From Red to Black: Best Practices for a Successful ASC Turnaround

From Red to Black: Best Practices for a Successful ASC Turnaround

By Jennifer Schraag

No one has to spell out the challenges ambulatory surgery centers (ASCs) face in healthcare’s competitive market. As the reins are pulled tighter on reimbursement and costs climb ever higher, it is no wonder that centers around the country find themselves faltering.

Many administrators are scratching their heads at what can be done to make it right again; what changes they can implement to keep their center afloat. The first and most important step is that one must recognize the preliminary signs of failure — before it grips the center too tightly.

Luke M. Lambert, chief executive officer of Norwell, Mass.-based Ambulatory Surgical Centers of America (ASCOA), says the steps that lead to failure begin all the way back at the center’s original planning stages. He shares the three most common planning mistakes he sees:

• Overbuilding
  “Overbuilding leads to excessive fixed costs that can sink an ASC. As a rule of thumb we like to see the square footage be less than or equal to twice the number of planned cases.”
• Plastic surgery
  “Surgery centers that are built around plastic surgery can be terrific for the plastic surgeons’ practices, but rarely do they make for profitable surgery centers. The inherent conflict between the plastic surgeon’s financial interest and that of the center usually results in the center losing. Plastic surgeons usually give their patients a global fee and have to pay for anesthesia and the facility out of that fee.”
• Ownership
  “Too often we see that failing centers were built on a Field of Dreams premise: ‘Build it and they will come.’ It is far better to get surgeon commitment at inception by including them as significant participants in the founding partnership. If the center is owned by parties that can’t bring cases, it can be challenging to attract sufficient volume merely on schedule availability and service. Working to get significant surgeon participation up front enables you to get direct and meaningful indications of the support your center will get.”

Once centers are up and running, the warning signs become more obvious and urgent, Lambert adds. He says a lack of cases, a lack of revenue, a lack of operating cash surplus, challenges with venders who aren’t shipping because of nonpayment, and surgeons frustrated with inefficiency, are a few such signs.

William G. Southwick, president and chief executive officer of Nashville, Tenn.-based HealthMark Partners, Inc., shares his top five signs of impending center failure. They include:

• Steady quarter over quarter case volume declines 
• Cessation of distributions to partners for three quarters or more 
• Increased debt requirements due to an inability to fund capital expenses as budgeted 
• Staff departures to multiple other locations 
• Trouble scheduling meetings with physician leaders for strategic planning and decision making 

Other financial indicators may include difficulty in generating distributions and not enough money on hand to pay vendors or to make payroll.

Robert J. Zasa, MSHHA, FACMPE, partner with Pasadena, Calif.-based Woodrum/Ambulatory Systems Development, adds that continued dissatisfaction and bickering among partnered physicians regarding ownership percentages and ownership of units or shares is a clear sign of things turning sour. He also mentions that continued concerns regarding operations of the center, a reduction of cases, and continued problems with collections, all are indicators of an ensuing downward spiral.

Facing a turnaround obviously is not clear of its challenges — challenges for the companies coming in to help with the turnaround as well as challenges for those manning the center.

Thomas Mallon, founder and chief executive officer of Westchester, Ill.-based Regent Surgical Health, perhaps says it best when he quotes the great Albert Einstein, “Einstein said the greatest insanity is continuing to do things the same way and expecting different results. That is the most challenging aspect — getting people to try doing things differently,” he shares.

“Usually, it doesn’t take a genius to see what is wrong at a facility,” Lambert notes. “What is typically the most challenging is getting surgeons and center staff to change the practices, traditions, and habits that have led to failure. Surgeon owners sometimes need to overcome hospital threats and strong-arm tactics to bring their own cases. Center staff may need to overcome a leisurely culture in order to deliver the turnover times needed to be dramatically more productive,” he points out.

Addressing the fears of the staff and physician owners can make or break a turnaround attempt. Clear, concise and regular communication is imperative to keep everyone up to speed and involved because, “there will be certain staff members who are key to the turnaround,” Southwick points out. “Talk with them early, gain their confidence and make them part of the process. Some jobs will need to be terminated, but don’t let the good ones go over lack of communication and participation,” he warns.

Remember that staff turnover is unavoidable. “Inevitably you will see some good ones leave and have to terminate the underperformers,” Southwick states. “This is stressful and can be fought initially by current staff.”

Mallon agrees that the staff is always worried about their jobs and he adds that the best employees often are the first to leave. “The physicians also worry about doing everything legal and ethical. This requires the help of excellent legal counsel,” he warns.

In relation to this topic, Southwick says a common misconception is that of trimming staff and costs means impending failure. “A house cleaning is almost inevitable and changes are the only option. Physician members need to understand the longer term plan,” he asserts.

Zasa points out that the surgeons often do not want drastic change in their operating environment, so keeping the staff motivated is important — as well as challenging — while going through the turnaround. “Physicians and staff think everything will change. Fixing overstaffing issues (is the) hardest to change. Each of the nurses has their doctor advocates and the nurse administrator is used to staffing a certain way. Keeping the staff’s attitude positive as you implement the changes are necessary. You must communicate clearly why the changes are necessary for keeping the center afloat and their jobs intact. Management must create an imperative for the changes, and they must reassure them that only specific changes are necessary, and make a strong case for changing them,” he advises.

Another misconception is that of the inability to recruit additional surgeons to a losing center. An interesting point and one that Southwick says that conceptually, is “just wrong.”

“Buy low/sell high is lost on many and the best time to come into membership is when the additional volumes provided by new surgeons makes the difference in success,” he points out. “Fair market value buy-in is low, returns to them are better, and they can see them [the returns] within months rather than years, and without the risk of new center startup challenges.”

Other facets may include the additional capitalization that may be required and disproving good money after bad concerns. “Planning for debt and capitalization needs to carry out the turnaround,” Southwick asserts. “It is hard to increase debt in bad times but sometimes that just has to happen if equipment is poor.”

In addition to the above, marketing efforts, concern over competitive physicians, and the ability for competitors to accept competitors as partners for a common purpose, are all challenges which may occur.

Robert Carrera, president of Fort Collins, Colo.-based Pinnacle III, adds that the biggest challenge in the physician recruitment realm is the proliferation of centers that have gone up around the country. Finding physicians that will pump up the volume in a center and make it viable again, and finding a group of physicians that are not already invested in something else, are where the challenges lie, he says.

Recruiting additional volume and physicians are the key avenues in the turnaround of a center, according to Carrera and, “That’s the paramount thing,” he says. While those two are the “backbones,” all the intricate details that will be involved in each of those two aspects also are very important.

Staff and Physician Changes

The first step Zasa suggests is to immediately interview each owner of the center to identify the key issues they feel need to be addressed. “Look at ownership and restructure this, and reassure employees and communicate with them frequently,” Zasa adds.

Get non-surgeon owners to sell their ownership to surgeons in the community. This is imperative according to Zasa, but it is also important to ensure you are putting the right price on the right value.

“Even though physician member buy-ins can be low, be sure to not encourage very small ownership levels. They are not committed and will likely run afoul of Office of Inspector General (OIG) safe harbors,” Southwick warns.

A transition plan must be developed that all employees can understand and begin accomplishing. When establishing such a plan, Southwick suggests clear communication of that plan as well as shared progress on its execution. “Things don’t turn around overnight and physician partners are busy doing what they do, and if you leave it to guess, they will not feel good about your efforts,” he explains.

He suggests effective physician education with concrete evidence of turnaround options and execution plan, as well as staff empowerment to take ownership in center performance and tracking to targeted benchmarks. Moreover, he says the center must have solid clinical care — first. “If this is not the case then little else will ultimately matter,” he warns.

Lambert mentions that the center must gain compromise and dedication from its employees to work more efficiently. He suggests compressing the surgical schedule so that the center staff members have full days of surgical activity without down time. “This takes significant cooperation and support from your physicians,” he asserts.

He continues, "Implement a variable staffing model whereby staff members are sent home once the cases are done. There is no point to pay people when there is no work to be done.”

Streamlining the practices encircling the OR is imperative. Lambert says the culture must change and staff who have been getting paid for hours or days without there being any work at the center will have to lose hours. “Surgeons will need to be accepting of a rational scheduling approach that enables the ASC to operate efficiently, and anesthesia that is insufficiently skilled at outpatient procedures may need to be upgraded,” he suggests.

“Those who fear the changes necessitated by a turnaround are often those who have been benefiting at the center’s expense,” he points out. “Some surgeons worry that patient care will be sacrificed for cost savings. This should never be the case. It would be better to close a center than compromise care,” he concludes.

Financial Changes

“The most important thing is to identify the most pressing issues and solve those before turning to anything that does not threaten the viability of the business,” Mallon warns. He says it is usually too few cases or too little reimbursement per case.

Lambert agrees, adding, “Know your costs and stop performing unprofitable cases,” he asserts. “Centers that are threatened with closure due to unprofitability need to look closely at where they are losing money. If your payers aren’t paying for implanted tissue that is driving losses, then those cases need to go to a facility where it is reimbursed. It is not uncommon to find major segments of a center’s volume to be unprofitable. If a center loses $1,000 on an implant that isn’t paid for, it can sometimes take another five cases to get back to break even.”

Zasa says it is best to start with the easiest fixes first in order to gain momentum. He suggests such aspects as changing group purchasing organizations (GPOs) to improve the cost per case and the costs of drugs, fixing service contracts, and reviewing payer contracts. “These are things that can improve the bottom line of the center, get the staff seeing that improvements can be made, and they are not personal in nature,” he says.

Zasa shares that he has a center in California which has accomplished many of the aforementioned tasks successfully to reduce the loss at the facility. The loss has been reduced from over $100,000 per month to less than $35,000 per month on a cash basis in four months, he shares. Zasa adds that the center is now offering a new service (pain) “that will help the caseload and be a profitable new service to the ASC.”

“Also,” Zasa suggests, “strategize with staff and physicians as to what new services or doctors can be added to the center. Get people thinking how to grow the business, not just cut costs.”

As Zasa mentioned earlier, a total review and revision of third party payor contracts can boost the center’s bottom line as quickly. Renegotiating payor contracts can be a lengthy, challenging, and daunting task, but one that should be done regularly anyway. “Many centers that have been poorly managed haven’t negotiated payer increases in years, despite increasing costs,” Lambert points out. “Renegotiating payor contracts can be time consuming but it also can be critically rewarding.”

Other financial modalities of great importance include that of conducting a total review and revision of the charge master, seeking restructuring opportunities and better terms or lower interest rates, and lowering the accounts receivable (A/R) time period. Lambert says it is imperative to ensure that A/R are being effectively pursued. “Dropping your accounts receivable days from 75 days to 35 can generate important and significant cash flow in a short time period,” he shares.

A Case Study

Southwick shares the example of a HealthMark Partners (HMP) center that was in significant debt. The center was majority-owned by a hospital partner so that was the first aspect they deciphered needed attention. HMP had the center purchase the hospital interests and all nonparticipating members’ interests. It resyndicated to a major physician-owned model with targeted physicians fulfilling the case type assessments, important in facilities that have market reputation for pending failure.

Once they recognized the facility’s limitations on the types of cases to perform and the volume requirements needed for success, they staffed according to case type needs and updated the equipment needed to generate the higher volumes. This in turn worked to attract surgeons who felt the facility was outdated.

HMP then assisted the center in renegotiating contracts and they added payors that previously were not available. The staff and their functions were overhauled with more streamlined job descriptions and duties. This approach helped in improving business office functions as well.

“In a year and a half, the center went from cash flow negative to distributing a half a million and growing,” Southwick shares. “The center now has next to no debt. The syndication required many hours and extensive efforts to convince area surgeons of the possibilities due to lower entry costs for this facility, but the center now has requests for partnerships that are unsolicited.”

Of course, not all aspects of a turnaround are going to run smoothly and end in such sweet success. In fact, not all centers can be saved. Some have been built so large that the fixed costs alone prevent the center from ever becoming profitable, as Lambert points out. “Some are owned by plastic surgeon groups who don’t much care if the ASC ever makes money. They are content to earn profits in their practices at the expense of the center. Some physician groups see their surgery center as an entity that exists for their convenience and pleasure rather than as a for-profit entity. A committed group of surgeons is a prerequisite for turning a center around,” he adds.

Successful Exit Strategies

“I think the biggest misconception is that every center is fixable,” asserts Carrera. “Most groups think, ‘Oh, if we just do this’ or ‘We just do that’ than we are good; ‘It’s just a volume problem’ or ‘It’s just a net revenue problem. Once we get this one thing fixed then this center is just going to explode and be great.’”

There are some situations where the center is ill conceived from the beginning, he explains. “Bad market, bad mix of physicians, bad contracts in a market that is highly competitive, an overbuilt market, and in some situations, we look at a center and say you know what, we don’t necessarily think this is fixable. There isn’t a group of physicians interested in coming in to help fix it or the market is so competitive that you are not going to do any better on contracts so therefore you are not going to have the upside to sell to another group of doctors.

“Or, the center is so overbuilt and carries so much expense with it that there really is no upside potential to it. So I think the most common misconception is that every center is capable of being turned around,” he explains.

Carrera says the available exit strategies for such instances depend upon the marketplace. “It may be a situation where the physicians themselves; if it is a 100 percent physician- owned center, the physicians themselves can’t find a way out,” he points out. “Can one of the large national players come in? Do they have a contact in the marketplace? Is there a hospital system that needs the additional square footage or additional space for surgery? Maybe that hospital system has better physician contacts and can add to the recruiting process,” he offers.

Lambert makes an interesting point when he says, “Exit strategies for the troubled center don’t amount to much when your center is losing money,” he asserts, adding, “The exit strategy for profitable centers is to sell to a majority buyer such as USPI, Symbion, NovaMed, National Surgical Care, Meridian, and AmSurg. Even then it isn’t a total exit. These buyers will buy only 51 percent to 65 percent, typically.”

The story of turnarounds comes full circle when Carrera points out that a physician owner or center administrator has to do due diligence on the front end of the center from the feasibility standpoint and make sure it is a good project from the beginning.

Identifying those criteria from the beginning is imperative, he offers. “Don’t wait until you’re not making payroll or you have completely tapped out your line of credit or you’re in a disaster situation at the center before you realize you have a problem that needs to be fixed. 

“Dealing with those things up front can help you avoid a lot of problems down the road. You can start looking for the turnaround possibility or that exit strategy before you become desperate.”

He adds that in many cases, it is oftentimes worth it “to pay for some extra teeth” and hire a company experienced in handling turnarounds. “Also, there are times maybe early on that you want an objective view of how your center is doing. Maybe it’s an accounting firm or maybe a management company, but some expertise that can come in and give you a picture of ‘Here is what is going on in your center and here is what you need to do to make it better or fix it.’ 

“Not all of that knowledge is homegrown. Sometimes groups need to go outside and get that information and then utilize it,” he adds.

Mallon’s company has performed many turnarounds and as he concludes, “They are extremely hard but incredibly rewarding. Our partners who have faced financial devastation are so appreciative of what we accomplish — together.”