areas were identified where the center could avail itself to savings (these will be covered in the next section).
Element 4: The Plan
Based on the aforementioned elements, a 14-step plan of action was developed and executed.
1. Managed care. Key managed care contracts were re-negotiated to include multiple procedures and implant costs. This took about six months, and the impact is just beginning to be felt. Unless a patient qualifies as a charity care patient, the center has ceased performing cases for which expenses exceed reimbursement.
2. Collections. A front-desk collection policy has been adopted and is charted each day. In addition, a full-time collector was hired to aid this process. Front-desk collections increased from an average of $7,200 per month to $41,250 per month. Payor contracts were loaded into the MIS system and denials and follow-ups from insurance are tracked daily. Weekly reporting, monthly reporting and, in some instances, daily reporting to our firm was initiated to track collections.
3. Coding. We performed a coding audit for compliance purposes, identified a few areas of improvement and implemented an action plan to address them.
4. Accounts payable and general ledger. A more efficient general ledger system was purchased and the staff was trained. Invoices are entered daily and accounts payable run bi-monthly.
5. Fee schedule. The fee schedule had not been updated since 1999, so a new one was adopted that better reflects charges in the community. A new cosmetic fee schedule was also adopted.
6. Employees and bonus program. Before our arrival, employees were guaranteed 40 hours per week regardless of whether they worked all of them. This policy was discontinued and a bonus program was adopted to allow employee participation in the center's success.
7. Supplies. The surgery center received deeper discounting on drug supplies by affiliating with our firm, generating significant savings.
8. Accounting. The center moved to accrual accounting and prescribed closing and reporting standards, as well as hiring a healthcare accounting firm to provide monthly financials.
9. Regular reporting. On a monthly basis, the investors receive a balance sheet, statement of cash flows and an income statement along with a benchmark analysis and management report. By keeping them aware of happenings at the center, shareholders can better understand its fiscal health. The updates also engender loyalty to the center as the investors are informed of decisions and operational and financial items.
10. Expense control. Significant decreases in monthly overhead for the center were realized after we implemented action plans for several areas that needed improvement, including renegotiation of insurance policies to expand coverage, at a lower rate; reduction of legal and accounting expenses; and reduction of other general and administrative expenses.
11. Bank debt and raising of equity. The surgery center raised equity and used the proceeds to reduce its debt. The terms of the bank debt were renegotiated to more favorable terms, debt guarantees were lifted, and the covenants were negotiated to give the center a clear path to declaring dividends when its fiscal health improved.
12. Employee matters. The center hired a human resources company, which drafted an updated employee handbook and conducted in-services with employees on risk management items.
13. Legal matters. The surgery center had not changed or adopted its bylaws in several years. As new investors purchased shares, the subscription agreements reflected different terms and conditions. At the direction of the new management team, the center engaged McGuireWoods to draft updated bylaws that reflect the current regulatory environment.
14. Equity offering. At our behest, the facility raised additional equity from new and existing shareholders. The proceeds were earmarked to reduce debt, and the infusion of equity became a condition precedent to the renegotiation of the loan with the bank on much more favorable terms.
Element 5: The Result
On Aug. 13, nine-and-a-half months after the center was on the verge of bankruptcy, it declared a substantial dividend to the investors and a bonus to the staff. To date, this is the largest one-time dividend ever declared by a Woodrum/ASD center. Certainly, this story is especially dramatic due to the size of the center (10,000 cases per year). However, the keys to success are always the same.
Successful surgery centers are collaborative efforts between the surgeons, anesthesia, staff, on-site administration and management. At this center, administration was a problem, resulting in lack of leadership and clear direction. Eventually, the physicians became disgruntled and began to disagree among themselves, and the collaborative balance was upset.
The elements of the turnaround always center on the basics of ASC operations (quality of care; attracting and retaining good staff; turnaround times; inventory management; controls on supply and staffing costs; billing, coding, and collecting procedures; proper pricing; payables systems; effective accounting; and many other items beyond the scope of this article). However, healthcare is a people business, and installing effective and competent leadership let the center come back into balance by giving it clear direction and purpose.
Mr. Zasa (joezasa@woodrumasd.com) is the co-founder and managing partner of Woodrum/Ambulatory Systems Development, one of the oldest continually operating ASC development and management companies in the United States. It currently manages 25 ASCs with a focus on surgery center turnarounds and hospital/physician joint-ventures. He can be reached at (214) 369-2996. Learn more about Woodrum/ASD.