ASCs offer significant profits and risks

Surgicenters require a large up-front investment.

Moderator: Douglas W. Jackson, MD Chief Medical Editor, Orthopedics Today; President, Memorial Orthopaedic Surgery Group, Long Beach, Calif. Panelists: Jack M. Bert, MD Vice President and Medical Director, Summit Orthopaedics, St. Paul, Minn. Russell P.Chick, MD President, Phoenix Orthopedic Groups, Phoenix

Douglas W. Jackson, MD
Chief Medical Editor:

This is the second part of our discussion on physician-owned surgicenters and the opportunity they offer for supplemental income. Last month our panelists discussed the reasoning behind their choice of ownership structure of a surgicenter. Continuing in that vein, we are fortunate to have Dr. Jack Bert share his positive experience and his decision-making approach involved in ownership. Then, for contrast, Dr. Russell Chick and I share our thinking on why we have chosen not to participate in ownership.

Douglas W. Jackson, MD: What type of surgery center did you choose and why?

Jack Bert, MD: We are involved in two types of surgery center ownership. We have our own in-office surgery center that was opened in 1995. The in-office ambulatory surgery center (ASC) is by far the most efficient method of operation when combined with a clinic. It allows the surgeon to see patients between cases while the room is being turned over and it is not uncommon for one of our surgeons to perform four to five cases in a morning and see 30 patients in conjunction with the appropriate ancillary personnel. When the orthopedic group owns the surgery center, it allows the executive physician members to hire the most outstanding orthopedic OR nurses with the most patient-friendly attitudes, which results in an efficient, high-quality surgical experience for the surgeon and the patient.

The other ASC relationship we have is a 50-50 ownership with a hospital system that owns and controls several hundred family practitioners. We control the ASC completely, which allows us to manage the personnel as well as the day-to-day activities and financial operations of the ASC. Joint venturing with a hospital is only beneficial if they have control of a large patient population that can be directed to your group or if facility fee reimbursement is allowable at the joint venture hospital-owned center and not the physician’s privately owned in-office surgery center. As of this date, there are no documented hospital closings as a result of an ASC usurping outpatient cases from a hospital in even a small rural setting.

Russell P. Chick, MD: I considered several years ago, on a limited basis, investing in an integrated plaza, which included a surgicenter. I chose to be a limited, rather than general partner, because of my concern over the initial capital investment, as opposed to the projected overhead expense in the face of rapidly decreasing third-party reimbursements. I eventually chose not to participate at any level for the above reasons, as well as conflicts with other hospitals and outpatient centers that I used on a regular basis.

Jackson: I chose not to participate in ownership for personal reasons related to my investment style and practice situation. In the later stage of my career, I stopped participating in any limited partnership arrangements as an investment. In my personal investing, I place a premium on flexibility in terms of liquidity, want no specific investment meetings to attend, don’t like others voting on my investment direction and will settle for the returns of other types of opportunities. I really don’t like going to the planning and later business meetings that surgicenter ownership often entails.

In addition, the hospital in which I practice would be negatively affected if I moved my outpatient surgical volume. I discussed starting a freestanding surgicenter openly with the hospital administration. I had no desire to joint venture with them. In turn, they agreed to maintain the highest quality orthopedic hospital and outpatient surgical setting we could. They obtain the latest equipment and provide excellent staffing and availability of surgical time. I prefer using two operating rooms and having large (inpatient) cases in one room and fitting in the outpatient surgery during the turnovers related to the larger cases in an adjacent room. This makes my OR time very efficient. Also, my office and laboratories are all within a one-block walking distance. This convenience of driving to work in the morning and not driving until I go home at night is worth a lot to me.

Jackson: What are the important financial considerations in getting started?

Bert: When an orthopedic group begins to consider whether or not to build and construct the surgery center themselves, it is critical to do a feasibility study and market analysis to see if it is financially appropriate. Secondly, it is important to review the explanation of benefits (EOBs) on the top 10 procedures done as outpatients to see what patients are “portable” and can come to the physician-owned ASC so that the facility will be reimbursed. For example, in our group of 22 physicians, only approximately 39% of all the patients that we can see have private insurance that provide us with a facility fee. The remaining patients must go to an HMO-owned surgery center or to the hospital-owned surgery center (our joint-ventured ASC) for their surgical procedures. The primary reason for failure of surgery centers: not performing an appropriate feasibility and marketing analysis. Other causes are overbuilding, overstaffing and overestimating the number of cases that are portable (ie, available to come to the surgery center) as a result of an inaccurate internal pro-forma. Therefore, after doing the above and if the conclusion is to proceed, then it is important to obtain a line of credit from your local banking institution for start-up costs and about six months of cash flow. It will take anywhere between three to six months before contracts are obtained and reimbursement for facility fees are obtained.

Jackson: What are the pros and cons of entering or starting a surgery center?

Bert: The advantages of starting a surgery center are to increase cash flow to the orthopedic group through facility fee reimbursements. However, due to the significant risk associated with beginning the surgery center development process without doing a thorough feasibility and market analysis, it is important that the group is committed to this process. The field of dreams myth “if you build it they will come” is definitely a false assumption in today’s health care marketplace due to restrictions as to where the self-serving insurers and HMOs will allow the outpatient cases to be done. An example of this occurred in a Midwestern community where a private insurer had 70% of the local existing patient population enrolled in their plan. A private orthopedic group that performed more than 90% of the orthopedics in the area decided to build a surgery center based on a market analysis that showed that virtually all of their patients could be operated on in their own ASC. When the local hospital administration realized what was occurring, they negotiated with the private insurer to reduce the inpatient rates if all outpatient cases were forced to come to the hospital. Literally, overnight the orthopedic group lost 70% of its patient base to the hospital during the construction process of their ASC.

Secondly, it is useless to buy into an existing surgery center that has 50 to 100 partners, which may have a joint venture private or hospital partner. The return on investment is so minimal and may be unrelated to the volume of cases that are done individually, which can be negotiated since ASCs are non-designated health care services and are therefore unrelated to Stark & Safe Harbor restrictions. I would be wary of buying into a surgery center that doesn’t primarily do orthopedics. The five most profitable facility fee reimbursements at this time are orthopedics, hand, podiatry, pain management and ENT (Ortho.Surg.Developers Survey, 1/10/03). Obviously, the first four of these are orthopedic and easily contained within the surgery center. Therefore, it is critical to look at the advantages of buying into an existing surgery center as opposed to doing it by themselves. It may make sense if the physician is buying into an existing orthopedic surgery-based ASC that has a reasonably good cash flow, which primarily needs more volume that the physician-investor group can provide.

Chick: If you enter as a general partner and are willing to accept a significant upfront financial investment, there is an opportunity, over time, especially if you sell the surgicenter, to realize a significant profit.

However, when you consider the large up-front capital investment, in addition to the mental and physical energy required to run a surgicenter, the net profit that a physician will realize, in the customary 50% tax bracket, may not be worth the risk and time involved.

Unfortunately, I feel we are transitioning over the next five to 10 years toward a national health care service, resulting in more regulations and loss of physician control. This will translate to even greater difficulty in maintaining a profitable surgicenter venture.

The bulk of the surgicenters in the Phoenix community are struggling for most of the above reasons, and I strongly encourage any orthopedist or group of orthopedists contemplating starting a surgicenter to carefully weigh the downside risks.

Jackson: In my opinion, building and owning a surgicenter five to 10 years ago and then selling all or part of it three years later yielded the most return on investment to the physician owners. I am not convinced that scenario is as profitable at this time as more physicians, hospitals and companies are starting surgicenters. With any investment, one needs to look at the costs of investing (financial and personal), the potential for and the rate of returns, and liquidity, and weigh those factors against the risks involved. How do you monitor the profitability of your investment?

Bert: Profitability of this particular ancillary service is the same as any other. The ASC should be set up as an “independent profit and cost center” within the orthopedic group. Furthermore, the number of cases that each physician partner has performed is listed by quantity and type, which allows the executive committee to discuss with a partner what his needs are as well as his use of the ASC. If he is not using the ASC, it is important to find out why. The ASC profits can be distributed equally to offset group overhead, distributed based upon stock ownership or based upon individual surgeon productivity since ASCs are non-designated health care services. We literally do everything we can to make it convenient for our group’s surgeons to operate at the center by offering block time and providing an efficient, high-quality experience.

Jackson: What are some future considerations in complying with regulations with Medicare in particular and the private insurance?

Bert: Last year, 27 states had legislation attempting to restrict physician ownership sponsored by the American Hospital Association. Therefore, it is important for physicians to remain active politically at a state and perhaps federal level to educate legislators as to why this occurring.

It is much less expensive to do outpatient surgery at an ASC where the Ambulatory Payment Classification codes are in effect. It is important to educate the legislators regarding this since they are bombarded daily by hospital lobbyists who will claim just the opposite. In Minnesota, the lobbyists went so far as to state that infection rates are higher in ASCs than in the hospital setting (The infection rate is 4% nationally vs. 0.17% in an orthopedic ASC, in press). It is important to be state licensed and Medicare (federally) licensed by one of the three licensing bodies for ASCs. This is a stringent process but allows the ASC to argue that it is licensed just like a hospital. This will solve any problems associated with facility fee reimbursements from Medicare or private insurers.

Editor’s note: Dr. Bert is currently working on a book about ancillary services.