Renting Out Your ASC

Regulatory barriers make this often-discussed possibility complex to achieve in reality.

By Erin Murphy, Contributing Editor

If anybody could figure out how to work through the regulations and rent out an ASC, that person would be a hero,” says Stephen C. Sheppard, CPA, COE, managing principal at Medical Consulting Group based in Springfield, Mo. There’s no shortage of discussion on the subject, he says. It seems simple enough. ASCs that are closed a day or two a week could lease the space to another surgical group to increase their revenue. But when it comes to implementation, this deceptively simple concept gets much more complicated.

The Rental Discussion

Perhaps your ASC is fully booked. If not, you might be working to reduce downtime by adding surgeons. If you’re unable to do that, then your ASC sits in the dark. This is when surgeons typically begin to contemplate their options for renting use of the facility to outside doctors.

“A surgery center is a specialized piece of property with expensive equipment. The way to make the most money, quite simply, is to use it,” says Louis Sheffler, MPS, chief operating officer of American SurgiSite Centers, based in Somerset, N.J. “The idea of renting is to take a day of the week that earns you no revenue and start to bring something in. It’s not as profitable as your own surgical practice, but it can help offload some of your overhead.”

According to Sheppard, there’s a very wide gap between the revenue you make by working in your ASC and the potential revenue from renting it out. He points out that the proposed 2014 national average facility reimbursement for cataract surgery in the ASC (66984) is around $940.¹ A good surgeon with an efficient team can easily perform three surgeries per hour in a single room, so that room’s revenue potential is $2,820 per hour. On a day where the room is used for 8 hours, its revenue potential is $22,560.

“Clearly, you can’t charge that daily rate to lease the facility,” he says. “So, by far, the room’s most profitable use is for you and your surgical staff to be performing surgery. If you can attract good surgeons who work efficiently with reasonable case costs based on their specialty, then the surgery center is much better off growing its volume than serving another purpose.”

Sheffler, too, recommends that practices try to add doctors before considering other means of revenue. He says that ASC owners tend to consider the rental option after they’ve tried to attract more surgeons, but they may not be successful due to competing relationships or the ASC’s location in a rural area. In cases like these, he has seen practices try the rental option.

“I knew of a situation where another group rented a surgery center,” he says. “They rented not only the building and the parking lot, but also the nurses and supplies. They paid a rental fee to the facility and billed the insurance companies themselves.”

Although he’s heard a great deal of discussion on the rental subject, Sheppard has never seen it implemented. “One of the things that’s long been talked about is a simple sharing arrangement by two ophthalmic surgery practices,” he explains. “Medicare regulations say that when it’s permitted under state law, ASCs may use the same physical space so long as they are distinct temporally from each other. One ophthalmologist could work Monday through Wednesday, and then another ophthalmologist or other specialist could work Thursday and Friday. Each entity would have its own license to operate an ASC. For example, it may be possible for a cataract practice to rent its ASC to refractive surgeons with roll on/roll off lasers.”

Although Medicare regulations permit rental agreements, having separate practices share a facility is a complex legal arrangement, the rules for which vary from state to state.

“Owners would rather add more surgeons to the facility’s medical staff than rent,” says Michael A. Romansky, JD, senior lobbyist and vice president of corporate development at the Outpatient Ophthalmic Surgery Society (OOSS) in Washington, D.C. “I’m not sure whether it’s a great payoff financially or whether it’s even feasible in many situations. There’s a potential opportunity, but there are also complex regulatory challenges.”

Still, Sheppard says, renting is an intriguing topic to many people. “Small ASCs in particular, while they may be very profitable, generally are utilized at a very low rate — only about 20% to 40% of a 40-hour business week,” he says. “These ASCs have significant, predictable times when the center is completely dark. They’d love to find a way to generate more revenue on dark days, but between CMS and state licensure, it’s hard to figure out how to do that.”

Intriguing Possibilities

In a rental arrangement, two similar local practices might split the week, but there are other potential scenarios. Experts point to geographic motivations for ophthalmic surgeons, as well as the option of renting ASC time to other specialties.

“For surgeons in small towns, a rental arrangement could be particularly beneficial,” Sheppard says. “They might use their ASC a few days a week, but many other small-town medical surgical services are provided by itinerant surgeons who are in town once or twice a month. These surgeons might, for example, need a place to see clinical patients on a Tuesday and perform surgery on Wednesday. A surgery center isn’t set up very well as a medical clinic, but you could conceive of a number of ways to accommodate these needs, such as using a conference room as an exam lane.”

Sheffler sees rental arrangements as a potential way to expand a practice geographically.

“If an ophthalmology group with a surgery center in the city wants a branch in the suburbs, potentially the group could rent a few days at an existing ophthalmic ASC in the suburbs,” he says. “When they perform surgery in the suburbs, they’re operating as their own organization — using their policies, procedures, personnel, malpractice insurance and everything else that’s already part of their center in the city. The same arrangement may be possible with another specialty outside of ophthalmology if the equipment and supply needs are met.”

Assuming that equipment and supply needs are met — or could be provided by the renter — it may be possible for other medical specialties to rent an ophthalmic ASC.

Sheppard says, “I think you could explore whether state law might let you lease the space to a cosmetic surgeon as an in-office surgical suite, not a surgical facility.”

Sheffler says pain management may be another possibility.

“An anesthesia department can set up as an entity, rent an ASC, and perform pain management in that facility. On a slow day such as a Friday, they can give patients their back injections, and then the patients can relax for the weekend before they return to work. It’s a good scenario for both parties,” he says. “They’d be renting the ASC, minus the surgical equipment, but they would still be paying for premium space with oxygen, suction, nitrous oxide, stretchers and so forth.”

That premium rate is regulated, Sheppard points out. “ASCs are required to lease space at fair market value if the lessee is in a position to refer surgical cases to the ASC. If you rent it as surgical space, the rent must be comparable to other surgical rental rates in your area. The same is true if you rent it out as clinic space or meeting space — the rate must be fair market value for those uses.”

Regulatory Barriers

The consensus is that if you’re thinking of renting out your ASC, the first thing you should do is contact your healthcare attorney. He can lay out for you what rental situations are possible within the confines of your ASC’s regulations.

Sheppard thinks regulatory hurdles are the reason he doesn’t see more rental arrangements. “It doesn’t occur very often in my experience,” he says. “Virtually all the ASCs I work with are Medicare certified. Medicare puts some fairly strict constraints on your ability to lease the facility. Several sections of CMS coverage conditions define what you can and can’t do.”

The distinct entity requirements mentioned by both Romansky and Sheppard mean that an ASC itself can’t provide surgical and non-surgical services — say, cataract surgery and radiology — in the same time frame. “To make use of unused time, you have to sell it to a different distinct entity. And that entity can only use it while you and your entity are not present,” Sheppard says.

Still, Medicare also requires facilities to comply with state licensure laws, so if the state is uncomfortable with the arrangement, it can’t happen.

“When I looked into rental arrangements for a few clients, the states didn’t get it,” Romansky says. “States are concerned that when you switch over to a different staff, patient health and safety are going to fall between the cracks. I don’t know of any data to support that idea, but I do understand their concerns.”

Every state’s regulations are a little different, according to Sheffler. “There are major differences in attitude from state to state. Some states are more liberal than others. Some have a laissez faire philosophy, while others don’t allow it at all. They want to see the same face when they show up at the door,” he says, adding that some states are learning as they go. “I know a rental situation that the state of New Jersey allowed to happen, only to stop it after a year or two. The state realized that it wasn’t set up to have the control they wanted over the situation, so they stopped it.”

Despite the variety of limitations placed on ASC rental from state to state, Sheppard doesn’t predict any major push toward regulatory clarity.

“Given what I see as a market limited to smaller facilities with a small ownership group and/or few surgeons, I don’t expect there to be a big push for regulatory changes, because it’s unlikely that many groups will approach state regulators and politicians to ask for these changes.”

Rental Contracts

If your attorney believes that a proposed rental arrangement is possible, both parties must draw up a strong, detailed contract that protects their interests. Sheppard points to some key considerations.

“ASCs must have a lease in writing. Again, if the lessee is in a position to refer surgical patients to the ASC, then the rental rate must be at fair market value for the space and other items furnished,” he says. “The lease could be solely for the space or it could include equipment and even labor. For example, lessees might want to use the gurneys in the pre-op area. Or, they may want to have some of the RNs work for them. Each lease has to be crafted to reflect what the lessee actually plans to do and what goods and services the ASC is providing.” ◊

Reference

1. “Proposed ASC Payment Rates for Corneal Transplant Released,” Eye Bank Association of America, The Focal Point: Advocacy and Legislative Update. August 6, 2013. (Accessed http://www.restoresight.org/wp-content/uploads/2013/08/The-Focal-Point-August-6-2013.pdf)