From Sinking Ship toFive-Star Cruise Line:

From Sinking Ship to Five-Star Cruise Line:
How to Execute a Successful Turnaround

By Jennifer Schraag

Centers falter. It’s no secret. It can happen to the most promising centers too. Knowing what to do when a center is drifting out to sea and taking the appropriate steps to anchor it can quickly get you back on the right path.

Recognizing there is a problem is the first step to any recovery — this is no different within the ambulatory surgery center (ASC) industry. However, the problem often spins out of control before the appropriate action is taken.

“We review some centers that require a complete washout of liabilities and debts before we or anyone will invest in them,” explains Thomas Mallon, founder and chief executive officer of Regent Surgical Health. “We only partner with 10 percent or so of the centers we visit. Many others are candidates, but have let the ship drift for too long and can only be salvaged by closure and reopening.”

“If we get called in to fix it, these people have usually exhausted every other thing that they can do,” affirms Brent Lambert, MD, president of Ambulatory Surgery Centers of America (ASCOA). “The majority of what we see have gone too far. But guess what, oftentimes these centers are fatally flawed from the beginning. They were conceived incorrectly. Often, what happens is they allow the debt to keep accumulating and accumulating, that they’ve dug such a hole for themselves that they can’t be resuscitated. The moment the thing starts to slip they need to act precipitously in finding expert help.”

“The last thing that they turn to is selling equity to an ASC management company to come in and fix it,” he continues. “We have a center that we took over that had been losing money for five years. They never made any money. They tried consultants, they tried to run it themselves; you name it. Finally they were forced to bring us in and after two months, they were profitable for the first time in five years. But they were desperate at that time.”

Witnessing the sinking of a center is a scary thing to take in, but overcoming that fear is a step in the right direction of salvaging that center. “The biggest fear is always the fear of failure,” Mallon sympathizes. “There needs to be a mindset change. Belief needs to replace doubt and positive attitudes need to replace negative attitudes.”

Is the Ship Really Sinking?

Generally, the underlying problems of the center that create that situation or feeling of vulnerability have been around for some time, explains Keith A. Bolton, president of Brentwood, Tenn.-based Specialty Surgery Centers of America, Inc. Bolton says his experience is that most owners of surgery centers begin recognizing the red flags when one of three events occur: an economic change, a loss of market share, or a competitive threat emerges.

“Having spent time in looking at some situations that have gone sour, some of the red flags are pretty obvious,” says Robert Goodman, MBA, CHE, managing partner of The Mansfield Group. Goodman, who has experience in turnarounds of hospitals and imaging centers, says one such flag is faltering levels of volume and support from physicians.

Red Flag No. 1: Physician Involvement

Feasibility studies are conducted at the onset of any ASC project, and Goodman says it is a good idea to go back to that and see how the center has strayed from those original plans. For example, what the projected volume rates were. “It is rare when it comes out exactly as projected,” he says, but it will give you a good idea of how and when the center began to falter  — if it were ever afloat to begin with.

Another key aspect to watch for, according to William G. Southwick, president and chief executive officer of Nashville, Tenn.-based HealthMark Partners, LLC, is if a physician member who is doing most of the cases is within a few years of retirement.

Southwick also advises to watch for physician interest in meetings, gatherings, etc., for the center; and to listen for constant complaints about the level of physician ownership being too low.

Red Flag No. 2: Regulatory Issues

Southwick says a tell-all sign is trouble with state surveys or accrediting body surveys. Fred W. Ortmann III, MHA, president of Ortmann Health-care Consultants, LLC, elaborates, “If the state or accrediting association has visited that center and the center has done poorly on the survey, that tells people that the center is not working day-to-day with its regulatory compliance.”

Red Flag No. 3: Financial Complications

“If paying bills becomes a juggling act for more than three months, then there is trouble. You are not seeing a temporary problem,” asserts Mallon. In addition, he says to watch for hesitation or denials from financial institutions.

Payor contracts are an important avenue to investigate because this area can be a major player in decreasing a center’s optimal potential. “You need to be contracted with as many third-party payors in the market as you can be,” affirms Goodman, who recommends the center investigate each physician’s practice payor mix and ensure the center is lined up accordingly.

Ortmann explains, “For example if the physicians that are coming to the center have contracts with 15 managed-care entities, but the center only has contracts with five, that means that center is missing two-thirds of the market and that’s two-thirds of the patients that might come there.”

Another aspect to watch for — and avoid — is if the specialty mix moves to a lower reimbursed specialty and/or the payor mix moves to a lower reimbursed payor, according to David Pflueger, MBA, principal of Pluris Healthcare Services. “This causes your ASC to lose money and is an indicator that things are not going well at the ASC,” he asserts.

“Overall, you have to look at the entire management financial condition of the center and whether you are meeting budget,” Ortmann advises. “At the same time, you need to look at service on your debt. Have you looked at refinancing that debt and looked at if you have the most appropriate or most favorable terms?”

Red Flag No. 4: Daily Operations/Staff Issues

Self assessments are critical. “The evaluation of the center needs to be looked at from a multifaceted approach,” Ortmann says. He advises thorough studies of routine operations, quality assurance, and management and staffing issues. “That tells you a little bit about your director. How often are your people turning over? Why are they leaving?”

Mallon takes it a step further and asks, “Is there is continual bickering between partners or between partners and senior staff members?” Friction between facility staff and physician leadership can be the result of poor financial performance and can lead to an accelerated downward spiral, adds Southwick.

The cultural aspects of the center also need to be investigated, according to Ortmann, who uses the example of orthopedic surgeons shifting from a hospital setting to an ASC setting. “In the hospital, the cost of plates and implants and such wasn’t a huge consideration whereas in the ASC it needs to be. You must facilitate a cultural change, he says, so that physicians are briefed on reimbursement rates in an ASC vs. a hospital and they are changing their behavior.”

Red Flag No. 5: Competition Comparatives

Southwick says competitive centers often have a direct impact. He says to listen and watch for rumors of competing interests in town because “they likely will contact your center’s members.”

Mallon adds that the case load can drop dramatically if a key physician invests elsewhere. “Get ready for the crisis,” he warns. “You need to assess the financial damage and take immediate action to reduce expenses and add additional revenue.”

On the flip side, Southwick says to watch for quality staff departure based on personal financial security or morale issues — not just due to competing offers.

The Maiden Voyage

The first steps to recovering a center and making it thrive vary greatly to what components an individual center needs to improve upon.

“We come in and we do our due diligence,” Lambert says. “We come in and we find out exactly what’s broken. Then we have a plan for everything that is broken, how to fix it, and we implement those on day one. For instance, on a center ASCOA worked with in Michigan, on day one, I case-costed every case. I found four plastic cases were done on that day and we lost an average of $450 on every one of those plastic cases. So I asked, ‘What are we charging them?’ Well, they were charging them $400 for the room for an hour, then $300 for the next hour. So clearly, we weren’t breaking even with that reimbursement.”

Lambert ceased all plastic cases pending investigation. “Then, we worked out what our true costs were for doing these cases and what 50 percent profit margin — which is what we like to get in our centers — would represent. Then we said we need $1,000 an hour if you’re going to rent the room. The physicians balked at that and said they would simply take their cases to the hospital. That’s fine, but we’re losing $450 for each case so we don’t want to do them anymore.”

“You have to identify the problems ahead of time and then act decisively to solve them with a plan. You have to act decisively and fix it. It’s not going to get better over time,” he adds.

Mallon recommends a full assessment to the real issues holding the center back — number of cases, expenses out of control, reimbursement per case; “Then, focus like a laser on the top three problems and leave the others for later after survival is no longer at stake,” he says.

Pflueger says the first few steps should include the determination of revenue and expense problems; doing a “SWOT” analysis, which identifies strengths, weaknesses, opportunities, and threats; create a recovery plan emphasizing key strategies, goals, and set specific action plans with concrete time frames, Finally, obtain the necessary resources — both financial and intellectual capital. “A good plan will include risks and contingencies,” he adds.

“I usually can identify five to 10 principal, underlying problems that prevent the facility from reaching its potential,” says Bolton. “I like to categorize these into short-term, medium-term, and long-term opportunities. With these, I can develop a game plan for each of them, and then begin the process of incorporating the stakeholders — usually physicians and staff — into accepting both the problem and the solution, thereby setting expectations with them about what will happen and when.”

Southwick offers an additional five steps for the initial recovery:

• Physician recruitment: educate them on the buying opportunity and the opportunity that rests with them helping to turn things around.
• Charge master review and possible changes. Several centers don’t address this often and in many cases find them outdated and leaving money on the table.
• Third-party payor contracting: be sure to review all contracts and compare to Medicare rates.
• Equipment assessment: you can’t attract new physicians and good clinical staff with poor equipment.
• Staff education and empowerment: teach them the things that matter and how to manage them.

Sometimes you need to re-syndicate the ownership, offers Goodman. He points out that there are instances when physicians are thoroughly involved and extremely motivated at the start-up, yet eventually waiver. “That’s a little more dire, but it might be something you have to do at some point down the road,” he says.

Also, physician prospect education is imperative, according to South-wick. “The market will know of facility struggles and you have to educate prospects on why that means opportunity not boarded windows,” he offers.

Mapping Out the Return Path

The time frame for a successful turnaround varies greatly by center. According to Southwick, it can be done in three months — at best — but should take no more than one year. “This is from problem recognition to realizing the targeted results are now evident. However, we have seen some take longer. Timing can be everything, but current physician members have to help, this will cut down the timeframe.”

Centers can expect a slow transition during a turnaround time, Pflueger says, but during that time, the center should expect a fresh look at all areas. It should expect to assess its equipment and its staffing as well as patient satisfaction.

The future strategic planning comes in stages, according to Mallon. “The first stage is ensuring continued survival. Second stage is expansion. Third stage is business as usual. Fourth stage is exit strategy,” he offers.

“Survival usually takes three to six months. Expansion may be a year or it may be five years depending on the market and the changes occurring. New physicians, new procedures, change to hospital license — are all considered during this stage. The business as usual stage will continue until the partners and large utilizers slow down and retire. Then the center may shift back to one of the earlier stages — hopefully expansion and not survival.

“Finally, there may come a time the partners want to sell out to a public company or a venture backed company or the local hospital. This gives the owners liquidity, they retain a minority stake, but they give up control of their business. We have not done this yet, but we expect to provide these services as our centers become more mature.”

Mallon continues, “One of the great barriers to expansion is the increasing value of the business makes it more difficult to attract new partners. We always sell interests at fair market value and we need to conduct an outside appraisal periodically to ensure our compliance with the Stark laws. New members look at the prices paid by founding or early members and sometimes do not partner due to the relatively higher cost, missing the issue that the risks are mitigated due to the success of the turnaround.”

Smooth Sailing

The experts also have a few tips for those centers that are already thriving. Such recommendations include growing the practice by bringing in additional physician partners who will perform more complex cases and benefit from the efficient work environment. “Ask your staff leaders what things slow them down or cause them to believe costs are above what they could be, and ask your physician partners and look for reoccurring themes,” says Southwick.

A center often is only as good as the staff running it. According to Gayle R. Evans, RN, MBA, CNOR, CASC, founder and president of Continuum Healthcare Consultants, Inc., careful review of staff operations is as critical as ongoing staff education. “Everything from changing documentation of patient care to streamlining the way they do their daily responsibilities. All of this falls to the bottom line. They (the staff) must understand that they are impacted by this through salaries and schedule for work.”

The recruitment of cases to increase volumes or adding specialties is key, according to Pflueger. “Continue to improve, emphasize your strengths, focus on your processes, strategic areas (such as contracting, case volume recruitment), and your employees,” he says.

Explore converting the facility to a small hospital, offers Mallon. “This is a logical step for successful centers and functional partnerships,” he says.

CASE STUDY SURGERY CENTER OF COLUMBIA, COLUMBIA, TENN.

1989, two practicing physicians developed a small two operating room, three procedure room surgery center adjacent to one of the physician’s office. The surgery center, known as Columbia Outpatient Surgery, Inc. (COS) was licensed as a multi-specialty center, although it predominately did urology and ophthalmology procedures.

COS had stagnated for some time. Caseload was running under 100 per month, with net revenues running approximately $500 per case.

In early 2000, Specialty Surgery Centers of America, Inc. was called in by the center’s lawyer. Bolton says he found 11 important issues that needed to be resolved:

Ownership structure: The ownership structure needed to be re-syndicated

Renovation: the facility had a number of problems to it that would require some construction and renovation

Equipment: The urologists wanted a comprehensive kidney stone center; the otolaryngologists wanted a sinus center; the general surgeons wanted to do gallbladders. The center needed a re-tooling

Staff: For a multitude of reasons, the staff needed to be separated, and full-time permanent staff employed

Anesthesia: the facility had no full-time, dedicated anesthesia personnel

Information systems: the facility was using a Medical Manager system, it needed to be replaced by a surgery center information management system

Fee Schedule: the fee schedule was significantly out of date

Managed-care contracts: there were a number of contracts in place that were barely above the Medicare allowable rate

Management: “When I discovered the surgery center medical staff files contained expired licenses and insurances, I knew this had to change.”

Capital: if the center was going to grow as rapidly as everyone had discussed, it would need working capital

Name: the name was associated with its old genre In January 2001, the center reopened as the Surgery Center of Columbia.

A number of issues were resolved during the due diligence and pre-acquisition phase. First, the financing, syndication, and capitalization issues were solved at the time of acquisition. A new LLC was syndicated to nine physicians, and $400,000 was raised in working capital.

The results of the changes implemented were fairly immediate, Bolton says. “We did 125 cases in January 2001, and ramped up to 280 cases by October 2001. Our Medicare provider number finally went through in April 2001, and we became cash flow positive a month later. We quickly ran out of space, and began removing low profit margin cases.”

The following year, a certificate of need application was filed and approved to build a replacement facility. Construction began in January 2004 on an 11,000square-foot center across from the local mall.

“Today, we have 16 partners; perform about 3,500 cases annually; and put nearly $4 million a year on the books,” Bolton announces enthusiastically. “The turnaround was full of challenges and pitfalls and opportunities to fail. But with a lot of confidence among our medical staff, perseverance by our employees and managers, and constant communication, we found a ‘diamond in the rough.’”
— Keith A. Bolton, president of Brentwood, Tenn. based Specialty Surgery Centers of America, Inc.

Case Study # 2:

Eye Surgery Center of Nashville, LLC, and Hope Square Surgical Center, LLC, Rancho Mirage, Calif.

“In each case, performance was bad before we got involved and in each case intermediate term viability was in question. We found physician champion to help educate the market on ability to buy below ability to build and asked for leads to likely partners. In each case, significant turnarounds were achieved and significant value created.

“Physician recruitment through education process was number one, but the many other contributing factors included those mentioned earlier; charges, third party payor contracts, supply cost and vendor negotiations and proving to physicians and staff through prior success stories that it can and will be done.”
-- William “Bill” G. Southwick, president and chief executive officer of Nashville, Tenn.-based HealthMark Partners, LLC (HMP). The HealthMark team has executed five successful ASC turnarounds.

Case Study # 3:

“We assisted a surgery center that needed to refocus itself in its market. Their problems were twofold: their particular market was oversaturated with competitors and they had several physician investors who were no longer contributing to the business. Using industry benchmarks, we worked with the active physician owners to review their operations. Together, we developed a more focused business plan.

“By immediately putting the plan into place, we were able to improve the surgery center’s days in AR, which helped cash flow. We also reduced personnel in an overstaffed department. Also, based on the initial plan, the surgery center divested itself of several non-contributing investors, which allowed the center to recruit new pain management physicians.

“The revised strategic plan ultimately improved the performance of the participating physicians and increased overall case volumes. The center reached its objective of becoming more competitive, and thus, more profitable.”

-- David Pflueger, MBA, principal of Pluris Healthcare Services