Pros and cons of practice-owned and

office-based ambulatory surgery centers

Jack M. Bert, MDSummit Orthopedics, Ltd., 17 West Exchange Street, Suite 307, Gallery Medical Building,

St. Paul, MN 55102, USA

An office ambulatory surgery center (ASC) has become an important element

in determining the financial success or failure of many orthopedic group practices

in the United States. Managed care represents up to 85% of insured patients in

some practices. As a result, decreasing professional fee reimbursement, which

has averaged 29% nationwide since 1994, has made it increasingly important to

add ancillary services to maintain orthopedic group practice revenue.

Advantages

Efficiency

Practice-owned ASCs not only provide an excellent source of practice income

if structured properly but also allow efficiencies never before realized by the

practicing orthopedist. Patient volume can be increased due to the significant

decrease in downtime the surgeon will experience when able to see patients

between procedures. In the authors’ practice-owned office-based ASC, which has

been operational for more than 7 years, the four surgeons who actively use the

ASC have noted an average of 1.5 hours in time savings per orthopedic workday.

This time savings is not only a result of the convenience of having the ASC

adjacent to clinic space but also a result of a decrease in total perisurgical time

associated with each procedure. The average time spent by a patient at the surgery

center including admission, surgery, and recovery averages 2.51 hours. Patients

spend more time at hospital-based facilities and significantly less time at free-

standing multispecialty ASCs in our community.

0278-5919/02/$ – see front matter D 2002, Elsevier Science (USA). All rights reserved.

PII: S0278 -5919 (01 )00009 -6

Reprinted with permission from The American Journal of Knee Surgery 2000;13(4):245–8.

E-mail address: bertx001@tc.umn.edu (J.M. Bert).

Clin Sports Med 21 (2002) 255–259

The ‘‘facility fee’’ is the reimbursement the ASC receives for the surgical

procedure. This is separate and distinct from the surgeon’s professional fee.

Historically, there has never been a lowering of facility fees. This obviously

has not been the case with surgeons’ professional fees. In Minnesota, facility-

fee reimbursement has been greater than professional-fee reimbursement for

many procedures. It appears that this discrepancy will increase with time.

Furthermore, it appears that increases in orthopedic-related facility fees (as

published by the Health Care Financing Administration) for the new ambula-

tory payment categories (35–80%) will be instituted over the next 4 years,

scheduled to begin April 1, 2002. Based on proposed ambulatory payment

category classification changes, this would increase the orthopedic payment

group for many procedures, with resulting dramatic increases in facility-fee

reimbursement for these procedures.

Pain management

Another advantage of the practice-owned ASC is the development of pain

management within the confines of the practice. Such a program is comple-

mented by including a Medicare-certified procedure room as part of the ASC. An

anesthesiologist, physiatrist, or other physician with pain-management experi-

ence can use the procedure room for epidural steriod injections, facet injections,

trigger point injections, and many other procedures. Out of 9.832 procedures

performed over a 6-year period in our office-based ASC, pain-control revenue

represented 30% of the total income.

The advantages of a practice-owned ASC include an increase in clinical

efficiency, improvement in surgeon satisfaction, improvement in patient satisfac-

tion and, almost always, an increase in practice net profitability.

Planning for an ASC

Unfortunately, not all ASCs are successful. In fact, it is estimated that one

third of newly built ASCs will fail due to poor financial planning. Failure to

perform a thorough payer and market analysis prior to proceeding with the ASC

can lead to financial disaster. This is no mythical ‘‘Field of Dreams.’’ If you build

it, they may not necessarily come.

The process of planning an ASC can be very difficult in a certificate-of-need

state. A thorough review must be performed with the state licensing agency to

determine whether it is possible to construct the center and obtain state licensure.

State licensure is necessary for Medicare certification, and accreditation is

required by most third-party payers to authorize facility-fee reimbursement. This

due diligence is mandatory prior to even beginning a market and payer analysis,

especially in a certificate-of-need state.

The financial feasibility analysis (pro-forma) must be based on a thorough

evaluation of the procedures performed by the practice that do not require usage

J.M. Bert / Clin Sports Med 21 (2002) 255–259256

of health care facilities. For example, there may be payers in the region that have

discounted fee structures for specific hospital systems. These prearranged agree-

ments are based on a discounted-fee structure for both inpatient and outpatient

procedures. This negotiation technique by the hospital is common and is used to

prevent physician-owned surgery centers from usurping outpatient procedures

from the hospital. The hospital has agreed, therefore, to give third-party payers a

significant discount on inpatient costs in return for an exclusive agreement on all

outpatient procedures for a specific patient population. This can, in essence, force

the surgeon to perform all ambulatory procedures for this insured patient

population at the hospital.

Causes of failure

Other potential causes of ASC failure include overbuilding, overequipping,

and overstaffing. High operational costs resulting from excessive initial capital

expenditure, a high lease rate for the facility, increased equipment costs, and

payroll expenditures can result in financial ruin for a surgery center that does not

have the appropriate mix of procedures and significant case volume.

The size of the ASC must be determined prior to construction based on the

number of surgeons using the facility, the quantity of procedures that will be

performed, and the mix of those procedures. Other factors such as determining

whether the ASC will be single specialty or multispecialty also will determine the

design and size of the ASC. In 2000, 23.8% of ASCs in the United States were

owned by multifacility ASC companies, 4.3% of ASCs were hospital owned, and

the remaining 71.9% were independently owned by physicians. Single-specialty

ASCs have demonstrated the highest percentage of success. There are many factors

influencing the success of these single-specialty ASCs. One important advantage is

the ability of the physicians to accurately determine their own payer profiles in a

given region and, thus, more easily perform a thorough market analysis.

The success or failure of an ASC endeavor greatly depends on specific

reimbursement per specialty. In some specialties such as gastroenterology and

opthamology, the facility-fee reimbursement may no longer be adequate to

support the operational expenses of the ASC, even given substantial volume.

Both of these specialties will likely experience a significant decrease in facility

reimbursement with the newly proposed ambulatory payment categories.

The most commonly performed procedures in ASCs are listed by specialty in

Fig. 1. The highest average facility-fee reimbursement per procedure is orthope-

dics. If the proposed ASC is multispecialty in nature, it is important to determine

what the proposed mix of surgeons and procedures will be. Unfortunately, it is

difficult to determine an accurate pro-forma based on what procedures will be

performed by surgeons of various specialties in a multispecialty ASC. One of the

most common problems with multispecialty ASCs is surgeons who have been

expected to perform a certain number of procedures do not ‘‘carry their own

weight’’ and perform far fewer procedures than initially anticipated. This often

J.M. Bert / Clin Sports Med 21 (2002) 255–259 257

leads to resentment among physician investors and eventually to failure of the

multispecialty ASC.

Joint ventures

Joint venturing the ASC with an ASC company may be advisable in some

situations. Scenarios that would lend themselves to such a joint venture would

include a single-specialty venture where capital for development is scarce. Most

of the large ASC companies would agree to provide the capital and construct the

ASC if the single-specialty group of surgeons agree to a long-term contract

committing a substantial percentage of the facility-fee revenue. The reason such

ventures may not be advisable, in many cases, is that when the ASC becomes

profitable, the ASC surgeons are stuck with a long-term contract and a partner

collecting up to 50% of the facility-fee revenue on an annual basis. If the ASC

company will provide the capital to the surgeons in the form of health care

financing, a somewhat smaller carried interest may be acceptable.

Another occasionally viable scenario is the surgeon/hospital joint venture. A

joint venture with a hospital usually is not advisable; however, if the facility is to be

developed in a certificate-of-need state where the hospital may oppose the project

at the state level, this option may be considered. If the facility is in a rural area

where removing outpatient volume from the hospital would represent an unman-

ageable loss of revenue, the surgeons may need to consider a surgeon/hospital joint

venture. Another reason to joint venture with a hospital is if the hospital or hospital

system has control of a specific patient population that the surgeon group wishes to

access. For example, in some highly penetrated managed care locations, the

hospital system may own a health maintenance organization (HMO) or control a

large managed care population of patients. If the hospital allows this patient

population to have ambulatory procedures performed in the jointly owned ASC, it

Fig. 1. Ambulatory surgery centers’ top surgical cases by specialty. (From Koren C. Rake Report.

February 2000.)

J.M. Bert / Clin Sports Med 21 (2002) 255–259258

may be advisable in this instance to consider a joint venture with the hospital. The

surgeons, however, should maintain a controlling interest in such a venture.

Hospital/surgeon ASC joint ventures also can fail. An example is an

orthopedic group in the Minneapolis–St. Paul area that entered into a joint

venture with a hospital and the hospital’s HMO system. The hospital represented

that more than 300,000 patients served by more than 100 family practitioners in

the area were managed by the hospital-owned HMO. The orthopedic group

thoroughly reviewed pro-formas presented by the hospital and the hospital-

owned HMO. Several legal and financial consultants were retained to analyze the

pro-forma presented by the hospital and the hospital-owned HMO. It was

determined that the joint-ventured ASC would have an appropriate market mix

and payer mix as well as sufficient case volume to succeed.

A problem was encountered within 3 months after the construction of the ASC

was completed. It was determined that the number of procedures represented by

the hospital and the hospital-owned HMO were inaccurate. The patient volumes

for specialists managing cases at the surgery center were grossly exaggerated.

The result was an overbuilt and insolvent ASC. The negative cash flow that

resulted from the overbuilt facility was substantial.

Minnesota’s surgeons, fortunately, were able to turn the situation around. The

solution devised by the surgeon/owners included other local surgeons in the

ownership of the ASC. These surgeons were known producers with high

ambulatory caseloads. They were brought in at the original investor price, which

negated any potential hesitancy on their part to buy in as second-tier investors.

The hospital and the hospital-owned HMO agreed to provide nonrecourse (no

personal liability) financing to the ASC partnership that would cover the negative

cash flow until the center reached profitability. Using the hospital and the hospital

HMO negotiating clout within the local community of third-party payers, the

payer mix was quickly adjusted. Poor payers were weeded out and better payers

were added. When last reviewed, it appeared that this ASC would realize a

positive cash flow within 6 months of the restructuring.

Summary

A detailed feasibility analysis is imperative to ensure the success of a practice-

owned ASC. Analysis of the payer mix and the market relating to surgical

volume that can be performed at the ASC is imperative. If overbuilding,

overequipping, and overstaffing are avoided and the group has adequate volume

that can be managed at the ASC, the facility should be a success. Building a

practice-owned ASC without an accurate and detailed financial feasibility and

payer study can place the endeavor at risk. A well-planned economically

constructed and properly managed ASC will result in an efficient and successful

ancillary service for the orthopedic group practice.

J.M. Bert / Clin Sports Med 21 (2002) 255–259 259