Note: Part 1 of “Establishing an Ambulatory Surgery Center — A Primer From A to Z” appeared in the May/June issue of Becker’s ASC Review. You can find the complete article online at www.BeckersASC.com.
Equity ownership, physician partner issues and hospitals and management companies as partners (continued)
4. Hospitals as partners.
Approximately 25 percent of ASCs in the country have a hospital partner. In many situations, a hospital can add value by 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 for 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 10-30 percent of the venture on the low end to 60-70 percent on the high end. A number of lawyers representing hospitals believe that physicians have to 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 ensure that the venture serves exempt purposes. From a business perspective, having a hospital partner has been helpful in many circumstances. However, it is not a panacea for surgery centers, and there are a great number of surgery centers that have hospital partners that still under-perform.
“Some hospital-physician joint ventures never survive the transition form a ‘spirit of negotiation’ to a ‘spirit of partnership,’” says Tom Yerden, CEO of TRY Healthcare solutions. “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.” Mr. Ellison believes that physician-hospital joint ventures can create a significant competitive advantage for surgery centers if structured properly and done for the right reasons. “It is critical that regardless of the level of hospital ownership, ASCs should be physician-led businesses,” he says. “Legal frameworks exist for this to happen in a way where the physicians still feel that they have control over their future.”
5. 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.
According to Luke Lambert, CEO of the Ambulatory Surgical Centers of America, most ma-ture eye practice are already participating in ASCs, noting that the quick nature of most eye cases play to the strengths of surgery centers. “When ophthalmologists start working in an ASC they never want to go back to the hospital,” he says.
According to the 2009 HealthCare Appraisers Surgery Center Valuation Survey, 89 percent of respondents believe that ophthalmology is a desirable specialty to have at an ASC. Ann Deters, from the cataract division of Vantage Outsourcing, suggests several reasons why this is so.
“Ophthalmic procedures represent steady caseloads, consistent revenue and added profits to a center,” she says. “Plus, these cases don’t fluctuate with the economy, like elective specialties. At the same time, the majority of ophthalmic cases are cataract procedures, which are low-risk surgeries.” In addition, she says that ophthalmology increases the surgeon-user base at an ASC and can increase the number of physician investors for a surgery center.
“Senior citizens have proven to be a great marketing tool for a surgery center [with an ophthalmology specialty],” Ms. Deters says. “Minimizing travel time for senior citizens and their families is a ‘plus’ and much appreciated by [this] population.”
6. Pain management and anesthesiologists.
Centers are increasingly concerned that physician-investors will perform their pain management procedures in their own offices rather than at the ASC. Medicare’s site-of-service differentials, which often pay more for in-office procedures (along with other incentives), may very well encourage this practice. ASCs should plan accordingly and diversify their 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, he does advise 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,” he says.
7. Gastroenterology can still be profitable.
In a 2006 study, gastroenterology was the largest surgical specialty, representing 25 percent of all surgical cases performed at ASCs. Medicare has implemented decreased reimbursement for gastroenterology procedures performed in an ASC. This can hurt an ASC because gastroenterology/endoscopy centers typically rely on Medicare for about 20-40 percent of their cases. Fortunately, because these centers still generate 60-80 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.”
Gastroenterologists will increasingly have to minor in anesthesiology. Increasingly, payors will not pay physicians separately for anesthesia procedures provided in connection with gastroenterology procedures. Thus, gastroenterologists should be competent at offering all types of anesthesia procedures.
8. Plastics.
In multi-specialty 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 payor.
9. Bariatrics are booming, but do not count on bariatrics as a long-term profit center.
Bariatric procedures are growing rapidly and are increasingly 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 be conservative when developing bariatric programs.
Thomas Michaud, chairman and CEO of Foundation Surgery Affiliates, notes the “patient acquisition” syndrome he sees as a common trend in bariatrics. “Many bariatric surgical patients come from ‘obesity programs’ that include seminars, continuing education, postsurgical support, etc.,” he says. “Many of these programs, which are very costly to operate, are sponsored by hospitals, and the hospitals are not likely to let their surgical candidates leave ‘their program’ to have surgery performed elsewhere without effort to retain these patients in ‘their program.’”
10. Lasik.
Lasik surgery, for reasons akin to why plastic surgery is problematic, is often best left to practices.
11. Orthopedic procedures remain great procedures for ASCs.
“How well you do with orthopedics depends — to a great deal — on how successful you are in negotiating payor contracts,” says Mr. Lambert. “Medicare’s new fee schedule phase-in is making it possible cover costs and setting a reference point that is helpful when negotiating with other payors.”
12. Neurosurgery and spine.
Spine procedures are increasingly performed at ASCs and remain a popular and growing specialty for ASCs. Orthopedics profits from the new CMS surgery center rates. These are likely to remain good specialties for ASCs for a substantial period of time. In the best situation, the center has a base of cases from both specialties.
Despite the promise of these specialties, it is important to consider the costs.
“Spine service costs up to $360,000 to set up,” says Tom Mallon, CEO of Regent Surgical Health. He says that it can cost $80,000 for microscopes, $80,000 for trays, $120,000 for a C-arm and $80,000 for a Jackson table, and he says that costs 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, [around] $160,000,” he says.
In addition, Mr. Mallon mentions some caveats in this specialty. “Spine often cannot be performed on contracted patients,” he says. “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 payors recognize the benefits, you will be able to negotiate reasonable reimbursements.”
13. 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.
“We see ENT as an attractive specialty if the cases in your area are not overly dependent on Medicaid,” says Mr. Lambert. “Special considerations for this specialty include requiring skilled pediatric anesthesia and having a private recovery area for children.”
14. Urology.
Urology can be a profitable specialty for ASCs.
Dr. Herb Riemenschneider, founder of Knightsbridge Surgical Center says, “Many procedures are short and can pay well on a time of utilization basis. Of those that are longer, some reimburse well.” He notes that longer procedures, for urinary tract stone disease (such as extra corporal shock wave lithotripsy and ureteroscopic stone work with laser), urinary prosthetics (such as penile prosthesis and artificial urinary sphincter), prosthetic slings for treatment of female incontinence and most recently, cryoablation for the treatment of prostate cancer, have the most potential if they are performed correctly.
“Urology can be profitable when it involves lithotripsy and female incontinence surgery,” Mr. Mallon says. Both are predominantly commercial populations. Serving Medicare men with prostate cancer can often be break even at best.”
“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 multi-specialty center where this equipment may not be used as much.” He also notes that the number and type of procedures that can be performed at a surgery center continues to grow yearly.
Building issues
1. Do not overspend on real estate.
Physicians planning centers should purchase property that is cost appropriate. Normally, a secondor third-tier commercial property that is level, safe, 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 setbacks, zoning restrictions or a lack of utilities, it may ultimately cost more in the long term. 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 that has been used previously as an ASC is automatically qualified to fit your needs. In many cases, existing structures may not be up to standard code, and a change in ownership or management of the facility will trigger a need to update it to current specifications.
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.
2. 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 and your equipment requirements should determine your space needs.
3. Lease or build from the ground up; lease or own the real estate.
A center needs one operating room per every 1,000-1,500 cases. A typical two-room ASC can be built in 7,000-8,000 square feet. An average size ASC is approximately 14,000 square feet. VMG Health’s Intellimarker 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. On average, rental rates are approximately $28 per square foot each year. 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.
Mr. Lambert says that leasing is preferable because it is possible to lease without personal guarantees and to avoid putting cash or equity into real estate. “Surgery centers, if conceived and managed properly, can offer returns that are superior to that of the typical ASC real estate investment,” he says.
4. Equipment budget and planning.
As you develop a center, you have to decide whether or not you are going to use an equipment planner. It costs approximately $200,000-$500,000 to set up a single operating room and is one of the largest expenses at the surgery center. Employing an expert can help you save costs, plan more efficiently and coordinate better through design, development and construction. However, a center may be able to do this on its own or it could use a management or development company. In fact, many people resent the extra cost of using an equipment planner coupled with management fees. Further, there are situations where the equipment planning firm may have such close ties with equipment manufacturers that using an equipment planner might not get you some of the benefits that you expected to get from the process.
5. Other building issues.
Early in the design process, an ASC should examine how information technology systems, fluid management systems and anesthesia systems will be incorporated into the design. Bill Merkle of MD Technologies says there are a number of factors to consider with fluid management systems.
“ASC design should consider fluid waste management, since disposal systems require plumbing, drains and medical gas piping most easily installed during construction or remodeling,” he says. “Procedure room layout should address fluid management to ensure 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 (around 80 percent) fluid management costs are for canisters, with the 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.”
Miscellaneous
1. Accreditation and state licensure.
Many surgery centers are statelicensed, Medicare-certified and accredited. For example, in 2005, more than 4,500 of 6,000 ASCs in the United States were Medicare-certified. Many states require ASCs to be licensed. In addition, ASCs should attempt to become accredited by the Joint Commission, the AAAHC or another reputable accrediting agency such as the AAAASF. Accreditation often enables ASCs to be deemed Medicare-certified, to serve certain payors and to measure their services and performance against national recognized standards, thereby helping them to improve the quality of their care.
Speak with your state health department early on in your development process. Each state has different ASC licensing requirements. In all cases, you will want to speak with them very early on to access state requirements and processes, and to help avoid unexpected delays in licensure requirements.
2. Hire strong leadership.
High-quality management is critical to an ASC’s success. All management companies are not equal. Many management companies offer superior services; however, many are of little value. For this reason, it is important to work with an experienced management company that has a proven track record of success. Working with a lowquality, inexperienced company will do more harm than good. You will need to start by hiring an administrator and director of nursing.
Greg Zoch, a partner with Kaye/Bassman, says that hiring top-rate leadership is critical to setting up a new ASC for success. “Leadership (administrators and clinical directors) will attract (or repel) great staff, manage the budget, negotiate payor and vendor contracts, manage inventory, mange staff, build the culture [of the ASC] and can be the determining factor in not just profitability, but in physician and patient satisfaction as well,” he says.
Mr. Zoch suggests having your administrator and clinical director on the job six months prior to opening. This allows them to build a good working relationship with one another and to make any changes to work-flow or design before the center opens. They can also deal with the processes that are necessary to handle so that your center can be online and on-budget when it opens. He advises ASCs to start their recruiting process for an administrator or clinical director nine months before opening. He also advises ASCs to use an executive search firm to find good leadership. “Most top talent rarely, if ever, reads employment want-ads and can only be reached by a proactive approach,” he says.
A great staff can lead to a successful, 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 they are 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 be difficult.
Experienced RNs often make superior ASC administrators. 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 myriad ways to improve the surgery center. The RN must study and be interested in the business side of ASCs.
There are several important things to remember when determining salaries. Roger Manning, founder of the Manning Search Group, says that base salaries vary depending on geographic location, with California and certain areas of the Northeast (such as Boston) being the highest. He says that the average salary for an administrator ranges from $70,000-$110,000 annually, based on experience. Salaries for multi-site management positions range from $110,000-$125,000 on the low-end, to $150,000-$175,000 on the high end. This difference is again due to experience, according to Mr. Manning.
For directors of clinical services (directors of nursing), base salaries also vary depending on the geographic location. “Owners should expect to pay on the average $75,000-$88,000 [annually],” says Mr. Manning. “Recruiting a doctor with experience from a national competitor will probably coast you [upwards of] $90,000 because of the highly competitive nature of the ASC industry, coupled with the nursing shortage (especially in California).”
Mr. Manning advises physician-investors to consider hiring an administrator with prior ASC development experience who will stay on as administrator. He suggests hiring this person at “the conception of the deal.”
3. Establish MIS and billing systems early.
An ASC should establish its management information system and other operational systems — such as billing, materials management and marketing — 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.
According to Laura Gilbert, director of marketing communications for ProVation Medical, it takes around 90 days to set up an electronic documentation system, but she advises new ASCs to take as much as 6-9 months to evaluate systems and to see them in use. She recommends evaluating vendors for MIS and other systems by considering each system’s features and functionality. A site visit can give you a feel for how the system works. “If [a provider] is proud of their product, they will give you access to other end users so that you can have an honest discussion as to the pros and cons of their product,” she says.
Ms. Gilbert also recommends finding systems that have intuitive user interfaces on the clinical side of operations. Flexibility is also a priority, she says, and it is important to find a system that can be configured to your ASC’s needs and a provider that is willing to do the “heavy lifting” and make the modifications for your company.
Caryl Serbin, CEO of Serbin Surgery Center Billing, implores those planning ASCs to decide early whether to outsource billing or handle billing internally; an ASC should decide at least 4-6 months prior to becoming operational.
An ASC should also set up its billing office early so that it can start billing (and collecting) reimbursements from day one. Another option is to outsource billing and collections services. If you choose to use an outside provider, it is advisable to also get them involved early in the develop stage in order to expedite implementation of their systems.
Contact Scott Becker at sbecker@mcguirewoods.com; contact Bart Walker at bwalker@mcguirewoods.com; contact Renée Tomcanin at renee@beckersasc.com.