5 Common Mistakes Hospitals Make When Investing in Surgery Centers with Physicians

Hospitals are increasingly building new ambulatory surgery centers in partnership with surgeons. It is a strategy that can help the hospital strengthen relationships with physicians, prepare for reimbursement changes and defend against competing health systems, says Brandon Frazier, vice president of acquisitions & development at ASCOA. But he warns that hospitals need to be careful they don’t fall victim to five common mistakes surrounding such arrangements.

1. Insufficient equity for surgeons. Surgeons need to have sufficient equity for them to have a sense of ownership in the center. "They need to feel it is their center," Mr. Frazier says. "One of the reasons ASCs operate so efficiently is that surgeons have a vested interest in making the center efficient." For example, when tardy surgeons are shown that OR time in their center is worth $18 per minute, they don’t show up late any more. The same applies to prices for equipment and supplies. "Surgeons tend to be much more judicious when the money is coming out of their pockets," he says.

2. Running the center like a hospital. "Bringing the hospital bureaucracy into the ASC is a death sentence for the center," Mr. Frazier says. Surgery centers operate differently from acute-care hospitals. "Surgeons are attracted to ASCs because of the efficiencies they provide," he says. "If ASCs turn into a smaller model of the hospital, they will be very frustrated." They will disenfranchise existing surgeons, and it will be difficult for the center to attract new surgeons.

3. Overbuilding the facility. "I see this all the time," Mr. Frazier says. "It is the most common error hospitals make when building an ASC from scratch." The hospital puts in a big conference room and spacious lounges. "This is wasted space that is expensive and doesn’t generate revenue," he says. The added expense will increase the monthly debt payment for the ASC and delay the time when earnings can be distributed to physicians, which is a big negative. Distributions help make the physicians more engaged. Mr. Frazier advises scaling the center to the number of cases the physician investors will bring. He uses a benchmark of 2,000 cases per OR, per year for a multi-specialty center. Excess capacity of 20-30 percent can be built in for future growth.

4. Not using the ASC as a recruiting tool. Hospital executives are often concerned the ASC would cannibalize cases that would otherwise go to hospital ORs, but they fail to realize that a new ASC can help increase their inpatient volume, Mr. Frazier says. Typically, more than 50 percent of cases in the new surgery center come from competing hospitals. "A new center can be a powerful marketing tool to attract surgeons from surrounding hospitals," he says. "They have seen an increase in inpatient cases in addition to the cases they have recruited to the ASC." A hospital executive who had come to appreciate this advantage calls it the "halo effect," Mr. Frazier says.

5. Running an unprofitable center
. "The most important factor affecting the relationship between a hospital and its surgeons is the profitability of the ASC," Mr. Frazier says. While making surgeons financial partners in the ASC can help build relationships if the ASC is profitable, it is a huge disadvantage if the center is unprofitable. "If they end up with no distributions or, worse yet, cash calls to cover an ASC's losses, they are going to be unhappy," he says. This happens all too often. It is estimated that about a quarter of all ASCs are making cash calls and another quarter simply break even. To help ensure healthy profits, the hospital may want to include a corporate partner who specializes in running ASCs.

Learn more about ASCOA.


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