Pros and Cons of a ASC[1]

SOCIOECONOMICS & POLITICS practice management The Pros and Cons of Developing an Ambulatory Surgery Center Author To Come To come City, ST T Initially, partnership with the hospital took a substantial amount of risk out of the deal, produced a significant return on investment, and provided a more convenient and efficient surgical facility for both patients and physicians. But as time went on, the ownership and administration of the hospital changed, bringing with it a change in surgery center management. he rising costs of medical services, and decreasing payments for those ser vices, continue to put pressure on physicians. More and more, physicians are seeking additional sources of income by providing ancillary services related to their practices. Many articles have been written, symposiums and courses given, and companies formed to address the demand for information and assistance in these projects. This article is written to provide some insight into the process of developing an ambulatory surgery center and to examine some of the pros and cons. Over the past 18 years, I have been involved in three ambulatory surgery center projects. In that time I have developed some expertise in creating a successful surgery center and I’ve also learned a few things about avoiding the potential pitfalls. had a majority ownership (51%), which seemed like a reasonable approach at the time, but turned out to be a mistake for several reasons. Initially, partnership with the hospital took a substantial amount of risk out of the deal, produced a significant return on investment, and provided a more convenient and efficient surgical facility for both patients and physicians. But as time went on, the ownership and administration of the hospital changed, bringing with it a change in surgery center management. The health care environment had become much more challenging and the efficiency of the operation—and the return on our investment—both declined significantly. Despite the fact that our group had grown and become a major source of referrals for the center, we had diminished input in the surgery center’s operations and were not benefiting financially. Experience 1: Environment Less Than Favorable In my first effort in 1984, we attempted to put together a group of orthopedists with the goal of developing a comprehensive orthopedic clinic. The clinic was to have included our offices, physical therapy and rehab facilities, a surgery center and an imaging center. At the time, there were very few experts in ambulatory surgery centers, and real estate costs and interest rates were both very high in our region. We were not able to develop a prospectus that was sufficiently enticing to move forward with the project. Experience 3: Success! In 1998 we began looking into other options for providing outpatient surgical services. Initially we investigated the possibility of adding a single operating room onto our existing office space. We found that the space requirements and the need for additional parking spaces made the cost prohibitive. We concluded that we needed to obtain a separate building for our surgery center. We soon secured a nearby building, contingent on obtaining approval for construction of an ambulatory surgical center, and we began to investigate several surgery center development companies. In the process of interviewing firms as potential developers and partners, we also solicited their assessment of the property we had secured. Eventually we chose a company that shared our business philosophy and was the most flexible in their fees for the evaluation, development and management of the project. Experience 2: Hospital Partnership Proves Problematic Two years later, we successfully put together a group of multispecialty surgeons to build a five–operating-room surgery center in joint venture with our local hospital. The hospital 38 SPINELINE NOVEMBER/DECEMBER 2003 SOCIOECONOMICS & POLITICS In hopes of avoiding a political backlash, we continued to negotiate with our local hospital’s administration. We even proposed taking over management of the existing center —the one that had been developed in 1986— with the assistance of our development-management company. Despite more than a year of negotiations, we failed to reach an agreement that was acceptable to both sides. We decided to go ahead with our own surgery center. By now, the larger center we were planning—with two operating rooms and a procedure room—would provide excess capacity for our projected volume of cases. Consequently, we elected to solicit outside physicians to invest in and use the new facility. Inclusion of additional physicians would enhance the utilization and thus the profitability of the new center. This decision was made despite the fact that the prospectus projected a positive cash flow for our group alone once the facility was fully operational. Our new surgery center, a friendly, efficient, and state-of-the-art facility, has been open since January 2002 and has been tremendously successful. Of vital importance is a careful analysis of the user/investors, their caseloads and the payer mix. This is what ultimately determines whether the project should be undertaken in the first place. Lessons Learned So what have I learned about developing and operating an ambulatory surgery center? First, that it is a very complicated endeavor. Of vital importance is a careful analysis of the user/investors, their caseloads and the payer mix. This is what ultimately determines whether the project should be undertaken in the first place. Once a feasibility study establishes that the caseload will support a surgery center, a management team with surgery center experience, preferably in your own state, is essential. This should be a team of experts with solid experience in developing successful centers on time and within budget. The task of developing a surgery center is too complex, too technical and too regulated by multiple government agencies to be undertaken by just a physician or physicians unless they are doing it full time as a business. Throughout the process, strong leadership, coordination and input from physi- cians were critical components in building our surgery center. A health care attorney and accountant were also essential to protect investors’ interests and to establish the best tax structure for the organization. Contracts, leases and other documents had to be negotiated and drawn up between the management company and the entity, between the entity and the investors and for the entity itself. Once the legal entity was established and our surgery center designed, the plans required approval from the city. The design must meet the local government’s building, fire and updated earthquake codes, and thanks to our architect’s experience, we were fully informed about these regulations prior to purchasing the property. Also, to ensure that the design would meet the size, electrical and plumbing requirements of necessary equipment, major pieces had to be selected before the design was completed. We utilized the services of a medical equipment consulting firm with extensive ASC experience to assist us in the selection and procurement of our equipment needs. This company was able to secure for us the most competitive pricing and later coordinated the delivery and installation of numerous pieces of equipment. Once plans were approved, construction of our project was expected to take three to four months. It was completed on time and within budget shortly after Labor Day 2001. Another important step was finding a nurse administrator who would be responsible for day to day clinical operations. The smooth and successful operation of a surgical center depends directly on the quality of the staff hired. The nurse administrator must supervise the selection of—and then manage—the nursing, technical and custodial staff. Our management team advised us to hire our nurse administrator early in the process to assist in the design process and the equipment selection. This was excellent advice and we were fortunate to hire our local hospital’s acting OR supervisor. Sound financing was another critical component in our successful project. Adequate cash reserves must be available to cover start-up costs, construction or regulatory delays and salaries and expenses until there is adequate cash flow from operations. Inadequate cash reserves to tide a business over until cash starts flowing from operations is the leading cause of business failure. Insurance company contracts also play a significant role in the success of our center. We have a limited number of contracts with insurance companies and sign only those that clearly offer a financially sound arrangement. The development process includes several other components such as selecting a medical director, board of directors and quality assurance and utilization review committees. Governing policies and a business operating system must be decided upon, and investment documents and policy and procedure manuals must be prepared. While the most interesting part of the process is construction of the operating room with all of its technical intricacies, the most stressful part is the licensing, Medicare certification and accreditation process. This is the most unpredictable part of the entire process, and despite the experience of our development and management team, we still could not predict the delays that would be caused by our local Department of Health Services’ (DHS) inspection team leader. First of all, throughout construction we had maintained communication with the DHS and had informed them of our readiness for inspection by October 1st (to allow for staff training). But though our construction was completed on time, the inspection team did not actually arrive until mid No- NOVEMBER/DECEMBER 2003 SPINELINE 39 SOCIOECONOMICS & POLITICS vember. Secondly, our inspector had very specific ideas on what he wanted in a surgery center. He didn’t like our air humidification system, even though the same system had been used in many centers around the country and met the specifications of the chief engineer who wrote the codes. Still, our inspector would not approve it. Though we could have defended the system as installed, we elected to change it. The delay of the dispute process would have cost more than the cost of replacing the system. Although it took less than a week to make the required changes to our air humidification system, we waited another six weeks – until mid January – for the inspection team to return. Fortunately, we passed the inspection and could open immediately, but it took yet another month to obtain our Medicare certification. We could not submit billing to Medicare or several other payors until then. Adequate cash reserves must be available to cover start-up costs, construction or regulatory delays and salaries and expenses until there is adequate cash flow from operations. Inadequate cash reserves to tide a business over until cash starts flowing from operations is the leading cause of business failure. Summary In summary, if your practice has a sufficient caseload to support an outpatient surgery center—and again, it depends very much on the payer mix—or if you can put together a group of physicians with an adequate caseload, there are many companies with the expertise to build and manage an ASC for you. In all cases, the active involvement of a physician leader throughout the process will greatly affect how successful your venture will be. Select Reading List McCaslin MJ. Bring your ambulatory surgery center to fruition. The AAOS Bulletin. Feb 2003. Available at: http://www.aaos.org. Accessed date McCaslin MJ. Capitalizing and financing an ASC. The AAOS Bulletin.Dec 2002. Available at: http://www.aaos.org. Accessed date McCaslin MJ. Is an ambulatory surgery center right for you? The AAOS Bulletin.August 2002. Available at: http:// www.aaos.org. Accessed date Cunningham JG, Anders GT. Need more income? Try new service. The AAOS Bulletin. Oct 2001. Available at: http://www.aaos.org. Accessed date Bert JM. Ancillary services tap new income. The AAOS Bulletin. Oct 2000. Available at: http://www.aaos.org. Accessed date 40 SPINELINE NOVEMBER/DECEMBER 2003