August 2002 Bulletin

Is an ambulatory surgery center right for you?

Feasibility study will help you decide

By Michael J. McCaslin, CPA

This is the first of a three-part series of articles to address the development of an ambulatory surgery center (ASC) for orthopaedic surgeons. This article focuses on the need to conduct a feasibility study. Part II will address capitalization and financing requirements; Part III will address the team of individuals needed to bring your ASC to fruition.

Is an ASC in your future? You won’t know for sure until you complete a feasibility study. At a minimum, a feasibility study should consist of the following elements:

  1. Financial projection of the operating results for the contemplated facility.
  2. Assessment of the regulatory climate in your state and the impact of the federal anti-kickback and fraud and abuse provisions related to the ownership of your facility.
  3. Analysis of implications on your relationships with your local hospital and regional health care system–if you decide to proceed with the center.
  4. Evaluation of the payer environment and their acceptance of the physician-owned ASC.
  5. Consideration of non-financial issues such as changes in physician behavior required to make the facility work, impact on relationships with other physicians in the marketplace and other non-financial areas.

Financial projection

The first step in a feasibility study is to determine whether developing an ASC makes financial sense. This involves the preparation of a five-year financial projection that includes a statement of income, a statement of cash flow and a balance sheet. The financial projection will incorporate the following:

  1. Fixed expenses will not vary based upon case volume. These include facility rent, depreciation on equipment, furniture and fixtures, professional fees, insurance, telephone, property taxes and advertising.
  2. Semi-fixed expenses remain level up to a certain volume of cases–but then increase to accommodate additional case volume. They would include staff wages (clinical and business office), benefits, all other related personnel expenses and equipment maintenance.
  3. Variable expenses are projected on a per-case basis and include drugs and medications, medical supplies, laundry and linens, office supplies, hazardous waste removal and miscellaneous expenses.

If the results of the financial feasibility study project a positive financial outcome, then the other elements of the feasibility study can be undertaken. If the results are marginal, or project losses, then the project should probably be terminated.

If you proceed with the project, you will need to complete four or five additional projections before the ASC actually opens. As you near the opening of the facility, update your financial projections as cost estimates become reality and case volume projections are continually refined.

State regulatory environment

Some states still have Certificate of Need (CON) requirements that can impact the ability of physicians to independently develop an ASC. CONs essentially require the provider to prove the need for the health care facility to the community. They have historically protected the interest of hospitals because they have been the dominant owners of health care facilities and are most impacted by the development of additional facilities.

Each state’s CON requirements vary; some states have significant restrictions while others have much more relaxed provisions. Therefore, if a determination is made that your proposed ASC has a financial upside, the next step is to evaluate whether there is a CON requirement in your state that could prevent you from proceeding.

If there is a CON requirement, then you will need to analyze whether the requirements to obtain a Certificate will prevent you from proceeding, whether your independent group of physicians can obtain a Certificate without hospital assistance or whether one of the hospitals you work with happens to own a Certificate that may require you to propose a joint venture with this hospital to utilize their Certificate. Joint venturing with a hospital can be an outstanding option for achieving financial success with an ASC.

If you determine there are no CON requirements in your state–a number of states have long eliminated the CON –then you should use your qualified health care attorney to evaluate the risk associated with the ASC at the state and federal level related to the anti-kickback statutes.

Federal anti-kickback statute

On November 19, 1999, the Office of the Inspector General (OIG) of the Department of Health and Human Services published regulations establishing in final form eight new safe harbors and clarifying six of the original 11 safe harbors under the Anti-Kickback Statute, 42 U.S.C. 1320a-7b(b). Included with these published regulations were the safe harbors for ASCs. The OIG identified four categories of ASCs (surgeon-owned, single-specialty, multi-specialty and hospital/physician).

All ASCs must meet seven core requirements to be safe harbor protected; they must also meet the requirements spelled out by the OIG based upon the four categories identified. Meeting all of the requirements of the safe harbors means that you are protected from prosecution under the anti-kickback statute.

Not meeting all of the requirements for safe harbor protection does not mean that you are violating the anti-kickback statute–but rather that you simply do not have the blanket protection provided by the safe harbor.

You will also want to evaluate your state laws related to the anti-kickback statute. Some states mirror the federal statute while other states do not have similar state provisions. It is very important to have a qualified health care attorney help steer you through this element of the feasibility study.

When you complete this phase of the feasibility study, you again must decide whether to continue to the next element of the feasibility process, or whether the state and federal barriers are too costly to overcome or put you at too much legal risk.

Implications in hospital relationships

Physicians developing an ASC often fail to assess the impact the facility will have on their relationships with local hospitals and regional health care delivery systems. Hospitals and health systems could retaliate against the group and the facility, putting pressure on payers to influence them not to contract with your facility, putting pressure on primary care physicians to change their referral patterns and pressuring anesthesiology physicians who might cover the facility or deliver timely coverage for add-on cases or emergency cases in the hospital.

This part of the feasibility analysis should include meetings with hospital personnel to discuss the project. The result of these meetings could be that the hospital will want to participate with you or that you will invite them to joint venture with you. A hospital-licensed ASC does have a reimbursement advantage over a physician-owned freestanding ASC.

If the ASC group agrees to enter into a joint venture arrangement, our firm strongly advises the physician organization to proceed with the development of the facility, its governance structure, ownership and economic structure and bring in the hospital only after these decisions have already been made. You do not want to subject your fellow physicians to the decision-making structure and process that hospitals are used to, which is counter-productive to how physician groups operate.

In addition, although the hospital may show a willingness to participate, its natural tendency is to slow down the process. While joint venturing will give the hospital access to some of the profits, it will be less profitable in comparison to the situation they currently have (i.e., 100 percent) of the outpatient surgery business. If the joint venture discussions fail to produce governance and economic relationships that satisfy you, you will be back to making a decision about whether or not to proceed in partnership without your local hospital.

Non-financial issues

The first of the non-financial issues to evaluate is the potential change in physician schedules for performing outpatient surgery center cases. Although raw data analysis may identify a certain volume of cases that could be performed in the ASC, there clearly will be conflicts in scheduling that will prevent some cases from being done in the ASC, unless you can work with the physicians to rearrange their surgery schedules. This is no small task because most physicians are quite locked into their schedules.

In addition to evaluating outpatient schedules, it will be very important to look at the schedules of physicians who have both inpatient and outpatient practices. It is not always efficient to expect a physician to drive back to the ASC between inpatient cases to perform outpatient surgeries. Many physicians, even though the facilities are conveniently located and there is an economic benefit to altering their schedules, will still do outpatient cases in the hospital facility. It is imperative that you meet with every physician in the project and obtain commitments for the days that they are willing to utilize the surgery center operating rooms. Once the facility is up and running, you will continually need to meet with the physicians to ensure utilization of the facility. Most of the physicians will likely assume that everyone else is making the change to use the facility, so they do not need to make the change.

The next significant matter to be discussed is the ownership and any differentials in ownership among the physician participants. In a group practice environment, there are usually damaging political implications to creating differences in ownership among physician members. In deciding on ownership, you need to be aware of the impact on the medical practice and not just the surgery center. This issue could quickly move to a financial issue if there are physicians who are upset with the allocation of ownership. This not only could impact utilization of the facility, it could also affect the economics of the practice if it causes a physician to leave the practice.

Once ownership is decided upon, you will need to address this issue on an on-going basis; ownership is not a one-time decision. While equal ownership is usually the most saleable short-term answer, after the facility has been open for some time the physicians will begin analyzing utilization and related ownership. Although you cannot restructure ownership based upon the volume or value of referrals, it will not diminish the complaints from physicians about which physicians are contributing to the ASC’s success and which are not.

You must also evaluate the feasibility of having non-physician owners such as management companies, consultants or your administrative staff. The initial thought process with many physicians is to include these people in the ownership group. This will encourage these individuals to get the center up and running as quickly as possible and provide an incentive to ensure its profitability on an on-going basis.

Inevitably, a number of years down the road when the surgery center is doing extremely well, the physicians will wonder how or why the non-physician owners are realizing such an economic benefit from the surgery center in addition to what they are being paid to run the medical practice. The physicians will then question why they let them have an ownership interest. Once non-physicians become owners, it is extremely difficult to remove them. So think very hard about this issue before making a decision.

An ASC project is a significant project that requires a significant financial and time commitment to be successful. The more time invested in the feasibility process, the greater the possibility and opportunity for success of the facility.

Michael J. McCaslin, CPA, is director, Health Care Group Services at Somerset Financial Services Health Care Group in Indianapolis, Ind. He can be reached at (800) 469-7206 or MMcCaslin@somr.com.


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