Should You Join the ASC Revolution?

Weary of hospital-based surgery? Here's how to tell if you should declare your own "independence day."

BY PRAVIN U. DUGEL, M.D. AND STEPHEN SHEPPARD, C.P.A.

Do you relish the idea of having an independent income stream, greater surgical efficiency and the ability to control your surgical environment? Then, like many ophthalmologists, you've probably considered starting up an ambulatory surgery center. We must warn you that the journey is complex and should be studied with great care. However, the most important reason to consider this venture should be to provide better patient care. If you do not believe that an ASC setting will allow you to improve the care that you deliver to your patients, then all the other reasons are irrelevant. It must be said that some excellent surgeons are more comfortable in a hospital environment and it is important to recognize your comfort level and be honest with yourself when evaluating the ASC option.

Rules and Regulations

Once you determine that an ASC is appropriate for your practice plan, consider any regional regulatory constraints. For instance, some states have a certificate of need (CON) requirement, which is often tedious and expensive to overcome. In such cases, another strategy, such as partnering with a hospital in a joint venture, may be easier.

The second consideration is case volume. Over the last several years, the design and construction requirements for ASCs have become increasingly rigorous. Ophthalmology provides a good example. In 2009, you should be able to count on 700 to 800 anterior segment cases annually to attain an acceptable profitable level. For a posterior segment center, the minimum case volumes will be 800 to 1,000 annually. In the early years of this decade, the target volume levels were perhaps 200 annual cases lower.

If you feel that your case volume alone is sufficient for an ASC, then a single-use ASC that is only state licensed and Medicare-certified may be appropriate. Such an ASC has fewer regulatory constraints and is often easier to set up. On the other hand, if your surgical volume alone is not sufficient, consider bringing in other surgeons to the venture. This means that additional regulatory requirements may have to be met.

Depending on the number of surgical partners and their specialties, state and federal self-referral regulations must be considered. The structure of the enterprise may benefit by conforming to the Stark "Safe Harbor" provisions. Additionally, consult with your attorney to ensure that you aren't violating state or federal laws regulating the sale of unregistered securities.

Sizing up the Options

■ Single specialty (i.e., cataract only, retina only). A single-specialty ASC has the advantage of being more focused and allowing for greater efficiency and profitability. However, much like owning only a single type of stock in a portfolio, a single-specialty ASC also carries a greater degree of business risk for the owners. Due to the limited type of surgeries, there is a greater dependency on reimbursement changes.

■ Multi-specialty ophthalmology only. This type of ASC allows for a significant focus on the subspecialties within ophthalmology, as well as efficiency and profitability, but decreases the risk of single-specialty ownership. This is akin to owning a sector of stocks, as opposed to only one type of stock, in a portfolio. Although there is some dependence on reimbursement changes, there is enough diversity in the types of surgeries to mitigate the risk. For example, at Dr. Dugel's Spectra Eye Institute, although reimbursement for glaucoma shunt procedures has significantly decreased, offsetting increases in the reimbursement for retinal procedures allow us to continue to be profitable and not compromise care that our glaucoma colleagues deliver.

■ Multi-specialty ASC. This variety includes not only all subspecialties of ophthalmology, but also other fields of medicine, such as pain management, general plastic surgery, orthopedic surgery, gastrointestinal surgery, etc. This is akin to owing a stock portfolio with many stock sectors across the board. The advantage, as in a stock portfolio, lies in the diversity of cases and the mitigation of reimbursement pressure risks. However, the disadvantage is the loss of focus and efficiency.

This may be particularly true for ophthalmology as it tends require very different processes than the other specialties occupying multi-specialty ASCs. For instance, a circulating nurse who is well versed in general plastic surgery may quite easily cross over to gastrointestinal surgery. However, she would have a more difficult task of crossing over to vitreoretinal surgery. Therefore, the ophthalmologist tends to be assigned a small group of people who have an interest and expertise in ophthalmology only. Although this small group may be very efficient, when it is not intact, the efficiency tends to dwindle.

Moreover, multi-specialty ASCs are typically managed by a governing body and ophthalmology tends to have limited representation. This can be a problem, as ophthalmology equipment tends to be very expensive and technically oriented.

Ownership Models

■ Physician alone. This option has the highest risk, but also the highest reward. The physician owners must be committed to spending a great deal of time and effort in researching and planning the ASC venture. Although excellent consultants are available, physicians must still be involved at every step. Not only is the time commitment considerable, but the financial commitment, and therefore risk, is equally significant.

This is a business venture and should be thought of as any other business venture. The risk of loss of capital is real; however, the advantages are also substantial.

Physicians alone decide the day-to-day workings of the ASC. Issues such as equipment purchases, staffing, etc., do not need to be rescinded to any committees. Decisions can be made quickly and effectively and typically reflect what is best for the patient.

Finally, a physician-owned ASC also has the potential to be a growing asset. Not only will a successful physician-owned ASC provide regular dividend distributions, historically these facilities have appreciated as an asset. This can be realized as shares are sold, when new members join or when the ASC or a portion of the ASC is sold to another entity, such as a management company or hospital.

■ Physician-hospital venture. The advantage of this model is a decrease in both monetary risk and time requirements for the physician. Often, in such a venture, the hospital bylaws will require that the hospital own the majority share, although there is no regulatory requirement for this. In turn, the hospital will also provide resources, such as capital, consultants, real estate and support to obtain a CON if needed.

We have seen this model succeed when the venture is established as an entity distinguished from the hospital and, therefore, free of hospital bureaucracy. Physicians must feel that they have a significant voice in the decision-making process as well as the day-to-day function of the ASC. Additionally, full commitment of the hospital is critical. On the surface, the hospital has a direct conflict of interest with the ASC resulting from the transfer of surgical cases to the new facility. A full and frank discussion with the hospital decision-makers is required before heading down this road.

Hospitals operate in an entirely different manner than ASCs, thus, if such a venture is created under the umbrella of a hospital bureaucracy, it tends to suffer the same inefficiencies as the operating rooms of the hospital itself.

This model does allow for a dividend-paying asset if it is run properly and profitably. However, it rarely provides an asset-building function, as it is unlikely that another entity would purchase this venture in cases where the hospital is the majority owner.

■ Hospital alone. The hospital-alone ASC model does not allow for physicians to buy into the venture in contrast to the physician-hospital venture. Often, this is simply an extension of the hospital walls and, if it is under the hospital bureaucracy, it tends to be similarly inefficient.

■ Management company. This model reduces the business risk for the physician via limited partnership interest. If this venture is properly created with a reputable management company, it can be very rewarding. It has the potential of decreasing risk while allowing for physician ownership and efficiency. There are various options of management company/physician decision-making ownership that range from a management company-run ASC to an ASC that is eventually entirely owned by the physicians.

There are two critical questions for physicians considering this model. First, what does the management company bring to the arrangement? This can be capital, development expertise, managerial skill or some combination of the three. Secondly, you must evaluate the ability of the management company (read, non-surgeon partner) to deliver something of continuing value to the enterprise. Typically, in single-specialty centers, management companies have minority positions and may agree to remain investors for a limited period. In larger, multi-specialty centers, the corporate partner can provide valuable services on an on-going basis. They may also require a somewhat larger investment stake in this situation.

Building the ASC

■ Finance. As mentioned, it is important to think of an ASC as any other business venture with all its risks and rewards. Lending institutions will not think any differently. The recent economic downturn has seen banks requiring more equity, 20% to 30% of the total loan, and shorter amortization periods. Many lending institutions will, additionally, require significant guarantees.

■ Consultant team. A good consultant team is essential for a successful ASC project. There are many reputable ASC consultants who have a team of legal and accounting staff to provide a total package of consultancy. Such ASC consultants have years of experience and are able to customize the project according to physician and regional needs. An excellent resource for such consultants is an ASC organization, such as the Outpatient Ophthalmic Surgery Society (OOSS) or the ASC Association.

■ Real estate. The basic need for real estate is to control the space for 20 to 30 years as the ASC is not portable. There are two ways to accomplish this. First, the building can be bought and the real estate itself may be thought of as a venture. This investment may pay dividends if other physicians are allowed to invest and, if properly managed, will usually appreciate in asset value. Although the initial capital outlay is large, the ASC tenant and the rental income stream are virtually guaranteed as long as the ASC remains viable. On the other hand, the real estate can also be rented. As long as the rental agreement allows for the space to be occupied for 20 or 30 years by the ASC with a predetermined rental formula, renting the real estate will decrease the initial capital outlay.

■ Legal issues. The safe harbor rules for physician ownership of ASC interests are very clear and well established. However, they vary depending on the facility's ownership structure. These regulations are based on the premise that the facility is an extension of the surgeon's practice. Non-surgeons can typically own interests in surgery centers, but they should not be in a position to refer patients to the center.

Qualified surgeons are defined as physicians obtaining at least a third of their practice income from performing surgical procedures that are approved for ASCs. Multi-specialty centers and physician/hospital joint ventures also require that surgeons perform at least one third of their surgeries in the center where they are an owner.

In addition to these "performance" requirements, there are several other requirements to be satisfied to fully fall within the safe harbor. If those requirements are met, then the safe harbor requirements are satisfied. It is important to emphasize that being outside the safe harbor requirements does not mean that the venture is illegal. Compliance with the safe harbor regulations creates a favorable presumption that the ownership structure does not promote inappropriate utilization of the center.

The buy-sell provisions of an ASC are another major issue. We have seen successful ASCs fail due to inadequate buy-sell provisions. In our experience, it is very important that the owners of the ASC be like-minded and in agreement as to the goal of the ASC. It is also helpful, although not essential, to have owners who are in a similar stage of their career. Remember that physicians cannot be rewarded for increased volume and that dividends must be shared according to percent of ownership. This has to be considered when taking on new owners and evaluating their potential contribution to the growth of the ASC.

Equally important, but often overlooked, the buyout provisions must be clear. There must be a clear understanding by all owners as to the transfer of shares in case of retirement, disability, or relocation. We have seen facilities where the buy-in provisions have received a lot of attention, but it is the buyout provisions that have caused the most problems. The facility needs the ability to redeem the interests of non-active surgeons over some reasonable period following their withdrawal from practice.

■ Accreditation. The Accreditation Association for Ambulatory Health Care (AAAHC) is the leading organization for the accreditation of ASCs. However, the Joint Commission and the AAAHC also accredit surgery centers. All three of these organization have "deemed status" with CMS and can thus conduct Medicare certification surveys, in addition to accreditation surveys.

In some states, e.g., Texas and California, successfully completing a deemed status survey by one of the accrediting bodies is now the only path to Medicare certification for physician owned ambulatory surgery centers.

■ Running the ASC. Perhaps the most important hire for a well-run ASC is the clinical director. It is this hire that will determine whether the ASC has the mission, direction and efficiency that the physicians seek. If the clinical director does not share your goals, the ASC will not be successful. The "director" must be thought of as not only the day-to-day operations manager, but also the spiritual leader of your ASC: the "keeper of the mission." Often a substantial amount of time and effort will be spent in finding and developing this position. In the beginning, key physicians should be committed to giving substantial input and direction to the clinical director. The communication between the clinical director and key physicians needs to be open, honest and continuous.

■ Staffing. The single largest portion of the ASC overhead is staffing. Insufficient or ineffective staffing will certainly undermine the mission of the ASC. The key, then, is to match the staff with the proper task. At the Spectra Eye Institute, the number of staff we have at the check-in, preop and postop areas often surprises visitors. I then explain our strategy of matching the staff with the task at hand. For instance, we have staff that exclusively position patients prior to being brought to the OR. This adds to the patient's comfort, the surgeon's safety, and to the profitability by decreasing the turnover rates. However, a highly paid registered nurse is not necessary for this task. One of the major assignments for the clinical director is to balance efficiency with overhead.

You Make the Call

The decision to enter into an ASC venture is complex and diverse. There is no cookie cutter solution. Instead, the strategy must be forged according to the physicians' goals and regional requirements. The venture must be looked upon as a business and decisions must be made accordingly. The monetary and time requirements must not be underestimated. However, like any other journey, the first step is always the most difficult and most meaningful. This step involves the simple question of whether you believe your patients will receive better care in an ASC. If, and only if, you believe this to be true, then an ASC may be appropriate for you. OM

Pravin U. Dugel, M.D. is managing partner at Retinal Consultants of Arizona in Phoenix. He is also the founding partner of Spectra Eye Institute in Sun City, Ariz.
Stephen C. Sheppard, CPA, COE, is a managing principal with Medical Consulting Group, LLC, an ophthalmic consulting firm with offices in Springfield, Mo. and Fayetteville, Ark.