5 Cardinal Sins of Developing a Surgery Center
By Robert Zasa, MSHHA, FACMPE
There are five cardinal sins to avoid in developing a surgery center. I have listed them briefly to give the reader an idea of the kind of things to avoid that we have found over our 25 years of developing centers that are the most common mistakes made.
1. Don’t Overbuild
Many physicians underestimate the efficiency of an ASD (ambulatory surgery center) and plan for too large a space to accommodate patients. Many planners and architects, though well meaning, to afford their plans of an attractive space with room to grow, oversize the facilities and build them to hospital grade construction specifications. These folks do not have to live with costs that they plan, whatever the cost, they do not have to live with these costs. Just in time inventory, disposable anesthesia circuits, specialized prepackaged surgical packs, reduce size of medical records that fit in a fire-proof, lateral file, instead of clinic-type sliding shelf medical records systems significantly reduces space requirements for storage, anesthesia rooms (which can be replaced by an anesthesia closets), reduced medical records space, and no sub sterile rooms between operating rooms, as well as reduced sterile storage. These are now common space deficiencies found in many well-provided surgery centers. It has been our experience that every extra 1,000 square feet operationally costs the center approximately $50,000 per year, including rent, insurance, housekeeping, and housekeeping supply charges, staffing, utilities, property taxes, common area maintenance charges and repairs with extra HVAC and extra equipment. There is a tendency to equip the space if it is built. The vast majority of the ASDs in the US have not had to increase the size of their ASCs for additional cases due to the advances of technology, greater efficiencies, and anesthesia drugs in terms of reducing recovery time, and ability to make more product use of their employees. Most the ASDs built too large and it results in a permanent expense that owners have to bear financially. This is a major issue to avoid for potential for ASD owners.
2. Do Not Over Equip the Center
Some fixed and much movable equipment does not need to be brand new. Remanufactured equipment that comes with guarantees is much less expensive. There are multiple sources for this equipment. Just because you have the space does not mean that you have equip it or furnish it. Equipment procurement companies that worked on a fixed fee and do not take “referral fees” from manufactures to save the owner(s) a lot of money since they purchase so much equipment for year. They also know that this equipment is most reliable or in contrast, which equipment needs more repair than the other. One can outfit things in stages. Most equipment can be acquired in a short period of time after it is ordered. There is no reason to pay interest or lease charges for equipment that is not used routinely, hoping that some physician will use it. ASD owners can develop per use arrangements with equipment dealers, particularly for such equipment such as scopes, lasers, and other specialized equipment that is expensive, but not used as often as normal pieces of equipment, paying only when the equipment is used. It is not smart to tie up cash, particularly in equipment, which can often times be leased with an option to buy for a reasonable interest rate.
3. Do Not Overstaff the Center
When opening, an ASD owner does not know how many cases physicians will really do, nor how quickly the wrap–up will occur. The staff will not be as efficient working in that facility, since they are new to the facility as well. However, you want to provide very good service at the beginning, and due to these factors at least one extra nurse FTE is a good idea, particularly in the preoperative/recovery area. This is a location where there is no support patient contact, and those nurses have a great deal to do with the center’s patients starting on time and efficient discharge of the patients. Guidelines for staffing in a multi-specialty center doing approximately 2,400 to 3,000 cases per year are a) to have total payroll (salary, plus benefits, plus contract labor for business office in clinical areas) not greater than 25-27% of the net revenue of the facility, and b) achieve staffing level of 10-11 man-hours per total worked hours per patient (not procedures). Doing more endoscopy and pain cases in the surgery center will lower the worked hours per patient. More orthopedic, plastic, and eye patients and cases involving children will increase the number of worked hours per patient. You can always add staff; it is hard to fire them. Second, staffing is the largest variable cost in operating the ASC. Too many staff causes undue financial burden on an ASC. Flex staffing to help meet the variability in hourly caseloads should be extensively used in an ASC. Permanent, part-time, and P.R.N. staff are critical to have when opening and operating a successful surgery center. The level of quality in service to the patient is a function of staffing; however in trying to meet that goal, many centers carry three to four staff members more than is necessary. There needs to be some financial parameters set on the staffing along with good statistical basis to allow proper staffing to give good patient service, but not lose control of this critical operating parameter.
4. Do Not Under Capitalize the Business
For small business like an ASC “cash is king.” Many small business fail, including surgery centers, because they run out of cash and do not have enough staying power to get over the slow growth or paying problems or issues with over expenditures or time delays for the project. Proper cash flow planning is critical. This should be done at the beginning of the project. Proper business plans should be developed at the beginning of the project that projects the proper amount of pre-opening expenses and delayed cash flows due to initial accounts receivable delays when starting. Payer contracts take time to put in place after the opening of the center and it getting Medicare approval. Also, the caseload ramp-up should be very conservative for the first six months to plan prudent cash flow and cash needs of the business. For accounts receivable, projections less than 60 days for the first six months of operations are unrealistic (the rule of thumb is to use 120 days for the first six months, and then tighten it down to 50 days outstanding as operations move forward). The current amount of investment per share or per unit must be calculated correctly to collect enough cash to cover the startup months. Many ASCs undervalue the amount per share for purposes of making the deal more attractive to many doctors. They often then find they have not raised enough cash to fund the project or construction or tenant improvement overruns or delays in the project. A good guideline is to raise 25 to 30 percent of the total projects needs from the investors. This percentage includes the per-opening costs, equipment costs and operating costs for the first three months of operations. The credit line for the three months of operations should also be arranged in case delays occur so the ASC never runs out of case in its startup of 18 months (six months for pre-opening and the first elements of operation).
5. Do Not Allow One Physician or One Group To Own Too Many Shares
Unless the center is being developed for that surgeon’s practice, professional jealousy creates a situation where many doctors do not want to work at the center that is owned significantly by one or two other surgeons. No one wants to “line the pocket” of another surgeon based upon real work. There are better ways to properly remunerate “founding” surgeons. The surgeons who conceive and take time away from your practice to develop an ASC deserve to buy extra shares and/or obtain a nominal development fee and/or Board of Manager fees at an appropriate, administrative rate, if they will provide ongoing Board services. Units or shares can be divided into “founder” shares and non-founder shares. We have not found that Class A and Class B stock works. No surgeon wants to be considered Class B; however, you can develop a different category of shares relating to the amount of effort people will put in to help develop the center. Founder surgeons that have given up time from the practices can be allowed to purchase more shares than others (having nothing to do with their case volume) that were in the deal first, took the risks others did not, and spent legitimate time in developing and establishing success of the center. This is a very sensitive area when initially structuring the center. The rule of thumb is to make sure there are tangible services being delivered and that they are visible in order to justify any additional fees and/or additional shares being purchased by the founding surgeons. It is also strongly suggested that the per share cost of the founding surgeon be exactly the same as everybody else, not only for legal reasons, but also for political reasons as well. Undervaluing the shares for founders leads to numerous problems, which can be easily avoided by allowing the founders to have more shares, and other mechanisms described in this paragraph.
These are quick tips to use in developing surgery center and problems to avoid. Adhering to these tips can save a cost on the part of the founding physicians and help develop a healthy start to a successful surgery center.