overview of Ambulatory Surgery Center business- July 2013

1. M I C H A E L R . C A R D E N A S , M B A , C P C U , R P L U
J U L Y 2 0 1 3
Ambulatory Surgery Center
Business Overview
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2. Topics
ASC Defined Statistics Business
Justification
Procedures
performed in ASC
setting
Ownership Structure
Regulatory
Environment
Risk Management
Issues
Insurance Valuation Operations
Finance Dead Weight
Physicians
Additional Revenue
Sources Trends
Summary
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3. What is an Ambulatory Surgery Center?
Ambulatory surgery Center ( ASC) according to CMS is, “means any distinct
entity that operates exclusively for the purpose of providing surgical services
to patients not requiring hospitalization and in which expected duration of
services would not exceed 24 hours following an admission.”
Source: 42 CFR 416.2 Definitions. & ASCA.com
Since 1982, roughly 5,300 Medicare-certified facilities in USA, perform 25M
+ procedures each year
1st ASC in USA- 2/12/70 in Phoenix AZ
Founded by Wally Reed, MD and John Ford, MD.
Source: David Shapiro, Ambulatory Surgery Center, NCAS 2011
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4. What is an Ambulatory Surgery Center?
What are not ASC?
Rural health clinics
Urgent care centers
Ambulatory care centers only diagnostic or primary care
ASCs treat only patients who have already seen a health care provider and
selected surgery as the appropriate treatment for their condition.
ASCs are not physicians' offices either. All ASCs must have at least one
dedicated operating room and the equipment needed to perform surgery
safely and ensure quality patient care
Source: Ambulatory Surgery Center Association(ASCA)
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5. ASC Statistics, Status and Settings
Total number of ASCs in USA
For Profit or Non-Profit
Urban vs. Rural Spread
Source: Medpac June 2012 Healthcare spending and Medicare program
Year 2004 2005 2006 2007 2008 2009 2010 2011
Number of Centers 4,033 4,328 4,567 4,838 5,045 5,157 5,252 5,344
new centers 367 354 328 345 281 218 189 153
exiting centers 81 59 89 74 74 106 94 61
Net % growth from
previous yr 6.70% 7.30% 5.50% 5.90% 4.30% 2.20% 1.80% 1.80%
Total Number of ASC
Year 2004 2005 2006 2007 2008 2009 2010 2011
For Profit 3,872 4,155 4,384 4,644 4,843 4,951 5,094 5,184
Nonprofit 161 173 183 194 202 206 158 160
Profit or Non‐Profit
Year 2004 2005 2006 2007 2008 2009 2010 2011
Urban 91% 91% 91% 91% 91% 91% 91% 91%
Rural 9% 9% 9% 9% 9% 9% 9% 9%
Urban vs. Rural
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6. Why Ambulatory Surgery Center?
Value-based healthcare delivery method, in-line with principles of A.C.A.
Quality delivery method
40% less expensive than Institutional environment
ASC pass along savings to patients & payer by providing services at lower price than
full service hospital due to specialization and scale of operations
Medicare saves $2.5 billion annually when surgical procedures are performed at
ASCs instead of hospital outpatient departments.
Patient: not exposed to hospital institutional environment
Physician: additional source of revenue / scope of operations
Sources: ASCA (What is an ASC?, 2013) and Medpac, Report to Congress, Health Care Spending and
the Medicare Program, page 91-120
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7. Types of Procedures in ASC?
Procedure Percentage of all procedures
E.N.T 8.0%
G.I. 20.4%
General Surgery 8.7%
OB/GYN 3.7%
Ophthalmology 14.8%
Orthopedic 16.1%
Other 1.8%
Pain 16.0%
Plastic 3.4%
Podiatry 2.9%
Urology 4.2%
Based on Multi-Specialty ASC business model
Source: ASCA 2011 ASC Employee Salary & Benefits Survey
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8. Type of Ownership
Entity Percentage of USA ASC Market
Physician(s) 65%
Hospital & Physician 18%
Hospitals 3%
Corporations‐ Physicians 8%
Corp.‐Hospitals & Physicians 6%
Majority owned by Physicians
Trend-Hospital & Physician JV, HOPD
Source: ASCA 2011 ASC Employee Salary & Benefits Survey
6%
8%
18%
2%
66%
Type of Owners
Corp.‐
Hospitals &
Physicians
Corporations‐
Physicians
Hospital &
Physician
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9. Physician-owned ASC Profile
Number of Physicians % of physican owned ASC
1‐5 47%
6‐10 10%
11‐15 9%
16‐25 10%
26‐50 10%
51+ 6%
65% of ASC Market
Number of physicians in ownership group of ASC
Specific Specialties expect ownership in ASC: Orthopedic, General
Surgeon & Neurosurgeons
• 1-5 ownership structure issues:
• Typically single specialty
• Efficiencies-Operations
• A.C.A. reporting requirements –Costs
• Reimbursement fluctuation
• Multi-Specialty Competition
• Hospital-Physician JV
• A.C.A. uncertainty
Source: VMG Intellimaker Survey 2010 Affiliated Physicians per ASC
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10. Ownership- Hospitals
Different type of hospital ownership
HOPD
Hospital- Physician JV
Rational for Hospital ownership:
Patient Care: patient not exposed to institutional setting
OR Capacity at cheaper cost
Eliminate ASC competitors
Utilize ASC JV as a method to recruit physicians expecting ASC revenue
Accountable Care Organization: component
Hospital/ Hospital System Competitors
Three competitors in West Los Angeles:
UCLA vs. Cedars-Sinai vs. Trinity Health
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11. Management Companies
22% of all ASC are owned by management companies
Top 10 management companies
Source: Ambulatory Surgery Center Business Planning and Organization Formation, Christian Ellison,
SVP Health Inventure, October 18,2012
Name Ownership
AmSurg Publicly traded
USPI Privately held: Welsh, Carson, Anderson & Stone
SCA Privately held: Texas Pacific Group
HCA Publicly traded
Symbion Publicly traded
SurgCenter
Development Privately held
Surgery Partners
Holdings Privately held : H.IG. Capital
ASCOA Privately held
Nueterra Healthcare Privately held
Health Inventures Privately held
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12. Regulatory Environment
Entities that regulate and govern ASC business
CMS- Centers for Medicare & Medicaid Services
JCAHO-Joint Commission on Accreditation of Healthcare Organizations
Individual States
AAAHC- Accreditation Association for Ambulatory Health Care
AAAASF -American Association for Accreditation of Ambulatory Surgery Facilities
Insurance Companies-Audits, inspections, risk management services
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13. Risk Management
Mitigate the risk of loss through risk management techniques: loss control, insurance,
education, process, teams
Infection Control Concepts –Evidence-based best practices:
Surveillance
Sterilization& disinfection standards
Safe Infection standard
Point of care medical device standards
Continuing education
Environmental controls
Physician Credentialing
Medical Director-DON-Facility Manager Team
Medical Malpractice Risk Management Services
Medicare Ambulatory Surgical Center Value-based Implementation Plan –implementation –
must report data in 2012, if don’t, reimbursement reductions will be implemented in 2014
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14. Insurance
• Insurance is a primary tool used to hedge against the risk of a
contingent, uncertain loss
• Transfer the risk of loss to a third party
• Premiums paid are corporate business expense
• Indemnify only, no profit or gain realized
• Business risks to mitigate:
• Operational exposures / liability claims: malpractice, premises
• Healthy & productive workforce: health insurance for employees
• Workplace accidents: return to work programs
• Property, Plant & Equipment: damage to P,P &E
• Automobile: owned vehicles, non-owned autos
• Management Liability: Board of Directors
• Business interruption: eight-inch water main breaks, flood center, operations shut
down for three months
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15. Insurance
• Insurance distribution: agent, wholesale brokers, insurers
• Selection of insurance solutions:
• Agent/firm with experience in medical professional liability, largest exposure
• Insurers with medical business experience/clients: malpractice underwriting, actuary,
claims and risk management expertise
• Risk management solutions: healthcare focused insurers with risk management
solution, custom vs. boilerplate solutions
• Consultants: impact of Affordable Care Act on operations, human capital, finance and
insurance matters
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16. Valuation
Business Valuation measurements: Market, Comparison, Capital Asset Pricing
Model (CAPM), DCF, DDM, EBITDA multiplier
ASC most commonly used, EBITDA multiplier
2012 and 2013 projected year: EBITDA multiplier is approximately for multi-
specialty ASC is 6ish
source: Jerry J. Sokol, 2012 ASC symposium, ASC mergers & acquisitions
and Health Care Industry/ ASC Private Equity Update, February 24,2012
Multi-Specialty more valuable, less weighted average reimbursement
fluctuation
ASC not typically highly levered
Payer contracts: CMS and health insurance company contracts effect EBITDA
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17. Valuation
Single specialty ASC, not as valuable vs. Multi-Specialty
Reimbursement fluctuation
Physician uncertainty- A.C.A.
Physician Retirement
Hospital competition
Multi-Specialty ASC competitors
Hospital JV, HOPD
• ASC with focus in Ortho, G.I., Pain & Ophthalmology-most attractive,
contribution margin per procedure, plastic least attractive
source: Ambulatory Surgery Center Business Planning and Organization Formation, Christian Ellison,
SVP Health Inventure, October 18,2012
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18. Operations
Maximize Contribution margin per
procedure
Physician Productivity Standards , MGMA
standard
Patient Flow Process
Supply/Materials manager
Marketing: on-going
ASC and partner MD offices, JV, etc.
Front office management: reduce turnover
Time training vs. treating and recruiting
patients
Consistent physician and allied healthcare
recruitment
1/3 rule- deadweight physicians
Third party payers
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19. Finance
Management accounting: cost-volume profit analysis: Contribution Margin:procedure
revenue minus per surgery variable costs ( C=P-V)
Utilize ASC assets to maximize Contribution Margin per procedure, while providing
quality care, positive outcomes and superior customer service
Objectives: increase cash, reduce A/R and working capital
On average, all facilities statistics:
Cash is 17.5 % of an ASC’s total assets
Net A/R is 21.4 % of an ASC’s total assets
Working Capital is 14.0 % of an ASC’s total assets
Source: Beckersasc.com , 12 Statistics on ASC liquidity based on Number of OR units, Carrie Pallardy,
June 21,2013
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20. Finance
Increase CM by increasing high CM procedures, reducing low reimbursement procedures
Insurance and Managed Care Contracts: negatively effect net income/ under reimbursed
Increase CM, utilize assets efficiently
Hours per patient benchmarks
Staff to procedure ratios
P,P & E
Vendor financing: transfer cost to vendor, reduce WC
Consignment: implants , reduce working capital , reduce WC
Best Practices: material managers, join risk purchasing group and form supply volume
analysis committee
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21. Deadweight Physicians (DWP)
Negative effect on Net Income
Deadweight physicians lowers EBITDA valuation
Morale
Presents business risk, going concern
Negatively impacts ability to recruit new physicians
Safe Harbor, Anti-Trust laws prohibit punishment for not referring
Source: Buy-outs and Dealing with Physician Owner Inequities, Jeff Fox and Eric Gordon, February
24,2012, 2012 ASC Symposium presentation
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22. Deadweight Physicians (DWP)
• Reallocation of ownership, remove DWP, could cause legal risks
• A few justifications for removing DWP
• Credentialing/ quality assurance process
• Competition or Business Conflicts of interest
• Retirement, Relocation, Death, Incapacity, and non-attendance at meetings
• State statutory requirements
• For Cause: fraud, felony, bankruptcy, unlawful behavior
• Hospital employment, conflict
Key: conditions for reallocation and or removal from the partnership, should be
expressed in the Corporate governance documents/ should include pricing model
• Pricing: Fair Market Value : not mandatory, but could significantly reduce legal risks
Source: Buy-outs and Dealing with Physician Owner Inequities, Jeff Fox and Eric Gordon, February
24,2012, 2012 ASC Symposium presentation
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23. Deadweight Physicians (DWP)
1/3 medical practice income test:
Every physician investor must derive at least 1/3 of medical practice income from ASC procedures
at the investment ASC
Medical Income: not typically ROI, teaching income, or expert witness fees
1/3 procedures test only applies to multi-specialty ASC
Safe Harbor in tact if rule applied to all physicians in ASC investment
1/3 Rule: Monitoring & Enforcement Process
If Safe Harbor rules violated, creates Anti-Kickback violation
Sources: Buy-outs and Dealing with Physician Owner Inequities, Jeff Fox and Eric Gordon, February
24,2012, 2012 ASC Symposium presentation/The ASC Safe Harbors: an Overview and Key Considerations
for Enforcement, NC Bar Association Health Law Section, 2010 Annual Meeting, Bart Walker,
McGuireWoods
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24. Additional Revenue Sources
Three Sources of Additional Revenue for ASC:
Anesthesia services
Outpatient surgical recovery suites, next to ASC
Pathology services
Source: Additional Revenue Sources for ASCs and their physician owners, 2012 ASC Symposium
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25. Trends
Hospital employment of physicians
Market consolidation
Titan Health acquired by USPI, October 5,2011
Individual Physician uncertainty: Affordable Care Act
Lack of De Novo development
Sharp reduction in net growth of single-specialty ASC, growth in multi-specialty
ASC high valuation causing physicians to sell
Source: CMS and Ambulatory Surgery Center Business Planning and Organization Formation, Christian
Ellison, SVP Health Inventure, October 18,2012
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26. Trends
Reimbursement pressure: specialty specific
Aging physician population
Long-term volume growth: push procedures out of hospital
Demographic Changes and Growth in procedures: Ophthalmology 26%, neurosurgery 12% and
orthopedics 11%
CMS increasing reimbursement in 2013 and 2014 for procedures
A.C.A. compliance, increase operating costs, ASC need scale
ASCs opportunities to increase EBITDA by increasing scope of operations, three additional revenue
sources
Sources: CMS and Ambulatory Surgery Center Business Planning and Organization Formation, Christian Ellison, SVP
Health Inventure, October 18,2012, Medpac June 2012 Health Care Spending and the Medicare Program
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27. Summary
Revenue growth in ASC marketplace, low cost delivery model consistent with
A.C.A
Hospital push procedures to outpatient setting
A.C.A will increase operating cost for compliance
Non-hospital setting + for patients
Additional revenue sources provide opportunity to increase EBITDA
Quality outcomes
High employee satisfaction, not employee of hospital system
Market is consolidating
Flat ASC same store locations
Increase revenue from CMS reimbursement in 2013 and 2014
CMS and payers incentivize outpatient surgery vs. hospital setting
Hospital-Physician JV: provide OR capacity, and satisfy physicians expectation
of ASC income
EBITDA multiplier in 2013 @ 6ish, increase demand, increase reimbursement
and flat supply of ASC locations
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