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 August 2011 Issue

​Ambulatory Surgery Centers A-Z

By Gregory Horner, MD and Anne Miller, MD
As physicians we want the best care possible for our patients.  As surgeons we want control over the OR environment.  And because we earn a living from our profession, we want to maximize our reimbursement. 
Many surgeons around the country have found that participation in an ambulatory surgery center enables them to maximize these three goals.  Hand Surgery is among the specialties best suited for an outpatient setting and hand surgeons are a desirable addition to an ambulatory surgery center (ASC).  With entitlement programs on the brink of major reform and the continual loss of purchasing power facing surgeons, economic participation in an ASC is becoming an attractive option.
The ambulatory surgery center industry began in 1982 when Medicare first approved payment to ASCs.  The Office of the Inspector General promulgated rulings to create a Safe Harbor for physician ownership in ASCs.   This act by the OIG made way for physician ownership in ASCs by protecting surgeons from anti-kickback legislation.  The OIG commented in their 1999 ruling on the Safe Harbor that private ambulatory surgery centers can save money for Federal healthcare programs through improved efficiency and lower costs.
By 1990, 2.3 million procedures were performed in ASC’s annually.  In 2009, ASC's performed 22 million procedures, including 3.3 million Medicare beneficiaries alone.  That same year, there were 5,260 Medicare certified ASCs in the United States.  Medicare combined spending on ASC services was $3.2 billion, an increase of 5.1 percent per beneficiary over 2008.  As freestanding ASCs are paid more than 30% less than Hospital Outpatient Departments (HOPD's), this Medicare reliance on ASC's has saved billions for taxpayers and program beneficiaries. Early results of benchmarking data suggest that the quality of ASC's are on par or may exceed that of hospitals and HOPD's.

The private ambulatory surgery industry is not without risk.  In fact, a large percentage of ASC's fail to turn a profit.  Buying into an existing center is a less risky route to ownership.  Syndication of a HOPD to referring physicians is another avenue to consider.   These syndications are an increasing phenomenon given the greater efficiency that can be achieved by the hospital with the surgeons invested in the success of the center.  Frequently, an expert opinion is required to assure proper valuation and advice in these transactions. 
Getting In
With millions of dollars at stake, the surgeon who prefers to start a de novo ASC should become familiar with the best practices involved with starting an ASC.  The initial involvement with an ASC begins with the politics of your local healthcare delivery system and how it relates to your practice.  For example, in regions where the hospital has begun to hire physicians from your referring doctor pool, an entrepreneurial move by the specialists can be seen as a threat to the hospital and may interfere with your referral pattern.  Certificates of need (CON) are required in 43 states.  This can lead to difficulty getting started, as the hospitals wield considerable influence over the Certificate granting process. It may be possible to bypass the CON process by re-syndicating an existing center.
If you can clear the political hurdles, the next potential obstacle is the payer mix.  Not all payers are of the mindset that ASC's are the big money savers that owners purport them to be.  In some markets the payers will not contract with new outpatient facilities. Thus, it behooves the physician investors to get a firm understanding of the expected payment structure, the requirements and the timeline for participation with the commercial payers in their market.  Either way, early in its operations the center may be without contracts with some payers.  So-called “Out of Network Billing” raises many legal issues that must be understood.
Next the surgeons must identify a group of physicians who will bring cases to the center and determine the volume and type of surgeries that can be expected.  Center readiness by way of equipment and instruments, geography, referral politics, and health status, among other issues, will play a roll in determining which patients can be brought to the center.  This material must be processed into CPT codes by volume and payer mix in a formulaic manner.  The case volume data is then used to plan the size and scope of the center.  All of this information is then used to create a financial model of the potential center that is hypothetical, or “pro forma.”  The pro forma financial statements are used as the basis of the business plan and as discussion documents for banks and potential investors.  An accurate pro forma is extremely important.   The most common cause of failure of ASCs is overbuilding, as surgeons tend to overestimate the number of procedures they will bring to the center.

Keeping it Going
Physician owners effectively manage many ASC's.  Other owners of privately developed centers may choose one of many ASC management companies to handle day-to-day operations.  These companies will get paid either as a percent of net revenue, through shared equity or some combination thereof.   Either way it is best to have goals aligned so that the manager and surgeon owners will benefit from increased profitability.
Regardless of how the management company is compensated, their management must be held to a standard.  The management should be monitored by the owners and measured against regional and internal benchmarks.  Financial and non-financial benchmarks may also form the basis for financial incentives for employees.  Management should be methodical and disciplined with strict adherence to the regulations of CMS, accreditation agencies, and state and local authorities. They must stay on top of the ever-changing requirements from these agencies.  The management company should also oversee the hiring of a Director of Nursing who will insure the maintenance of high clinical standards. Decisions such as distribution of block time, equipment purchasing and standardization of implants to keep costs down are also critical. It is typical for surgeon owners to become involved in peer review and other quality performance measures.
Getting Out
The need for redemption of a partner or sale of surgery center equity is very common. For example, a surgeon owner may retire or move.  Or a surgeon may slow down and wish to sell shares to a younger partner who is becoming more active.  Occasionally, a physician owner may underutilize the center, triggering redemption of his shares.  It is critical that the Operating Agreement of the partnership include clauses to cover both voluntary and involuntary transfer  of shares of the ASC. If not, outside consultants and legal counsel will be required. 

In addition, a surgery center ownership may decide to sell some portion of its equity to an acquiring entity. Surgery centers are hot targets for acquisition by large management companies, private equity firms and hospitals. The process of negotiating such a “liquidity event” and determining price can be a complicated process.  It is common for owners to employ expert brokers and or valuation firms during the transaction. The price of an acquisition is usually based on a multiple of annual EBITDA (earnings before interest, taxes, depreciation and amortization).  This multiple can often be 5x to 6x EBITDA. The taxes to the owners on such a sale may qualify for long-term capital gains, which may be substantially lower than regular income tax.  Generally, the sale involves a controlling interest but not the entire center.  This way continued financial incentives remain for surgeon utilization and involvement in governance.  
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