There's a lilt of sadness in her voice when Tracy Biedermann, RN, CPAN, talks about the Harrison Outpatient Surgery Center — one of the first, if not the first, freestanding outpatient centers in New York State.

"It was a great surgery center, really a center of excellence," she says, recalling the halcyon late 1980s, when — fueled by an ingenious new concept — the Harrison Center seemed to have found a can't-miss formula. Outpatient surgery was a new world of opportunity, and in and around downtown Syracuse, where the center stood, there was plenty of business and virtually no competition.

"It was quite lucrative back then," says Ms. Biedermann, a staff nurse at the center, and later its recovery room supervisor. "Outpatient surgery was really up and coming. The business grew, and the owners even opened a second center (in Camillus, N.Y.)."

But over time, a new reality began to set in. If the business model — one that involved a steady number of takers and a diminishing number of givers — seemed too good to be true, that was because it was. It was a model that couldn't adapt to an evolving and increasingly competitive landscape.

"Over the years, many of the surgeons who were stakeholders retired or began operating at other facilities, and they were no longer bringing revenue to the center," Ms. Biedermann recalls. "But all the owners continued to receive distributions. That's fine, when you don't have competition."

But soon the center did. An orthopedic group that had been doing a large number of cases at Harrison saw a chance to get in on the action by opening its own outpatient center. "A second orthopedic group came in and helped make up for that," says Ms. Biedermann, "but ultimately they opened their own center, too."

Still, portions of the dwindling revenue continued to be distributed to retired surgeons. The burden eventually became too heavy to sustain, and in 2010 the center closed. A month later, it was acquired by Upstate University Hospital, where Ms. Biedermann is now the clinical manager. The Camillus center was also sold. "Times change," she says wistfully.

TOO OPTIMISTIC? Overbuilding can result in overhead that eats ASCs alive.

Inequitable arrangements
It's a scenario that's played out again and again. Centers with shortsighted ownership arrangements may thrive at first, but eventually the initial flock of surgeons scatters and/or ages, and the golden eggs begin to disappear.

"If one or a few doctors own a majority interest and get most of the distributions, they have a hard time attracting new partners," says Jon Vick, president of ASCs, Inc., a Valley Center, Calif., consulting firm that specializes in sales, strategic partnerships and joint ASC ventures. "Then, as some of the partners start to slow down, revenues and profits decline, and it gets even harder to attract new physicians. Now the center is just breaking even, or losing money, and nobody wants to buy in, so it closes."

About 100 ASCs close every year, says Mr. Vick, many because they fail to recruit new physicians and ultimately can't find buyers (see "ASCs Now Rising and Falling at the Same Rate").

The people bringing the cases have to have an adequate incentive, says Jeff Péo, chief development officer for management company Ambulatory Surgical Centers of America in Hanover, Mass. He describes a typical recent example: a center on the verge of collapse because several of the partner-surgeons were bringing next-to-no cases. "They said it was because no matter how many cases they did, they didn't make any money. So we looked at the ownership charts. Sure enough, almost 90% was owned by people who were no longer practicing medicine, or who'd moved out of state. The docs who'd stuck around were saying: It isn't worth it. I'm busting my butt to put dollars in someone else's pocket."

Any ownership scenario in which one physician has a significantly larger stake than any of the others is also likely headed for trouble, adds Joe Zasa, co-founder of ASD Management in Glendale, Calif. "The other physicians start to feel disenfranchised, like second-class citizens," he says, "and it dissuades them from being proactive participants. Running a center is a team effort. If it becomes a one-man show, the other players start drifting away, and one physician typically can't support a center."

Centers need, he says, equitable arrangements, ones that reward partners based on their ongoing contributions.

You also need to plan for what may seem like the distant future, says Mr. Vick. "Physician-owners spend a lot of time developing an ASC, but give little or no thought to an exit strategy until it's too late. That's another reason ASCs close. When doctors turn 60, potential buyers start to heavily discount the value of their cases going forward, because they know they're likely to retire within a few years." Those opportunities continue to decline, says Mr. Vick, especially in the absence of a strong recruitment program. It's important to have a strategic partner who can help attract new doctors, new cases and new contracts, says Mr. Vick.

Boundless optimism
Unwarranted, unrealistic optimism has also been the downfall of many surgery centers, say Mr. Péo and Mr. Zasa, both of whom note the Hollywood-like assumption that once an ASC is up and running, scores of physicians and patients will semi-miraculously be drawn to its door.

Expectations have to be based on conservative projections, says Mr. Zasa. "Not on, 'if you build it, they will come.'"

"This isn't Field of Dreams," adds Mr. Péo. "Unfortunately, a lot of people think that's what happens."

No one knows exactly how many centers have gone under because they overbuilt, over-equipped or overstaffed, but it's a common trap.

"I've looked at hundreds and hundreds of surgery centers," says Mr. Péo. "People say, I've only got a thousand cases right now, but if I build this surgery center, we'll immediately be up to 3,000 or 4,000. They build too big for the case volume they have and the overhead eats them up. They're equipped too big, staffed too big, paying rent on something too big, and they never really get out from underneath that."

Cautious, realistic planning is essential, says Mr. Zasa: "Measure twice, cut once. Make realistic projections based on the actual cases that physicians do, and then discount those down."

You should also be looking at each physician's payer mix, and what types of cases he is doing, says Mr. Péo. Then kick out the cases that aren't typically done in a surgery center, or that aren't reimbursed well enough or that are typically done in an office. Then whittle that number down to an even more conservative estimate and build based on those numbers.

And if some surgeons are saying they're not interested in buying into the center, but that they'll bring their cases? "Don't count on those cases," says Mr. Péo. "If they do, it's gravy. But the only cases you can count on are the owners', because they're legally obligated to do at least one-third of their eligible cases in the surgery center."

Bad contracts
Right-sized centers with the right number of physician-owners are still doomed if they don't make money. One of the biggest reasons centers fail is that they sign bad payer contracts, says Mr. Péo. Too many sign the first offer they see, without bothering to negotiate. When they do, trouble is bound to follow. You can go back to the payer and say you now realize you've signed a bad contract. But the response, says Mr. Péo, is going to be, As soon as it's up, we'll be happy to renegotiate. And even then they probably won't renegotiate much.

The key is case costing and negotiating accordingly. But too many centers have gotten lost in the haze that surrounds the myriad details. "It takes 2 months to get paid, and there's overhead, supplies, implants, and so on," says Mr. Péo. "People don't always understand what it's costing them to do these cases, and that can be a huge money-loser at times."

In other words, if you're not making money on a given case, and you keep adding more of those cases, you don't make up for the losses, you just lose more money. "I've seen it a lot," says Mr. Péo. "People making $500 or $600 on a case, but when all is said and done, it's costing them $700 or $800 to do the case."

Part of the challenge is teaching surgeons how to think like surgery center owners and contain costs, says Mr. Péo. "They're smart people, but they don't know what they don't know. They have to be trained."

When negotiating with payers, centers need to arm themselves with detailed data, he says: We're doing X number of these cases, and we want to keep doing them, but we have to be profitable. If you take these cases to the hospital, it's going to cost you that much more. So give us half the difference and we'll both be happy.

Of course, there are some cases you simply can't afford to do. "You have to send them to the hospital," says Mr. Péo. "The thing that keeps surgery centers open is financial performance. And the things that ensure good financial performance are having cases you can count on and good payer contracts."

Who's in charge?
The ship is also a lot more likely to go down if it isn't clear who's the captain, or if the captain is neither immersed nor well-versed in all the details.

When the chain of command is compromised or diluted, says Mr. Zasa, it's a recipe for trouble. If there's a management company involved, but there's also a physician that the nurses think they're reporting to, the management company may decide to cut ties, he says. "And you end up with a doctor who isn't experienced at running a surgery center, listening to nurses who aren't experienced either, and they're all having to deal with fairly complex issues."

Another dangerous scenario: A physician becomes a sounding board for the staff. He hears their version of the truth, but since they lack objectivity, the physician gets agitated over what may or may not be the whole story. That, too, can undermine management and cause it to lose control, says Mr. Zasa. When it happens, the center may start drifting off into a sea of uncertainty.

Any time management is undermined, it creates an untenable structure, says Mr. Zasa, adding that the best solution is to have a governing board: "Five heads are better than one, and that dilutes the influence of one person. Now you're operating like a real business entity, with 5 to 7 board members providing input, entrusting management, but also objectively evaluating management."

That objectivity is crucial, and benchmarking is an essential component of it. A failure to objectively evaluate how your center compares to others is another death knell, says Mr. Zasa. "You don't run surgery centers off of spread-sheets, but if there's a problem, spreadsheets tell you where to look. You use the data to find the problems and to correct the problems before they fester and become long-term problems."

Objective benchmarking may be tougher for independent facilities, but it's still crucial. "If you listen to what the staff says all the time, that's great, because they're the ones closest to the center," says Mr. Zasa. "But they don't have perspective. Having an outside source provides balance and ensures that you're fulfilling your duty to the center if you're on the governing board."

PLUSES AND MINUSES
ASCs Now Rising and Falling at the Same Rate

Ambulatory surgery centers appear to be opening and closing at about the same rate, with roughly 100 being built each year and roughly 100 closing, says Jon Vick, president of consulting firm ASCs, Inc.

"The market is saturated, growth has leveled off, and that's not expected to change," says Mr. Vick.

As of 2014, there were 5,377 Medicare-certified ASCs. That's a huge jump from the 326 that existed in 1986, but it's only a tiny increase from the 5,316 that existed in 2010.

Those closing down, says Mr. Vick, include some that are being converted to GI endoscopy centers or cardiac catheterization labs, but many are also simply falling by the wayside, unable to recruit new physicians or find buyers.

Then there's attrition on another front. An increasing number of hospitals are converting surgery centers into hospital outpatient departments. Of the 205 surgery centers that closed between 2009 and 2011, hospitals flipped more than one-third of them to HOPDs, says the Ambulatory Surgery Center Association (ASCA). Between 2009 and 2014, ASCA estimates that there have been more than 110 ASC-to-HOPD conversions.

Meanwhile, hospitals have become a major player, and now have ownership stakes in an estimated 24% of ASCs, up from about 2% in 2000. According to this current ownership breakdown, based on estimates provided by ASCs, Inc., physician-owned ASCs still dominate the marketplace:

• Physicians only: 62%
• Hospital/physician(s): 16%
• Corporation/physician(s): 8%
• Corporation/hospital/physician(s): 6%
• Corporation only: 6%
• Hospital only: 2%

— Jim Burger

Organic changes
There have also been centers that did everything right, but still ended up shuttering their doors.

A surgery center in Oklahoma was closed for 6 months when a water line running under the edge of the building broke and began shooting water into the OR in the middle of a case. Fortunately, the center survived, but as Mr. Péo points out, it's hard to predict where the next hurricane, tornado or earthquake may hit. That's why it's important to have business continuity insurance.

Sometimes there are simply "organic changes in the market," says Mr. Zasa. Take so-called economic credentialing, for example. Hospitals may buy up groups of physicians and tell them they can't operate at your surgery center anymore. Or surgeons may leave the area.

"Years ago, surgeons stayed put," says Ms. Biedermann, recalling the glory days of the Harrison Surgery Center. "But now they can go anywhere. They have so many more opportunities."

Their leaving is compounded because most fixed costs are left behind. "Usually it takes 150 to 200 cases a month for a smaller center to break even," says Mr. Zasa. "And anything over that makes money." If you suddenly drop from 300 cases a month to 150 or fewer, you'll likely start bleeding red ink.

Exploit your advantage
How can you make sure your surgery center won't become a fond memory for those who know it, and a mere statistic for those who don't?

"There are empty ASCs in every major market," says Mr. Vick. "Current ASCs will prosper if they can get profitable in-network contracts, concentrate on high-volume short cases and have the best doctors in the community on their staff. Steerage by major payors is also helpful. As low-cost, high-quality providers, they have a built-in advantage. Having a strategic partner can help them capitalize on that advantage."