An ASC management company can boost a center's value by improving billing and collections and by renegotiating contracts, and it can lift significant financial and administrative burdens off physicians' shoulders.

Unfortunately, a management company can also drag an ASC down if its business philosophy is incompatible with the objectives of the facility's owners. To help ensure the right fit, I recommend asking your prospective ASC management firm these five important questions before entering into any contractual relationship.

Development or management company?
There are a growing number of ASC "management" firms on the market, and the reason is that there is money to be made in this business. While this is a good thing for ASCs and management companies alike, ASC owners should know up front if a firm has a short- or long-term focus. One good way to determine the motives of your prospective management firm is to ask the company representatives to categorize their services as "development" or "management." Here's the difference:

• Development firms tend to offer a broad range of services needed for facility start-up, expansion or redesign - like equipment planning, architectural design, system configuration/upgrading and financial consulting. Typically, development firms have little involvement in the day-to-day operations of a center once the project is completed.
• Other firms are considered true "management" companies because their focus is to help the ASC run more efficiently and effectively over the long term. While these firms may undertake development projects, they also maintain a long-term relationship with the ASC. Under these partnerships, the ASC's physician owners retain the management firm to support the facility managers.

Keep in mind that your needs should dictate the type of firm you select.

Corporate culture?
Once you determine the type of firm you need, try to define each prospective firm's corporate culture. That is, will the firm take a "drive-down from the top" or a true partnership approach? Will it centralize administrative functions like billing, collections, accounting, payroll and basic business office tasks in its corporate headquarters, or will it empower the ASC to perform these functions? Will it control clinical decisions or provide guidance while leaving the ultimate clinical decisions to the physician owners? Will it institute pre-existing 'corporate-wide policies,' or will the physician owners have a hand in creating new policies designed to serve the particular ASC? The more you find out about the corporate culture beforehand, the greater the chance you will find a partner whose business approach mirrors your own.

I also recommend investigating how each prospective firm handles financial issues. Billing is a very important example, because physicians have the most to lose if their patients are disgruntled with the ASC's billing practices. Thanks to insurers' efforts, patients are increasingly knowledgeable about the cost of their own care, making it especially important for physicians to understand the methodology behind their charges and buy into the overall revenue strategy. Some management firms, for instance, may set gross charges based on a universal multiple of Medicare reimbursements (universal charge master), while others use the cost of each procedure as the basis for the charge and then add a mark-up (costing approach). Although the net revenue will be similar under both billing strategies in ASCs that are contracted with third-party payors, some physicians prefer the costing approach because each charge is more likely to reflect the time, effort, cost and skill invested in the service, as well as its market value. Under a universal charge master, some charges may not reflect the true value of a service and can be excessive.

Importantly, if you are considering partnering with a publicly traded management firm, be aware that the financial reporting requirements will be very stringent. These firms are required to report financial results in very specific ways, often and promptly. In addition, publicly traded companies tend to have strict capital allocation budgets as well as debt-to-equity ratios - both of which can translate into tight control over capital expenditures and other investments.

Strengths and weaknesses?
In any business, it is rare to find a firm that can be everything to everyone. So, ask your prospective ASC management firm about its particular strengths as well as its weaknesses, and try to match your needs with its expertise. Some firms, for example, may be particularly good at credentialing or billing. Or, a firm may be in a unique position to help the ASC with a specific challenge, such as obtaining a certificate of need. If, on the other hand, you need to improve the bottom line, you may need a firm that can give you a fresh perspective on essential business functions and uncover underlying inefficiencies that result from poorly performing contracts, ineffective or underutilized staff, and/or poor systems design and set up. Often, a good management firm can enhance an ASC's performance with relatively minor changes, simply by researching and generating the information needed to make good decisions. For example, a good management company might help an ASC in a state without a workers' comp fee schedule to prevent health plans from leasing their rates to workers' comp carriers simply by evaluating its payor contracts carefully. For most centers, there is a significant difference between receiving 80 percent of billed charges and receiving the pre-negotiated grouper rates.

It also helps to ask a prospective firm about its specific track record with other clients, obtain a list of each employee's qualifications and experience (direct industry experience is best), call references and visit centers. These steps are essential to achieving some level of confidence in your decision. In fact, the more you "sniff around" and talk to other ASC owners who have firsthand experience with your prospective firms, the more you'll know about what the firms do - and do not - have to offer.

Will the firm negotiate fairly?
Before agreeing to a payment or equity arrangement, be sure you understand the terms and evaluate them for fairness. First, is the firm willing to clearly identify its services and agree to a fair system for measuring the performance of these services? This is the only way physician owners can quantify the value of the management company over time. This also makes the duration of the contract almost a moot point because, if the management company delivers, the facility's board will opt to keep the relationship going.

Second, is the management firm willing to be rewarded for its performance? The firm should calculate its fees in a way that reflects the value it brings to the partnership. To lay the groundwork for performance-based compensation, find out if the firm wants a flat fee, a percentage of net revenue or a percentage of net income. If it's one of the latter, how exactly does the firm define net revenue or net income? This question is very important, because some firms may base the percentage on billings, while others may work off of collections. Given the disparity between billings and actual collections in healthcare, there is a very big difference between taking 5 percent of net billings and taking 5 percent of net collections. In fact, 6 percent of net billings can be substantially more than 10 percent of net collections. Therefore, if a firm's services are limited to the revenue cycle (payor contracting, billing/collections and charge-master setting), a financial payment based on a fair portion of the net collections, not billings, is often appropriate. However, if the management company is also responsible for inventory management, staffing and overall operational efficiency, net collections alone might not be a fair basis for compensation.

Is the firm well capitalized?
The most common cause of partnership failure is undercapitalization. Since equity partners that acquire a substantial stake in an ASC - some as much as 51 percent - take on the lion's share of the financial risk, it is essential to ensure the firm's fiscal viability up front. A good accountant and lawyer can help you determine if the firm can withstand unforeseen setbacks, especially those that inevitably occur with start-up facilities. Physicians still typically retain at least some liability, because most lending institutions (particularly those which offer the most favorable financing rates) require some recourse on the physicians. Local banks tend to have the most stringent debt covenants.

Do the homework
When you ask your prospective management firm these five questions, there may not be one right or wrong answer. For example, some physicians may prefer a corporate partner that will relieve the ASC of its heavy administrative burden by centralizing billing and other functions; others may wish to keep most functions within the ASC. The key to success is to first understand the firm's philosophy and the terms of the deal, then evaluate this information in light of your personal preferences and needs.