The Profitability Puzzle

By Kathy Dix

“What we have done is taken a poorly performing facility and resurrected it, for lack of a better term, in three primary areas,” says William Webb, chief development officer of Symbion Healthcare. “One has been managed-care contracting, which has been mismanaged in the context of signing poor contracts, not recognizing where the opportunities are, and the rates that you set with the payor and groupers. You might, for example, sign a contract that may not give you the best reimbursement in one specialty, but a better reimbursement in another specialty.

“The second area is staffing,” Webb continues. “Oftentimes, we find that in poorly performing centers, their labor and man-hour per case ratios are too high, and therefore they have limited their ability to make any money because of their manpower issues. Third is recruiting new utilizers, and that takes a number of faces. One is going out and making personal calls on surgeons who heretofore haven’t been either approached or haven’t been properly approached on how to win their business,” he adds. “On a parallel track is signing up new surgeons to be investors in the center, and oftentimes that hasn’t been done or hasn’t been done properly in the past. So your utilization core group has been stagnant for a number of years, and as doctors age, oftentimes their case volumes drift down, and if you are not replenishing your utilizers, then you’re going to have a steady erosion of your core business. We also find new case types, which require an investment in new equipment in order to recruit those cases. Many time stagnant centers don’t have the capital to buy new equipment, and they are in a catch-22; they can’t grow their center if they can’t bring in new cases, and they can’t bring in new cases if they don’t invest in new equipment.”

Approaching a surgeon to utilize or invest in the ASC requires a certain amount of finesse. “An ‘improper’ approach might be if someone from the center makes a phone call to a doctor to see if he or she will consider using the ASC, and that more times than not will not change the behavior of a surgeon,” Webb points out. “What it takes is sitting down in person with the physician, explaining what the benefits of using the center would be, and talking to his/her scheduler. Schedulers have a lot to say about where a surgeon goes, so if you’re not in touch with the scheduler, then I don’t think you’re approaching the physician thoroughly.”

For ASCs that are already profitable, some of the same concepts apply. Webb says, “The key to ‘solid’ centers is two things — first, the managed-care contracting piece. You have to stay on top of that on a regular basis. The payors are becoming much more aggressive recently than they have been in the last five or 10 years; they’re cracking down on out-of-network reimbursement; they are cracking down on multiple procedures; and if you don’t work with the payors on some of these, they have gotten pretty ornery in terms of things they’ll do, such as remove you from their panel. So for well-performing centers, you have to work hard to keep those contracts solid for the center to remain strong. The other thing still goes back to recruiting new doctors and new cases; that’s something that cannot be overstated,” he says. “Frequently, when you have a very profitable ASC, you don’t pay as much attention to it because it’s doing well, but then eventually, it will show signs of some erosion if you don’t attend to new doctors and new opportunities.”

Keith Bolton, president of Specialty Surgery Centers of America, Inc. (SSCA) remarks, “The company was founded with the idea of being able to develop or turn around existing facilities, partly by making sure that the physician owners held the majority of the equity in any facility that I’d develop. I’m the managing partner; they owned the bus, but I was the driver. That concept seemed to work.”

SSCA owns a minority interest and operates two ASCs in Tennessee. The Clarksville Surgery Center (in Montgomery County), which was acquired in 2004, and the Surgery Center of Columbia (in Maury County), which was acquired in 2001, were existing facilities located in secondary markets. “SSCA, principally through re-syndication of partnerships, addition of capital for investment in plant and equipment, and the installation of new management and management information systems, has made dramatic fiscal turnarounds in each facility. At the heart of their success is an active cash and debt management program,” he explains. “Built in the late 1990s, Clarksville Surgery Center was originally a joint venture between two ASC management companies, the local hospital, and eight physicians representing six specialties. The facility is a 3,000 square-foot stand-alone building with two operating rooms (ORs). In 2003, the facility performed 1,300 cases and generated just over $1 million in cash revenues. In 2005, the facility did 2,500 cases and generated $2.3 million in revenues. The partnership was recapitalized and reorganized in 2004, with total long-term debt of approximately $1.5 million, including a long-term mortgage, a term note, and a revolving line of credit.”

In 2005, after outgrowing its existing space, the facility obtained a certificate of need (CON) from the state of Tennessee Health Services and Development Agency (HSDA) to replace its existing facility with a new 11,000- square-foot facility. The center plans to create a separate real estate holding company similar to that at Columbia Outpatient Surgery and is currently developing plans for that new facility.

“In 2001, SSCA acquired Columbia Outpatient Surgery, Inc. from two local physicians. The facility was then a 4,000-square-foot, two- OR, three-procedure room ASC performing predominantly local urology cases. The company’s ownership was re-syndicated, and today the operating entity has 16 physician investors. The caseload has grown from 1,000 cases per year to over 3,500, and operating revenues have grown from approximately $600,000 per year to nearly $4 million,” Bolton says.

“Originally, the center was capitalized with $400,000 in equity and approximately $1.2 million in non-recourse term debt. Cash was maintained in a standard operating checking account, with an attached money market function. Today, the company maintains a term note under $500,000, a revolving line of credit, and a depository checking account.” Bolton continues, “In 2003, the center received a CON to replace the existing facility and acquired 1.4 acres of land directly across from the local mall, at a price substantially below the appraised value. The center developed a separate real estate holding company along with the existing physician partners, and developed the property into a three-OR, three-procedure room center. The operating company of the ASC pays fair market value rent to the real estate holding company, and the real estate company holds a long-term commercial mortgage with a local bank. The mortgage on the property is sub-prime in rate, with an interest rate ceiling. The rental rate is well within the fair market value range for ASCs. With the ceiling on the interest rate and a triple net lease, the real estate company is guaranteed never to have a mortgage payment upside down to the rent. The guarantees on the mortgage are expected to burn off in four years.”

“The first facility, the Surgery Center of Columbia, had some fundamental problems: it had a lack of ownership structure, it had employees that were co-employed by a physician next door; it needed equipment; it needed renovation; it needed capitalization, and we were able to pick off one by one all of those items and make that turn around,” Bolton recalls.” We capitalized it by using nonrecourse debt through MarCap Corp., which allowed me to be able to not pin significant debt guarantees on all the physicians plus myself, and we were able to generate enough capital to be able to do all the things we needed to do — buy new equipment, renovate the place, etc.”

Both facilities, with combined revenues of $7 million, perform daily, automated cash management. “The goals of doing this are really two-fold,” he explains. “First, we obtain the maximum float on any checks or payments by having cash swept to pay bills when the check clears the bank rather than putting cash in an account when the check is written. Second, we obtain an interest saving on debt vs. receiving interest income. This is how we accomplish this: rather than hold cash balances in either no-interest or little-interest checking accounts (or even in money market accounts), both facilities have cash balances swept nightly against their lines of credit. For example, if we deposited $12,000 today and five checks, totaling $9,000 cleared the bank, $3,000 would be swept against (reducing) the line of credit. In doing this, instead of gaining 2 percent to 3 percent interest on cash accounts, lines of credit are reduced in balances, saving 6 percent to 7 percent in interest cost (or a net savings of about 4 percent). It also capitalizes on the float of any checks outstanding. This represents a substantial saving in interest (increasing income) over the course of a year,” he adds.

“Each facility also has debt payments automatically made on the due date. Rent from the real estate company is also automatically transferred from the operating company to the real estate company on the due date of the rent. This guarantees that the payment will be made, and by transferring on the date it is due, we obtain maximum float.”

The tricky part of this function is to ignore the balance of the line of credit, Bolton points out. “The bank may tell us that our outstanding balance on a $250,000 line of credit is $150,000, leaving $100,000 of capacity. If we have $60,000 of outstanding checks and liabilities, our real capacity is only $40,000. Don’t be deceived by the availability or ‘outstanding balance.’ It doesn’t take into consideration what is floating — checks written that haven’t cleared the bank.”

Scott Rein, JD, president of Salus Surgical Group, relates the background stemming from a single, very profitable ASC in Beverly Hills. The S&B Surgery Center was founded and run by Randy Rosen, MD, an anesthesiologist and pain management fellow who began one of the first surgery centers in the area that concentrated on complex procedures. “We were the first ones out here to do not only orthopedics, which are the concentration, sports medicine and pain, but also spine cases on an outpatient basis,” recalls Rein. “Rosen asked me to leave my own practice of 25 lawyers, and he would stop practicing medicine. We started Salus Surgical Group after he turned down a huge offer from a private equity fund to sell the company. Instead, the idea was to develop this new company. At the time, there were very few companies on the grand scale that were doing what we were doing — a physician-owned model, doing complex procedures, in a really luxurious setting. The lobbies of our centers look more like a Four Seasons, for strategic reasons. One is that when a patient walks in our lobby, they know it’s a quality place, and they know instantly that they’re not in a hospital, and that’s why they can go home that day. Second, the ORs are all state of the art. When we built our centers in Jersey, we had vendors who told me that the ORs were the talk of the state. All of our ORs in those two new flagship facilities have the STERIS booms and double digital monitors. All of our medications nationwide are kept in Pyxis machines that require you to get thumbprints to open the cabinets, in order to track narcotics. We have several C-arms in each of the facilities; we have Zeiss microscopes; we have the top-of-the-line Smith & Nephew and Stryker equipment. Really, it’s the fantasy wish list for a surgeon.”

The key, Rein says, is to pamper both the physician partner and the patient. “We’ll have a free car service for the patients if they need it; they are greeted by name when they come into the facility; and we have nursing care that watches them the entire time. We do innovative things. We’re rolling out a new model being done out of Massachusetts General, where they’re experimenting with tracking — having one nurse stay with the patient from check-in to discharge.”

Salus has several salient strategies for maintaining and improving upon the profitability of its centers. “We took the model from S&B, which was one of the most profitable ASCs in the United States,” Rein says. “We only enter into a handful of contracts, and only if they’re fair contracts. Otherwise, we bill on an out-ofnetwork basis. We only partner with the top doctors in the area; we have found that the best doctors tend to have the patients with the best insurance. These patients are willing to pay a bit extra if that’s what it requires, to go to see their doctor and go to their doctor’s facility, and we make it a value-added experience for them. Every aspect of it, from the minute they are contacted about how to get ready for surgery until the minute they’re discharged, it is completely different kind of experience.”

The focus on patient pampering has made all the difference. “In New Jersey, one of our first spine patients was initially very reticent about having a surgery — think about it: back surgery in an ASC. The doctor reassured him, and he had the surgery,” Rein relates. “Unfortunately, this patient was doing something he shouldn’t have been doing, and about six weeks later, he re-injured the back and had to have a redo, and insisted on having it done at the ASC — the same patient reticent about it at the beginning.”

Patient satisfaction surveys are, naturally, a regular part of business. “We do a patient satisfaction questionnaire for every patient, and we average between 4.96 and 4.97 out of 5. For any response that is less than 4.9, the patients are contacted, to find out what went wrong. If the rating is a 4.8, something happened that shouldn’t have happened.” The stress is on quality throughout, he emphasizes. “We got the best anesthesiologists because that’s the key to a successful experience surgically, and if a doctor comes to us and says ‘This nurse is the best ever,’ we try to hire that nurse. I’m stressing the best experience for the patient and doctor, but that’s the key in our minds to profitability, because when the center becomes the best, people don’t mind if it costs them a little bit of money.”

That core group of the “best” surgeons and anesthesiologists also helps when negotiating with insurance companies, Rein points out. “The insurance companies realize that we have the best doctors. They’re coming from the hospitals — which cost [the insurance companies] more money anyway — and the hospitals that we compete against are some of the most expensive hospitals in the U.S., so the contracts we have been offered have been very reasonable. But we also have never accepted an offer for an insurance company contract without having extensive long-term negotiations over it. We know what they’re paying the hospitals, and we fight them to give us a reasonable contract, and we can show them that it makes sense for them, because the quality is there. The worst thing that could happen to the patient and for an insurance company is for something to go wrong, such as a surgical site infection. We have somebody overseeing our infection control at the center level. We just hired a nationwide compliance director to ensure the centers stay a step ahead, and that allows us easily to attract the best quality doctors in each area. Those physicians bring the best patients with the best insurance. That gives us the best payments. For us, the model is all synergistic; it all works together. All aspects of it feed the same outcome, which is a great experience for the patient, a great experience for the surgeon, and a very profitable surgery center.”

Olympus America offers turnkey project financing, which enables an ASC to avoid the inefficiencies of multiple-source financing by providing a single resource that can fulfill all of a facility’s financial requirements, including working capital needs. Some costs that can be included are: design and construction, medical equipment, customary fees, furniture and fixtures, computer systems, and working capital. A key feature of the turnkey project financing is that payments can be made using the Cost Per Procedure® (CPP) plan. With CPP, payments are based on procedures performed and thereby cap the ASC’s costs. Payments are made as the facility generates income, facilitating cash flow and enabling it to maintain a predictable procedure margin. Fast response is a hallmark of the option. After receiving the necessary initial information, Olympus Financial Services® prepares a preliminary financing proposal for the surgery center’s review; once the proposal has been finalized, and an agreement is executed, the ASC’s financing needs are immediately satisfied. The entire process is designed to help it get a turnkey project underway quickly.

Another key is the money spent on “little things” — choosing the right piece of equipment can affect profitability down the line, especially if too much cash is being exhausted on repairs or upgrades. Wynn Blieberg, vice president of sales for Olympus America’s financial services, recommends that when an ASC is selecting, evaluating and purchasing capital equipment, it consider a manufacturer with a proven track record for technology leadership, performance and durability. “In addition, they should have confidence in the manufacturer’s representatives as well as satisfaction with customer service accessibility and reliability,” he observes. “Customers should also consider what other options and services a company can provide to help their department run more efficiently and effectively, maintaining a fiscal eye on the overall operating costs while maintaining maximum flexibility.

“The most important thing to remember is that the value of the equipment is in its use, not ownership,” he adds. “Flexibility and having the right equipment to meet current physician needs is key. It is critical that healthcare providers are able to maintain equipment and service flexibility at all times, allowing them to most effectively care for their patient base while growing their business and improving their services.”

Finally, Blieberg suggests, “Providers should look for equipment that meets their needs today and over the near term, while ensuring they have the ability to replace the depreciable equipment at opportune times in the most cost-effective and fiscally prudent means with new or technologically improved equipment. So again, this is where the equipment’s use and not being locked into ownership are important as leasing provides a hedge against both depreciation and technology obsolescence.”