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Should You Build an ASC?
Before you put the pedal to the metal, do your homework.
, Judith English, Caryl Serbin, Todd Caruso
Publish Date: October 10, 2007   |  Tags:   Facility Construction and Design

If you are a surgeon looking for more control, block time, revenue and more efficiency, or a hospital in need of a "for-profit" arm and a strategy for keeping your surgeons in the fold, an ambulatory surgery center may be a wonderful investment, as thousands of happy ASC owners will tell you. Then again, it may be one of the worst moves you ever made. Surgeons tend to hear a lot more about successes than failures. But we know of a Northeastern center that was built but never opened, an ASC in the Southeast that was open for only a year before closing, and a gorgeous 30,000 square foot center that's sitting empty to this day. Some experts estimate that as many as a third of all ASCs lose money.

What separates the winners from the losers is the same thing that separates good students from not-so-good ones. The winners did their homework. They carefully and conservatively analyzed their own potential for supporting an ASC before ever signing on the dotted line. As a result, some went forward with their projects with all guns blazing, and some pulled in their horns and saved themselves countless dollars and heartache.

In this brief article, we'll provide an overview of what you need to do before proceeding with an ASC.


Get a true estimate of cases
Step No. 1 is to ask all involved physicians for the

number of surgical procedures they performed in the past year, by CPT code. Most physicians can perform this analysis with their office software, provided that they have a thorough knowledge of CPT codes.

It is critical to also analyze which of these procedures were primary and which were secondary. Just as with professional fees, primary procedures get reimbursed at the full APC facility fee rate in an ASC, but secondary procedures done in the same sitting are usually reimbursed at a discount.

Once you have the number of cases, consider carefully how many of those could actually be done in an ambulatory surgery center.

Again, you can do the first portion of this analysis. First, print out of all the surgical cases you billed last year. Subtract all the cases that required an overnight stay, those that would not be appropriate for an ambulatory surgery center, and those that require very expensive equipment that probably wouldn't be available in an ASC.

A note here: Be conservative. Physicians often think big about the number of cases they can bring. It almost always turns out to be less than they think. You may start with the best intentions, but practice patterns are often difficult to change. It's not uncommon for a physician to find that the ASC's location is not as convenient as he thought, or to not get the block time he thinks he deserves, or to be bothered by the center's politics. Drifting back to the hospital is a lot less common when the operating physicians are members of just one group, or when all have significant investment in the center.

The second step of your analysis involves determining how many of the remaining cases could command a reasonable facility fee at an ASC. For this part of the analysis you really need someone with significant expertise in alternate site billing. Facility fee billing is an extraordinarily arcane discipline; it doesn't follow logic. Here are a couple of examples:

  • Laparoscopic cholecystectomies, which are almost always done on an outpatient basis in the hospital, are not currently reimbursed by Medicare when done in an ASC. This may change shortly.
  • You can remove a malignant skin lesion under 3 cm in diameter and the hospital will command a facility fee for it. Do the same thing in an ambulatory surgery center and the ASC will not receive a facility fee. Hospital reimbursement notwithstanding, Medicare considers this an office procedure.

Do a payor analysis
Once you've isolated the cases you did last year, sort them by payor. You'll need to know what your top payors pay for the various procedures. When we do feasibility studies, we determine ASC facility fees for the top procedures from the top 10 payors. Most payors base their reimbursements on Medicare; the facility fee may be "Medicare plus 10 percent" or "Medicare plus 15 percent."

A note here: Do not, repeat, do not, use a national managed care rate for your estimates. Reimbursement rates frequently vary widely even in markets that are very close together. Here in Ft. Myers, the market is heavily managed, whereas in nearby Naples, there is very little managed care. In some markets, such as Miami, the typical reimbursement is actually lower than that of Medicare. In these cases, of course, many more cases are required for profitability.

Some Common Mistakes Facilities Have Made

Here are some things to avoid:

  • Improper reimbursement estimates. A hospital calculated its probable income from an ASC using Hospital Outpatient Department fees. ASC facility fees are generally much lower.
  • Failure to obtain commitment from the participants. Many physicians are initially attracted to "non-recourse" deals, and deals where they don't have to put up any cash. Actually these can be the worst kinds of deals rather than the best. The reason is that the physicians are not committed, and will drop out of the center at the slightest provocation.
  • Poorly located centers. Never forget that the most important factor in ASC location is physician convenience. Patient convenience, low lease price and scenery are all nice, but they are all secondary. The single most common reason that physicians stop bringing cases to ASCs is inconvenient location. The center should be no more than 15 minutes away from the hospital and/or the physicians' offices, and less if possible.
  • Failure to do a feasibility study. These cost $10,000 to $15,000, but can save a lot of heartache later on. Your lender will want to see one anyway.
  • Poor partner selection. Never invite a physician into your ASC just because he has great case volume (in fact these are often the physicians who are going to retire in a couple of years anyway). These individuals will be your business partners; they need to share your philosophies. A rule of thumb is that if you wouldn't feel comfortable inviting him or her into your living room, you shouldn't invite him into your ASC.
  • Democracy. Physician groups need to pick one fair but decisive member and elect him chief of the ASC, and make sure everyone else understands that they are not in charge.
  • Failure to hire the pros. Appointing your brother-in-law chief architect may seem like a great way to save money at first, but using amateurs will inevitably end up making mistakes that will cost you much more in the end. Do your project right, even if it costs little more. You won't be sorry.
  • Belief in "cookie-cutter" analyses. If a consultant provides a "magic number" of cases needed to make your ASC profitable without an in-depth analysis, run the other way. It's simply not that easy.

It's important to also determine whether there may be problems with getting paid. Sometimes the panel is closed or a health plan has an exclusivity clause with a local hospital.

Calculate your costs
Once you have a revenues estimate, create a pro-forma budget with a cash-flow analysis. The more expertise you can marshal for this task, the better. We recommend involving an operations person and a certifed public accountant. Preferably both should be experienced with surgery centers.

Probably the largest fixed cost will be debt service from the loans you took for the build-out, equipment and working capital. To estimate the bricks and mortar cost, we typically work with an ASC-experienced architecture firm; they estimate the cost of build-out and adjust it for local building costs. To determine the equipment costs-typically 30 to 40 percent of the project cost-we use an equipment planner. Again, this results in only a rough estimate of what will be needed, as early in the project physicians will not have identified their equipment preferences.

A third piece is the consulting and legal fees. The latter can vary widely depending on your state's legal and regulatory environment. If your state requires a certificate of need, attorneys' fees may range from $30,000 to $100,000.

Sample Pro-Forma Income Statement

ANYWHERE ORTHOPEDIC GROUP
ASC FEASIBILITY ANALYSIS
ANYWHERE, USA

INCOME STATEMENT/CASH FLOW

Scenario 1
Based on 85% Case Transfer

Scenario 2

Break Even

Scenario 3
Based on 100%
Case Transfer

CASES

1,950

1,505

2,295

AVG. REIMBURSEMENT PER CASE

$1,200

$1,200

$1,200

INCOME

FACILITY FEE REIMBURSEMENTS

$2,340,000

$1,806,000

$2,754,000

NET REVENUE

$2,340,000

$1,806,000

$2,754,000

EXPENSES

SALARIES AND BENEFITS

628,000

565,000

650,000

MEDICAL/DRUG SUPPLIES

487,500

376,250

573,750

RENT

165,000

165,000

165,000

UTILITIES

33,600

33,600

33,600

OFFICE SUPPLIES & EXPENSE

21,060

16,254

24,785

CONTRACTED SERVICES

38,000

38,000

38,000

REPAIRS AND MAINTENANCE

42,000

42,000

42,000

MARKETING

5,000

5,000

5,000

INTEREST-IMPROVEMENT LOAN

77,000

77,000

77,000

INTEREST-EQUIP/WORKING CAP LOAN

165,000

165,000

165,000

LICENSES, FEES, ACCREDITATION

10,000

10,000

10,000

AMORTIZATION

62,000

62,000

62,000

DEPRECIATION

285,000

285,000

285,000

MANAGEMENT FEE

117,000

90,300

137,000

MALPRACTICE INSURANCE

12,000

12,000

12,000

COMMERCIAL D&O INSURANCE

7,000

7,000

7,000

LINEN, LAUNDRY & UNIFORMS

10,725

8,278

12,623

TAXES, OTHER THAN PAYROLL

4,500

4,500

4,500

OTHER OPERATING EXPENSES

19,500

15,050

22,950

TOTAL OPERATING EXPENSES

2,189,885

1,977,232

2,327,909

NET INCOME (LOSS)

150,115

(171,232)

426,092

LESS INCOME TAXES (PASS THRU ENTITY)

-

-

-

ADD BACK DEPREC./AMORTIZATION

347,000

347,000

347,000

DEDUCT PRINCIPAL PAYMENTS ON DEBT

(175,000)

(175,000)

(175,000)

NET CASH FLOW

$332,115

$769

$598,092

The final part of this debt service is your operational capital. You will need from three to six months of expenses in the bank prior to starting your project.

Other fixed costs include your lease and utilities.

Variable costs include payroll and supply costs.

To estimate staff costs, it's necessary to estimate the overall man-hours you will need. We like to break these into clinical hours and administrative hours. For the former, you will be able to use a mix of RNs and scrub techs. To find out their hourly rate, talk to nurses in your local hospital and examine national averages. We also use the Federated Ambulatory Surgery Association ASC Employee and Benefits and Salary Survey, which is broken down by state.

As for supplies, collect or create preference cards for the most common cases for all surgeons, then calculate the costs. We use an ASC management software program to do this. Multiply the costs per case by the number of cases you expect to do each month.

It's important to do a realistic cash-flow analysis along with the study. This is simply an estimate of how much money you will have in your bank account at any given time. It is very possible for a profitable ASC to go bankrupt. First, you must achieve accreditation before some insurance companies will reimburse you at all, a three- to six-month process. Second, at start-up, under the best of circumstances collections will take 75 days. More typically, they take 120 days. Most experts recommend having no less than three and preferably six months' worth of operating capital on hand when you open.

At the end of the process you can construct a reasonably accurate pro-forma income statement (See Statement on page 10), complete with cash flow. What's acceptable varies from person to person, but at a minimum the center should do well enough to pay off the start-up costs within five years.

A note here: It pays to think not just about the first year, but the "out" years as well. It is difficult to impossible to predict what will happen to health care in general, but you should definitely think about what will happen with the partners in your ASC. For example, if key members of the group plan to retire in the near future, you need to think about how you will replace those cases.

One final note: Doing this feasibility study is not free. Expect to invest a minimum of $10,000 and usually more.

We wish you the best of luck with your exploration. Be optimistic, but temper your outlook with the knowledge that not every ASC is meant to be. If you base your decision on the facts, you will have won in the long run.