June 1999 Bulletin

Profits in short stays

'. . .it's still a slow growing phenomenon due to regulatory hurdles, local politics and resistance from hospitals and payers.'

PRCs add income for recovery in ASC

By Sandra Lee Breisch

By incorporating postsurgical recovery care (PRC) and other related surgical services programs into an ambulatory surgery center (ASC), orthopaedic surgeons are extending their services and increasing profitability.

"There's a lot of activity by physician groups who have an ASC and are investigating ways to enhance the use of the facility with the addition of overnight beds," says Michael J. McCaslin, managing director of Somerset Financial Services' health care consulting division. "With overnight capabilities of 23-hours or more, physicians can increase the profitability of the facility with increased volume and the types of cases they take. Therefore, there's increased profit per case because they're spreading a fixed cost [for the facility] over more cases and getting higher facility fees for more advanced procedures. Physicians also will be able to bill for those beds rather than sending their patients to another overnight facility."

PRCs can be freestanding facilities, extensions of ASCs, a PRC unit of a hospital, a hospital transformed into a PRC, a PRC unit of a long-term care facility or a PRC as a service of a medical campus. PRCs can be as small as two beds or have more than 100 beds such as one in Connecticut. While some states license them as nursing facilities, others give them hospital licensure.

Depending on their state's facility licensing regulations and local political resistance from hospitals and payers, many orthopaedists have opted to go this route, says John A. Marasco, a principle at the Colorado-based Marasco & Associates, a national outpatient medical architecture firm. "Instead of doing their more advanced procedures in the hospital and having the patient stay in the hospital, our clients have their patients spend a day or so in the recovery care center after surgery in their own ASC," explains Marasco.

"What these systems do is provide the quality, low-cost efficient health care that everybody is looking for-the patients, their providers and the physicians." He says costs for procedures done in a PRC are typically 40 to 50 percent lower than average daily hospital charges, depending on the services, market conditions, licensing and degree of managed care penetration.

"When you eliminate costs associated with basic hospital services, such as for an emergency room, full imaging center or a full complement of medical services, the costs that remain are those that are essential for the provision of high-quality care of the healthy surgical patient," explains Joni M. Steinman, president of AUSMS Healthcare Consultants of San Diego, a developer of the ASCs and PRCs.

Although physician group enthusiasm for overnight stay facilities runs high, it's still a slowly growing phenomenon due to regulatory hurdles, local politics and resistance from hospitals and payers.

"Hospitals die slowly," says Paul L. Rohlf, MD, president of the American Association of Ambulatory Surgery Centers, a nonprofit advocate and educational organization.

"Now that we're getting reimbursed for outpatient care, much of the recovery from outpatient surgery doesn't have to be done in a hospital."

The 1996 "Post-Surgical Recovery Care Study," by the Federated Ambulatory Surgery Association indicates a more favorable regulatory climate in the West. California leads the nation with 63 centers, followed by Texas and Colorado with 28 and 20 centers, respectively. There currently are 23 states that have 23-hour post-surgical recovery/surgery centers. Six states allow for greater than 24-hour stays in the surgery center setting. Each of these states differs in exactly how they define and license recovery care.

In spite of any obstacles in the marketplace, some orthopaedic groups are not exactly singing the blues.

So says John J. Duggan, MD, one of eight orthopaedic surgeon shareholders at the Surgery Center of West Central Ohio in Lima, Ohio, an in-house 24-hour surgical center housed within the Orthopaedic Institute of Ohio, Inc. It opened in March of 1998 after three orthopaedic groups banded together. "We've seen 1998 to be a break-even year," he says. "This year, we're seeing good cash flow in both the surgery center of the practice side and recovery side, so we expect this to be a very good year in terms of economics.

"Our volume has increased gradually. Right now we're doing between 160 to 180 cases in surgery a month that include cruciate ligament reconstructions and lumbar laminectomies. Twenty percent of our patients stay overnight. And what's great is the state will allow the facility to expand the number of beds. It's something we're looking into."

The $5.5 million center has 32,000-square feet of space with a 10,000-square foot recovery center. It has three surgery suites, three procedure rooms, a post-anesthesia care unit and three rooms for overnight stays. The center performs about 2,400 cases of which 1,400 are orthopaedic cases. .

Echoing similar sentiments of success is Gregory G. West, MD, one of six orthopaedists at the Idaho Falls Recovery Center in Idaho. In 1980, they opened an ASC and in 1990 built a 10-bed recovery center with hospital licensure for 24-hour stays. Physicians, retired nurses and business owners in the community own the building and the land. It's been so successful they are going to build a 25- to 100-bed facility soon.

"We've been able to do extended services at our combination [ASC/PRC] center to include total joints and spine cases in selected healthy patients, but we're not doing hips," says Dr. West, who performs 40 percent of his procedures at the center rather than the hospital.

Is there an ASC in your future?

Evaluating whether or not you should build an ambulatory surgical center (ASC) requires a sound business analysis.

So says Michael McCaslin, managing director of Somerset Financial Service's health care consulting division, who has facilitated a number of ASC projects.

One of the first things you've got to assess is the political and regulatory environment you're in, stresses McCaslin. "Evaluate your state laws such as certificate of need requirements to get an initial determination of how difficult or easy it will be to get approval to open the facility," he says.

Critically important is conducting a "financial feasibility model," which includes the development, multiple refinements and presentations of financial data that analyzes the viability of the project.

This will tell you whether the project can make money or not, says McCaslin. Some of the determining factors include case volume by participating physicians, payer mix and operating expenses, including personnel, benefits, insurance, property taxes, telephone expenses, hazardous waste removal, advertising, professional fees and rent.

If you determine that it appears you have a viable project from a profitability and cash flow perspective, conduct due diligence on your project in the nonfinancial areas of market assessment, political/governmental assessment, societal implications, geographic market analysis, and payers' assessment, says McCaslin.

He points out that it's critical to go to payers to determine whether or not they will allow you to take their patients to your facility.

If you're comfortable with your financial and nonfinancial feasibility results, you need to work with your legal counsel, accounting and consulting experts to develop the organization.

If your feasibility study leads to too many unanswered questions, McCaslin says, you should not proceed to the next phase of pre-design, design, construction.

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