Intelligent Growth

Intelligent Growth
ADDING SPECIALTIES AND SERVICES WITH PROFITABILITY IN MIND

By Kris Ellis

In the ambulatory surgery center (ASC) setting, expansion of a facility’s clinical services can be a shot in the arm for profitability if done correctly. A diligent research and planning effort involves analyzing a number of different aspects of the new specialty or service, and can pay off by identifying the perfect addition, or avoiding those that may be ultimately detrimental to the bottom line.

Rob Carrera, president of Pinnacle III, contends that the process of exploring new specialties should initially focus on an ASC’s existing resources. “We generally look at what we have in the facility and then work with our physicians to identify other specialties or specialists that may be interested in the center,” he says. “Then we generally do a cost analysis; we run a pro forma on the cost and benefits of adding the service.” David Woodrum, MHE, FACHE, principal of Woodrum/ASD, cites the importance of a demand study in determining the viability of new specialties and new physicians. “Some doctors tend to have a more acute practice than others, so you have to know what the acuity of the practice is, and that’s done by basically evaluating the CPT codes of their practices — that gives you a rough idea of the potential volume that you could achieve,” he says. Reimbursement is a vital factor too, of course. “Not all surgical specialties are created equally; some are reimbursed at a higher rate than others.”

The clinical fit of new procedures, as well as the cultural compatibility of new partners, must also be considered, according to Anita Lambert- Gale, vice president of clinical operations at HealthMark Partners. “I’ve been in a situation where a new physician comes in, and you can alienate your other partners quickly if this person is not a good fit. It doesn’t mean that everybody needs to be best friends, but it does need to be a cultural fit,” she says. “Also, is it a strategic fit with where you see the long range plan for your center going?”

In terms of determining financial suitability, Lambert-Gale notes that patient mix should be considered in addition to potential volume. “If there are a lot of children, for example, have you done pediatrics before? That’s a whole other realm that you need to think about in terms of staff competency, equipment, and customization. With small children, you’ll need more staffing in the PACU than you would for adults. If you’re looking at adding bariatrics, the overall health of those patients is a significant issue. That mix will affect equipment as well as staffing needs.

“Also, what is the projected payor mix and reimbursement?” she continues. “Do you need additional equipment, and in thinking about that strategically, is there a possibility that the new equipment can expand into other services that you have? Some equipment might expand what your GYN or general surgeons can do, for example, which would help support getting the new equipment. You’ve also got to know what the disposable costs are, because some of the disposable costs can be as much as your reimbursements in some cases. Completing the pro forma to verify profitability is also key. It involves all those pieces — it must be a good clinical, cultural, strategic, and financial fit.”

Woodrum points out other elements that may also factor into the analysis. “Reimbursement is one thing, case volume is second, but length of surgery is a third criterion,” he says. “With cosmetic surgery for example, a face lift could take five hours, and generally it’s a global fee, meaning one payment is made, and that fee is then split between the surgeon, the anesthesiologist, and the ASC. Because it’s a very competitive field, the fees tend to stay low. A surgery center has tremendous resources being tied up for long periods of time, and then that time is not available to other doctors to come in and do other cases. Length of cases is something you have to look at.

“For example, ENT procedures are generally very short in duration,” Woodrum continues. “They may be fourth or fifth in terms of average reimbursement per case, but because the cases are short and you can turn them over quickly (because patients are usually not anesthetized very deeply), they recover fast and can go home, so you can pump volume through. In a fixed-fee reimbursement system, which is essentially what an ASC is, throughput is one of the main incentives, so you’ve got to be able to push cases through fast. Resources that are required to support the case is another factor that you must look at.”

Carrera recommends that ASCs think about the equipment they have in place when looking at new specialties. “If you’re a center that does a lot of plastic, you often hear that general surgery might be something that could be added, or if you do general surgery, you can often add plastics relatively easily, because the equipment is similar in many ways,” he explains. “You also have to consider what you’re looking for — are you after ‘filler’ business? Are you looking for business that has some flexibility as to when it’s scheduled? Lower equipment-use businesses, such as pain management, can be a nice adjunct. [Pain management] is pretty common in the industry, because a C-arm can be added relatively inexpensively. Again it depends on your current equipment and the needs of the service that you want to add. This goes into that pro forma process where you look at the new specialty and what CPT codes might be added, and what kinds of supplies would be needed. Are implants necessary? Do your contracts reimburse for supplies or implants, and if so, how? Is it going to be a profitable specialty to add overall?”

Some facilities may look at the specialties that carry higher reimbursement rates first. “Typically orthopedics is thought of as No.1 with podiatry number two, in terms of reimbursement,” Woodrum states. He adds that the industry has started to see podiatrist groups getting together to build their own centers. “That’s one untapped specialty that’s only now starting to be recognized. Podiatrists do very little in hospitals; they do most of the work in their offices and they do some procedures that could be reimbursed in a surgery center. A typical podiatrist, and this goes to volume again, generates about two cases per week, so they’re doing about 100 cases a year. Generally the podiatrists are willing to take slots on a surgical schedule that are open. It’s a good filler specialty if you have excess capacity in your surgery center, and just like with any specialty you need to make sure that people are allowed to practice only that level of surgery at which they’re qualified or that their training allows. That’s a specialty that’s accepted much more now than it used to be.”

Lambert-Gale emphasizes the importance of local market nuances that may impact new specialties. “With things like the payor mix in that market, you have to understand it very well and know if that mix will support doing procedures in that market. The local hospitals can be an issue as well — do they have exclusive contracts with the payors?

Also, within that community, what is the anesthesia coverage like? For example, in Southern California it’s primarily MD anesthesia for ophthalmology, whereas in Tennessee and Florida, you see a lot of CRNA administered anesthesia for ophthalmology. In some markets, certain GI procedures will have no anesthesia involved, but in other markets [anesthesia] is what everyone expects. Understanding the market you’re going into makes a difference in your planning.”

Lambert-Gale adds that building a plan around a new physician or physician group can be dangerous without the proper research. “If they’re very high-cost providers, that can definitely impact the success of the program, and you want to make sure they have good clinical outcomes. Underestimating time in the PACU can be a problem too. If the procedure or practice requires extended PACU time, can that cause a log jam? That’s certainly going to impact your other partners, because if their procedures are delayed because there’s no PACU availability, that’s going to be an issue. If it’s not a good cultural fit, could that cost you some loss of your current partners? Also, can your physical plant itself handle these patients?” 

Carrera suggests that smart facilities should always look toward the next step for growth, unless they are running at full capacity. “A facility that’s being proactive is always considering where it’s going next,” he says. “Especially for a facility that’s not performing optimally and is not close to meeting its capacity, it should always be looking at what types of procedures or cases can be added as a way to increase or sustain profitability.

“If you’ve got a management company, they should be able to provide you with resources to analyze these cases, and I would expect any management company to perform that analysis for the center and help the partners make that determination,” Carrera continues. “It’s fairly straightforward — it’s analyzing the costs per procedure and analyzing what the new procedure is, what the costs are going to be in terms of supplies, implants, and then going back to your contracts and determining what you’re going to get as far as reimbursement and is that adequate enough to make the case worthwhile.”

In addition to surgical specialties, ASCs may opt to explore the possibility of adding a non-surgical service to the center or physician practice. While this may be a viable and profitable solution for some facilities, potential state and federal regulatory issues require a cautious approach. Joshua M. Kaye, Esq., a partner in the health law department of McDermott Will & Emery LLP, says he generally sees interest in three primary ancillary services from ASC physician investors: anesthesia, pathology, and diagnostic imaging.

Block leasing and shared ancillary are the two primary types of diagnostic imaging arrangements, according to Kaye. “Because diagnostic imaging is subject to the Stark law, you cannot have physician referral sources set up a joint venture to own a freestanding diagnostic imaging center,” he explains. “With block leasing, the ASC physician owners utilize the ASC or form a new entity that would lease to their physician practices, as well as other physician practices, blocks of time to perform imaging services on the practices’ patients. In exchange, the practice would pay a fair market value lease payment to the ASC or new entity.

“That doesn’t allow the ASC to profit from performing diagnostic procedures, per se, but it does allow the physician investors an opportunity to perform diagnostic imaging on their patients, while generating some additional income,” Kaye continues. “To do this arrangement, it has to be set up and qualify for the in-office ancillary services exception to the Stark law. The one major impediment that surgery centers and physician practices will find to satisfying that exception is the requirement that the imaging services be provided within the same building in which the referring physician or a member of that referring physician’s group practice furnishes substantial physician services.”

A shared ancillary arrangement for diagnostic imaging is a variation of the block lease model, Kaye notes. “The primary difference is rather than the new entity leasing blocks of time to the medical practice, you would just have each practice assume a commercially reasonable proportion of the costs of the diagnostic business, and then each practice would utilize the equipment on a first-come, first-served basis. This also requires that each practice satisfy the in-office exception, and a shared expense arrangement, if not properly implemented, could raise greater legal concerns than a block lease from an anti-kickback statute perspective.”

While there was substantial interest in physician investors incorporating imaging services into ASCs about 18 to 24 months ago, Kaye has seen enthusiasm diminish recently. “In light of the Deficit Reduction Act, which takes effect in January of 2007, reimbursement for imaging is decreasing, so I’m not seeing as much interest in that area as I was. For someone still interested in incorporating diagnostic imaging into a surgery center, they should be aware of the potential reductions in reimbursement resulting from the Deficit Reduction Act.”

In terms of other services, Kaye has seen a substantial increase in gastroenterologists interested in profiting from pathology. “Those types of arrangements raise substantial anti-kickback statute concerns, but if structured properly, you can lower the risk threshold,” he says. “There are two models out there, with the first having the lower risk threshold. I refer to this as the in-house model. Ambulatory endoscopy centers are frequently owned by the same physicians who own a single medical practice. So you usually have the physician practice that employs the pathologists, and the pathologists come to the medical practice offices and work on the medical practice’s microscopes for specified hours. Then the medical practice would bill for the pathologists’ services. This model only allows the medical practice to capture the professional component of pathology services, but my understanding is that the added physician convenience along with there being a fair amount of dollars on the professional reimbursement side still makes that model practical.”

In the second model, which is more aggressive from Kaye’s perspective, a physician practice expresses interest in capturing both the professional component, which is the interpretation done by the pathologists, and the technical component, which includes the actual lab specimens, biopsy preparation, etc.

“With this model, the medical practice can capture both the professional and the technical component, but it’s substantially more aggressive in light of recent guidance provided by the Office of Inspector General,” Kaye explains. “The practice would lease space on an exclusive basis from a third-party pathology company and enter into an employment relationship with the pathologists. The pathologists would then work in the lease space for specified hours and the medical practice bills for the professional and technical components. I would advise only billing for the professional component, however. Additionally, recent proposed changes to the Stark law, if enacted, may make this model impractical.”

For ASCs or physician investors interested in capturing anesthesia revenue, Kaye points to three business models. “In the first, the surgery center would form a new line of business; basically the ASC won’t just do surgery, but it will also bill and collect for professional anesthesia. Therefore it will employ or contract with an anesthesiologist or anesthesia group to be the provider of anesthesia services, and the ASC bills for anesthesia services.” Kaye does voice two concerns that relate to this model. “One is that some states won’t allow it because of their corporate practice of medicine laws. The other is that some commercial payors won’t pay the surgery center at all, or will pay less, if the ASC bills for anesthesia services.”

Because of those limitations, the second model involves making the anesthesiologist or anesthesia group employees or independent contractors of the medical practices which the physician owners of the surgery centers are affiliated with, and have the medical practices bill for the anesthesia services, according to Kaye. “That model has its own advantages and disadvantages. On the pro side, it addresses the commercial payor concern with respect to an ASC not being reimbursed. On the negative side, an anesthesia group’s reimbursement may still be greater than a standard physician practice’s reimbursement levels for anesthesia services. And, if you’re in a large surgery center, it starts to look a little suspect if the same anesthesiologist is being employed or has contracted with five different medical practices, all billing for anesthesia services. So this is really more advantageous for a surgery center affiliated with one or two physician practices.”

The third anesthesia model, Kaye explains, is the joint venture model, where certain physician owners of the ASC and the anesthesia group set up a new entity to be the exclusive provider of anesthesia services to the surgery center. “This model does minimize the commercial reimbursement issues, but I would say it’s the most aggressive of the three models.” Kaye cautions, “all of these models raise federal and state regulatory concerns, and so they should only be implemented with the proper guidance of an experienced healthcare attorney.”