Improving Your ASC’s Operational Bottom Line

By Kris Ellis and John Roark

In order to compete and thrive in today’s market, ASCs must assess their own unique operational and administrative circumstances, resolve inefficiencies and capitalize on growth opportunities.

For many ambulatory surgery centers (ASCs), establishing and sustaining a healthy bottom line has become a challenge. Political and financial restrictions of many kinds have led facilities to closely examine their policies, procedures and priorities for ways to increase efficiency and profitability.

The freeze on Medicare reimbursement rates was a significant blow to ASCs’ expectations for profits, particularly since it is scheduled to remain in effect until 2009.

“The successful endeavors by lobbyists to cripple the ASC industry are reflected in Medicare’s decrease and moratorium on ASC fees,” says Judie English, vice president of business operations for Surgery Consultants of America, Inc. and Surgery Center Billing, LLC. “Having your margin decreased by 5 percent and held that way for five years as costs continue to increase could be devastating.”

English also points out that the ramifications of the freeze extend far beyond Medicare patients. “One must also take into consideration that a lot of managed care companies base their reimbursement on a percentage of Medicare reimbursement, which means that this price cut for five years may also be reflected in another large percentage of the ASC’s payors,” she says.

“Five years is more than one full business cycle for most businesses, and therefore damaging to margins,” says Bill Southwick, president of Nashville, Tenn.-based Surgical Health Partners, LLC. “It will likely force many Medicare cases back to the hospital setting. It’s counterintuitive to the Centers for Medicare & Medicaid Services (CMS)’s mission at this point, but so many Medicare cases now lose money for ASCs that the results are predictable.”

“When your payments are capped, regardless of what kinds of supply costs and what kinds of salary/wage/benefit costs are needed to perform the services, it definitely hinders your ability to be profitable, and it greatly increases your need to be able to control your costs, whether it be fixed or variable,” says Chad Furgason, regional director of operations at Healthcare Venture Professionals.

“The beneficial outcomes that you get from ASCs and the ability to be able to target new technology — disease management and focus of care — are going to be hard to stop,” says Robert James Cimasi, president of Health Capital Consultants. “On the other hand, like everything else, you’ve got to be able to pay for it. So the government, on behalf of the hospital sector, goes in and builds all these financial and regulatory disincentives. In essence what they’re doing is saying, ‘We don’t really want to save money here. We’re not worried about cost or quality. What we’re worried about is protecting these traditional community acutecare hospitals.’ Many of which are for-profit, I might add.”

While the Medicare freeze and other legislative issues are prominent and contentious challenges to ASCs’ bottom lines, there are many other elements that can factor in to this equation.

There are a variety of ways in which ASC margins can be squeezed, says John Smalley, principal at Healthcare Venture Professionals. “Whether it’s a lack of adequate increases recognizing cost of living or other adjustments, other payors ratcheting down on their reimbursement rates, a lot of these different factors are really squeezing the margins for the ASC. It’s going to continue to be problematic in the future — I don’t think there are a lot of payors out there who are looking to pay us more for what we do.”

In terms of day-to-day operations, Luke Lambert, CEO of Ambulatory Surgical Centers of America (ASCOA), cites inefficient case scheduling as one specific area that can hinder profitability. “Perhaps one of the biggest issues has always been getting an efficient surgical schedule,” he says. “It costs you basically the same from a labor perspective to do 10 cases a day as it does to do 30, because you have the same staff there, so you want to do the 30 cases in a day that you’re open rather than the 10. That’s what makes a difference between making a nice profit and breaking even.”

Paul Davis, senior vice president of operations at Health Inventures, points to inherent complexities in administrative areas such as billing and collections, and medical/surgical supplies cost management as challenges. Additionally, complacency in a facility’s business practices can be detrimental. “Surgery centers, like any other type of local business, have predictable life cycles,” Davis explains. “If a center fails to constantly try to attract new physician users, they risk decreasing volumes over time, or they’ll miss growth opportunities.”

Implementing changes in operations can lead to a healthier bottom line. Examining costs — exactly where the money goes — is a healthy place to start.

“Perform an operational and procedural audit,” recommends Stephen W. Earnhart, president and CEO of Earnhart & Associates. “Find out where the money is going, and why.”

Fixed and variable costs should be evaluated when reviewing surgery center profits, recommends Gayle R. Evans, RN, MBA, CSASC, president of Continuum Healthcare Consultants and president and CEO of Quality Surgery Centers. “Evaluating costs for supplies is generally the first review that should be performed.

The ASC should evaluate the group purchasing organization (GPO) that best fits their needs for this cost reduction. A customer-conscious GPO should be able to assist the facility, and even offers this service when contacted as part of the membership. Secondly, the distributor should be consulted in the costs reduction process. If there are specialty supplies that are used in certain procedures, the use of alternative product can be considered without compromising quality.

The physicians should have some input but they must be educated as to the costs associated with their procedures. Efficiency of staff and surgery center time are other factors that should be evaluated when costs are reviewed.”

Robert Edelstein, president of Millennium Surgical Corp., suggests that there is often room for improvement in terms of purchasing surgical instruments. “Surgical instrumentation is difficult because of the variety of procedures being done in developing centers and surgical hospitals,” he says. “Definition of appropriate instrument requirements is a huge task. Often each specialty has its unique requirements and unique vendors.”

Edelstein points out that efficient purchasing can have a positive impact on profits. “Purchasing, when correctly performed, can allow an ASC to reduce costs of the items purchased while maintaining quality,” he says. “If the ASC can purchase the right instruments and disposables, and do so investing fewer staff hours, the center will be much better off. The reality, however, is that all too often the person responsible for purchasing won’t have the time to make adequate comparisons to improve what the center is buying.”

Traditionally, ASCs have been known as the lower-cost alternative to hospital outpatient facilities because they police their costs, says Caryl Serbin, RN, BSN, LHRM, president and founder of Surgery Consultants of America, Inc. and Surgery Center Billing, LLC. “Efficiency through staff cross-training, efficient use of time and supplies, and standardization of supplies have allowed ASCs to provide excellent surgical care at a savings to their patients.”

In terms of identifying potential cost savings, securing the participation of physician-owners can be a step in the right direction. “Physicians have ownership in most freestanding ASCs,” Serbin continues. “Getting their ‘buy-in’ to improving efficiency through standardization of supplies and implants is the best way to save money and preserve the center’s bottom line.”

Davis reiterates that standardization is an excellent option under the right circumstances. “Working with physicians to standardize items can give a center leverage to negotiate with supply vendors on better pricing for standardized items,” he says. “Centers with significant physician ownership can be very successful at proactively managing costs.”

One obvious way for a facility to generate more profit is to increase case volume. While this strategy may be effective, there are pitfalls to be aware of. “That leads to many centers actually shooting themselves in the foot,” says Lambert. He explains that staying open for an entire day while doing only a small number of cases may actually lead to loss of profit. “Most people go full-bore after the cases, but most people forget to look at what I would call the marginal cost of providing that day compared to the cases they get. If the marginal cost to open that day is, say, $4,000 and you did five cases, you’re probably not going cover your costs.”

Payor contracts and revenue cycle management are areas that can become problematic with inadequate levels of knowledge and attention. “Much of a center’s revenue and payments are tied to negotiated contracts with third-party payors and networks,” says Denise Mayhew, vice president of physician partnerships at Nueterra Healthcare. “As a result, for any provider to be successful in this industry, managed care expertise is a must. It is critical that you know how to negotiate and what to negotiate (carve-outs, implants, multiple procedure, 23-hour stay, payment deadlines, etc). Second, you must manage the entire revenue cycle from charge capturing, coding accuracy and payor compliance to collection efforts.”

The importance of effectively managing the ASC’s revenue cycle is an idea also espoused by Azadeh Farahmand, CEO and president of GHN-Online. “Facilities don’t need to hire more collectors; rather they need to set priorities to do patient insurance verification so they can make sure they have the right information, that in fact the patient has the right insurance and they can provide the screening mechanism up front instead of trying to pay for it from the back end,” she says.

Robert Zasa, co-founder of Woodrum/ ASD, believes that one smart way of reducing costs and increasing distribution is through what he calls ‘advanced inventory supply management.’ “Inventory is cash on the shelf,” he says. The owners of ASCs managed by Woodrum have distribution based on profit. “If you tie up the distributable cash on the shelves, you can’t distribute it to the owners. Most people have some kind of incentive system. If you decrease your inventory, what you really increase is your cash, which really helps you increase your distribution.”

How does it work? “Order less, have more deliveries, and let the GPO hold it in their warehouse and deliver it more often,” says Zasa. “We also try to get more things on consignment.”

Zasa also recommends financing equipment on a per-case basis. “Even in higher-volume facilities we do this because that per-case fee includes maintenance and an upgrade on technological improvement. For those two reasons, rather than leasing or buying, I go ahead and do it on a per-case. Some people think it’s more expensive. You have to do the arithmetic based on the volume. But since it includes the maintenance fees — most things break down because they’re used so often. It’s a flat rate, which is good, and because you get a lot of backup equipment with it as well, in my facilities it saves around $300,000 to $400,000 in not expending that cash. Plus, I’ve got the maintenance costs, so it saves me even more.”

Another substantial source of savings lies in service contracts, says Zasa. “We also do an extensive service contract review,” he says. “People have service contracts on their copy and fax machines. It’s much cheaper to go with time and labor. If it’s breaking down that much, it’s time to replace the machine. We’ve got service contracts down to a minimum — basically on your generator, air conditioning, sterilizers and anesthesia equipment. That can be a lot of money. There is an enormous amount of money in service contracts.”

“Another thing that I think is critical for improving the cash predictability is knowing the health plans’ contracts,” Farahmand says. “Often when we run into improving the payment cycle base for healthcare facilities, what we learn is that the healthcare facilities do not have a grip on what type of contracts they’ve signed with the health plans, so understanding and constructing their information systems, their front-end billing systems so that they are aligned with the contract they’ve signed with the health plan — this is critical.”

For many facilities, boosting the bottom line could mean the difference between merely surviving and thriving. Getting back to basics may help in overcoming the obstacles necessary to make this leap. “I think a lot of it is common sense, and I think sometimes when you’re faced with a lot of problems or a lot of pressure, the first thing you have to turn to is common sense,” says Smalley. He explains that many times panic can lead to getting away from basics in terms of management decisions, knowing your costs to the penny, and managing to benchmarks, whether they’re industry-wide or internal.

“Mid-term and long-term solutions clearly lie on the revenue side,” Smalley continues. “That is adding new physicians, adding new specialties, intelligently adding new procedures that are in fact cost effective and margin effective as opposed to just being new in and of themselves.”

Adding new procedures will increase cash flow, suggests Earnhart. “The most effective way is to bring new surgeons into the center.” Zasa agrees, and recommends researching and filling a need within your market’s demographics. “You take what the market gives you. Look at the demographics of the area — how many females, how many males, age and ethnic groups. Also look at the state health plan, which tells you the most common diseases endemic to that population.”

Zasa offers the following example: “We were looking at a surgery center in Texas,” he says. “The county had an abnormally large percentage of males over the age of 45. That just screams for urology. We looked at the number of urologists in the county, and there was only one. It helped me figure out what the recruitment plan would be — to go get another urologist. We talked to the owners and said, ‘This is a hole in the market. Why don’t you go recruit another urologist; we’ll make them a partner, and we’ll use the surgery center as bait.’”

Thriving in today’s ASC environment takes a combination of street smarts, business savvy and common sense. The keys to success may be lying in some areas that are often overlooked.

Exploring marketing opportunities is an excellent place to start, says Cimasi. “ASCs need to continue the focus on making their argument to the community,” he says. “That means that they need to do more of a public relations outreach within their community to sell the beneficial outcomes that they bring to their patients, the efficiency of the surgeons, the quality issues and the fact that they are very cost-effective.”

Don’t let sleeping dogs lie, says Zasa. “You’ve just got to pound collections. We’re going over collection reports with our business managers possibly four times per month. If something gets into 90 days and it’s with a particular insurance company, we go back to the contract, look at the state law and see if there is a clean claims procedure law, or see if there’s a clean claims clause we’ve negotiated into our contracts. If it’s a clean claim, they’ve got 40 days to pay you. Some are terrible about that. Some contracts have the clause, and there are teeth in it because they signed the contract. We go back and we charge them interest. We don’t collect the interest, but we use it as the hammer to get paid.”

“Each center, because of its unique mix of patients, its age and its demographics, is an individual business problem to solve,” says Zasa. “By communicating with our physicians, we can come up with a priority of things that will make them the most competitive in their market. The people who are going to win in surgery centers, particularly with the flat Medicare increases and all these other factors, are the people who take an individualized approach to each center, prioritize the things that will make it the most competitive in its market, and focus on two, three or four things necessary to maximize the profit for that center, but not try to do them all at once. Put them in priority order that would make the biggest impact and knock them off one at a time. The centers that drill down to the details are going to win. Nobody said it was going to be easy, but if we pay attention to the individual details for each of those centers; in their market give them their particular circumstances, this is managing to the market and managing to the center and prioritizing those things that work best in that center and staying focused on getting those things done ... not setting such broad goals that the people can’t achieve them.”

A well motivated, incentivized and professional team is the foundation for success, says Barbara Teel, marketing manager for MRI International, Inc. “A strong, customer-oriented facility — focused on details and customer satisfaction. Knowing the needs of customers and exceeding their expectations will differentiate an ASC from its competition, and create public awareness of excellence. A passion for excellence is the greatest competitive advantage for ASCs.”

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