Fixing an Underperforming Surgery Center
By Jeff Simmons,
Regent Surgical Health Senior Vice President
Reprinted from AAASC's Monitor, Winter 2005

For nearly 20 years, a surgery center in the Midwest had enjoyed profitability. Yet two years ago, that changed, and the center fell into the red. Management had failed to attract new doctors, and costs had gotten out of control.

This center is not out of the ordinary. Out of the 4,000-plus ASCs across the country, many need financial improvement and must make changes sooner than later. By learning to look for early indicators, you can avoid economic difficulty while fixing the source of the problem with short- and long-term solutions.

Many facilities that find themselves in financial trouble fall into two categories: those that were once vibrant and financially successful but have leveled out in profitability and show limited growth, and those that never were able to achieve that status and are facing closure. In all cases, unless immediate and more strategic actions are taken, the facility will either continue to operate without success or may close its doors.

How to Know Your Facility May Be in Trouble

You probably already know that, but are ignoring the obvious signs.

Often problems are known early on but sometimes ignored as complaints by surgeons. Usually if more than one partner complains about an issue, then it IS an issue. If doctors are complaining about a specific problem for two consecutive months, then it needs to be fixed.

Most ASCs have an easy time finding surgeons to invest in the facility when it is first syndicated. If after six months of opening fewer surgeons are asking to become owners, then the word is probably out in the community that the ASC is in financial difficulty -- and it probably is. Also, while it is important to have non-compete clauses in the operating agreement, if other ASCs are opening in the market and your partners are joining them regardless of the agreement language, then your facility is in more serious financial difficulty than you realize.

For a more mature ASC (two years or more), if profitability has peaked for three or more consecutive months and a downward trend is starting, this should be taken seriously and corrective action started. Look at collections or net revenue per case as a key indicator. If either of these indicators is lower than the past two quarters, then corrective action must be taken. If the facility has embarked upon an out of network (OON) strategy, regardless of the percent of business that is OON and current reimbursements have not kept pace with the prior three to six months, then you can expect a continuing of lowering payments and corrective action is required. If your facility relies too heavily on one payor for reimbursement (eg: worker’s comp. or payer, then you are already at risk for economic difficulties. Other items to look out for include an increase in AR days, a change in mix to lower Medicare Grouper payments and an unseasonable drop in volume for two consecutive months.

Finally, the two most obvious signs that your facility may be in economic trouble are: if management is spending any amount of time juggling payments on any facility six months or more into start-up or if your “gut” tells you there is a problem, there most definitely is a problem.

Immediate Solutions

This section looks at a few key immediate solutions that you can employ to fix problems and position your facility towards financial health. The next section will provide more long-term and strategic solutions to your problem(s).

The manager of the ASC needs to present the problem(s) to the surgeons in a cogent, almost scientific, manner. Doctors are used to analyzing data and responding in a logical manner. Make recommendations that follow the data trail and keep the information summarized and the recommendations brief. You may be surprised that your partners can fix these problems themselves, but they usually are unaware of the magnitude of areas that are harming the ASC. As a rule of thumb, and as long as the revenue per case exceeds costs, more volume will fix many problems.

If lower payments are the problem, then every contract should be evaluated. There should be no “loss leader” cases. Cases need to pay the facility more than the cost of the case. Certain category of cases (eg: GYN) use more supply costs than other specialties. Other cases (eg: pain, GI) use less resources. If the facility is losing money on a cash basis (the only basis that counts), then every procedure needs to be scrutinized and all unprofitable cases should be discontinued. If your ASC competes with hospitals more than ASCs, then visit the local payer and let them know their low contract rates are placing you in serious financial difficulties, and if you close your doors, they will have less options and will pay higher rates at hospitals. If they refuse, cancel the contract; they oftentimes will then listen. .If your facility is doing Medicare cases that involve implants; stop these procedures immediately. You will always lose money on these cases and you cannot make it up in increased volume!

If your facility has been successful in the past, but has reached a peak in volume and profitability, and if “price per share” has become an impediment because it may be too high, then consider recapitalizing the ASC by adding debt if you can obtain a favorable loan and reduce the share price accordingly.

On the other hand, if you have not been profitable and you are having difficulty increasing volume and/or revenue quickly, then consider refinancing the debt service of your facility. You may be surprised that as long as you have had a good track record servicing the debt, you may be able to reduce the monthly payment by tens of thousands of dollars in reduced interest payments and/or by increasing the loan period. You could also increase the equity and lower your fixed costs by having current investors pay off a high interest loan thus providing for an immediate cash positive situation for the partnership and resulting in new or increased distributions.

If your account receivables are past 90 days and the cash outstanding is collectable, take immediate steps to change your billing and collections model. I always prefer having this function “in-house” instead of contracting out the service. If your administrator is staid, lazy, not asking the right questions, is not working long hours and not “feeling the pain” like the partners, then it is imperative that this person be replaced. At the same time, do not try to save money; hire the best administrator possible.

Other quick fixes include: assign premium time slots in the OR to the most profitable cases; open a Saturday line up if the reimbursements exceed the extra labor costs; move slower cases to the afternoon and find ONE new surgeon to do 30 “good” cases a month. Once you accomplish that, it will be easier to recruit other surgeons.

Sustainable Strategies

Does the partnership work? Does it need to change? Don’t be afraid to dilute shares if it means that a new group of surgeons will join the facility and bring excellent cases to the partnership. If the partnership does not work, consider selling it to another entity. We often are asked to come in as owners and managers because it not only provides the owners with more focused management, but provides the best legal way to terminate an agreement and start a new entity with many of the best partners.

Make a firm commitment to increase the reimbursement per case by focusing on contracts. Renegotiate all contracts and eliminate the bad contracts. Make a commitment to have at least one out of network payer. Regent does this strategy in every single market. Take a look at the existing Operating Agreement and fix “loop holes” that place the partnership at risk, such as non-competes, termination of partners, etc. Hire a very strong administrator and, if you have a corporate partner or are looking for one, make sure that their interests are completely aligned with the surgeon partners. Develop an achievable strategic plan and budget for one year and stick to the plan for the entire year. Agree on the success factors that are important to your ASC, such as quality and profit. Upgrade your data collection and by all means, analyze the data. Question everything.

In conclusion, the challenges facing ASCs that are not successful usually involve simple “fixes” but a strong degree of hard work. We call it “blocking and tackling.” This is a relatively simple business compared to hospitals, with a finite number of cases and amount of money that needs to be collected to achieve success. At the same time, unlike a hospital, most things have to work well to be successful.