Business Advisor: Launching a New Service Line

Do the work up front to avoid losing money while boosting your workload.

As more procedures from more specialties make their way to the outpatient arena, ASCs are understandably tempted to expand their offerings by adding new service lines. But as lucrative as adding a new specialty could potentially be, ASCs should tread carefully and strategically before building and activating a brand-new line.

Tackling the ROI question

To successfully add a new specialty, numerous variables require your attention. “First and foremost, have an honest conversation with your existing partners and board members,” says Sean Rambo, a 20-year veteran of the ASC industry who is president and cofounder of Compass Surgical Partners in Raleigh, N.C., a full-service ASC management and equity partner. “What specialties do we want to target that would complement our base book of business well and make the most sense to bring in?”

Next, says Mr. Rambo, examine whether you have critical mass in the specialties you’re targeting that would warrant investment in new equipment and training staff. “You wouldn’t necessarily add orthopedics as a specialty for one physician who was at retirement age, for example,” he says. “On the flip side, if you have a group of four or eight physicians of any specialty, it begins to make sense. Size up your equipment needs, perform your return on investment (ROI) analysis, and look at what your breakeven would be. What does that ROI look like over two, three, four years?”

This exercise is as important for your targeted physicians as for your center and its current stakeholders. “Do it on both sides,” says Mr. Rambo. “For the physicians coming in, what is their buy-in, and what does their ROI look like? Does this make sense for them relative to building their own center or partnering with somebody else? For your internal existing partners, if you bring in a new specialty line, what is their investment? What does the ROI on a diluted, per-share basis look like?There are a decent amount of financial analytics involved.”

Honestly examine how capable your center would be at handling the new line safely and efficiently. “The best way to avoid mistakes is to measure twice and cut once,” says Joe Zasa, JD, founder and managing partner of ASD Management, a Dallas-based surgery center management, development and consulting firm, and author of the book Developing and Managing Surgery Centers. “Go through a dry run of how these procedures are really going to work, and make sure you understand the true cost of doing them. Determine your expected reimbursement minus your variable costs — medical supplies, drugs, implants, transcription — to come up with a gross margin. If you need to add staff, that needs to be factored into the equation.” Finally, examine reimbursement. “Take a hard look at your commercial payer contracts to make sure you have appropriate reimbursement and carve-outs for the new service lines,” says Mr. Rambo. “For example, if you’re adding total joints to an existing orthopedic center, make sure your commercial payer contracts are priced appropriately for the total knee codes and total hip codes.”

Crunching the numbers

Mr. Zasa describes some calculations his partner centers make to determine the financial viability of adding a line, such as sensitivity analysis, which accounts for inflation, increased labor costs and unknown variables. “Figure out how many of these cases you think you’re going to do, and discount it by 30%. The remaining 70% is your expected volume,” he says. “Next, determine what you’ll be reimbursed: the number of cases times the reimbursement. Then determine your startup costs — we usually amortize them over five years. Finally, figure out your variable costs to learn what you’d actually make per case.”

Figure out how many of these cases you think you’re going to do, and discount it by 30%. The remaining 70% is your expected volume.
Joe Zasa, JD

Doing this work up front can ensure you don’t end up busier than ever but losing money in the process. “A common pitfall is really not understanding the practice of the new specialty you’re bringing on,” says Mr. Rambo. “Perform an honest assessment of it in your practice.”

For example, one of Mr. Rambo’s multispecialty ASC partners was recently looking to add urology. “Everyone got excited when they broke down their case volume and the number of doctors and thought it could be done at the surgery center,” he says. “Upon a deeper look, they found that 25% of the new business would be lithotripsy, and two of the six doctors they were looking to add own a litho company and the hospital pays them a per-click fee. At a surgery center, that would be unprofitable.” Another factor: patient safety. “Yes, the codes may be on the Medicare approved ASC list, but what are the comorbidities?” says Mr. Rambo. “What’s the comfort level of the physicians to bring those cases to the center?”

Adding spine is another cautionary example. “Spine can be a phenomenal specialty, but not all spine is created equal,” says Mr. Rambo. “Certain spine surgeons are classically trained and have always done everything at a hospital. Getting them to change course is tough compared to a younger spine surgeon who is fellowship trained in an outpatient setting, does everything laparoscopically, and can come over and be a fantastic contributing partner.”

To prevent efficiency issues, Mr. Rambo warns against adding too many specialties too quickly. “You simply lose the efficiency, and different specialties schedule differently,” he says. “If you schedule too many too fast, a lot of your nurses aren’t trained in certain specialties, and it just bogs the efficiency down.” OSM