Outpatient surgery dollars represent potential revenue stream for practices

Recapturing dollars from hospital setting can pay off

If Bill Gates or Sam Walton can do it, why not a physician practice? Identifying new revenue streams for a business is something corporate America has done for decades, and now it’s time for practices to learn how. Many groups are turning to outpatient surgery centers as one of these revenue sources.

Why? For years managed care organizations have asked practices to cut costs until practices feel they can’t get much leaner. By forming its own ambulatory surgery center — either independently, or jointly with other physician groups or a hospital — a practice can capture some of the outpatient surgery dollars from hospitals, as well as demonstrating greater cost efficiency to managed care organizations.

Some managed care organizations are taking the same route as Maryland-based MAMSI, which is venturing into co-ownership of ambulatory surgery centers. MAMSI is shifting all outpatient surgery procedures for its Montgomery County members from hospitals into the surgery center it co-owns.

"The typical freestanding ambulatory surgery center [cost] is about 35% to 40% less expensive than the hospital," says Dallas-based consultant Steve Earnhart, MS, president and CEO of Earnhart and Associates. Earnhart has worked with dozens of clients that have purchased equity in existing surgery facilities or started their own, and says the following types of organizations are particularly good candidates for considering ownership of surgery centers:

• practices with a high volume of surgery business (such as orthopedists or OB/GYN practices) or even a high volume of elective surgery procedures (plastic surgeons or podiatrists, for example);

• physician practice management companies looking to offer additional resources and efficiencies to the managed care organizations or physician practices they do business with;

• hospitals interested in benefiting from the cost savings that ownership of ambulatory surgery centers can offer.

Although no statistics are available on group practice ownership of ambulatory surgery centers, a survey by Chicago-based SMG Marketing shows that 278 physician partnerships reported ownership of ambulatory surgery centers in 1996. The SMG survey shows that 604 new ambulatory surgery centers have debuted since 1993, although it does not break down the data for either group practices or independent physician partnerships.

The benefits of starting an ambulatory surgery center are demonstrated by Arkansas Surgery Center, a Fayetteville-based center that started four years ago. The idea for the center was born when solo orthopedist James Arnold, MD, wanted the convenience and cost savings of being able to walk next door and perform surgeries. "It’s not incumbent upon him to see 100 patients a week plus doing 20 to 30 surgeries a week," explains Arkansas Surgery Center Executive Director Russ Greene, RN. "He’s able to do twice the number of cases at a freestanding surgery center, and is able to manage his time a lot better by using a surgery center with good patient turnover efficiencies."

The tactic Arkansas Surgery Center took is to have physician ownership through a general partnership. Although the original physician founder thought he could absorb the center’s costs and liabilities on his own, he quickly decided it was too much to bear, Greene explains. The physician purchased the property, built the facility, and leased the surgery center out to Professional Surgery Center of America, an organization the physician found by researching organizations that seemed to match his philosophy and way of doing business. Arnold is a limited partner in the venture, and receives a quarterly distribution from the general partner based on the center’s revenues. (The general partner today is Universal Health, because Professional Surgery Center of America later sold its shares in the center.) The physician now is considering partnering with other physicians in the community, who would participate in the limited partnership.

Greene and Earnhart say they’ve seen several different trends emerge for ambulatory surgery center ownership recently, including the following:

Co-ownership of surgery centers by hospitals and physician practices through a limited liability corporation. "This makes it easier to do managed care contracting, and gives the hospital increased profitability and efficiency," Earnhart says. Although reimbursements for outpatient surgery centers are typically lower than reimbursements for hospital-based outpatient procedures, it’s better than losing a larger chunk of these dollars to ambulatory surgery centers owned entirely by physician practices, or companies such as HEALTHSOUTH, or a physician practice management company. "My prediction is that virtually every hospital in the U.S. will have to have a freestanding surgery center within the next five years. And if they have to do it, they should do it with physician partners," he says.

Partnering with managed care organizations, which earn shares in the surgery centers. Managed care organizations will, in turn, steer patients toward that surgery center.

Forming or joining a management service organization (MSO) comprising several physician group practices. The physician practices share in use of the facility and ownership through a contractual relationship with the MSO. Arkansas Surgery Center is considering affiliating with Little Rock, AR-based U.S. Orthopaedics, Greene says.

Once you’ve decided to take the plunge into surgery center ownership, the work is just beginning. Greene offers the following tips to practices that are considering entering this arena:

If you are considering buying into an existing surgery center, have your surgeons perform cases there. This is simply a matter of applying for privileges at the center. Your physicians can observe how efficient staff members are and how willing they are to take care of surgeons’ needs.

Use your contacts or consider a consultant. If you’re not able to visit other surgery centers, your physicians probably know former medical school classmates who have entered the ambulatory surgery ownership arena, or your specialty medical association may have access to information about ownership. A consultant also is an option.

Staff carefully. Find a center administrator with experience with a stand-alone surgery facility, and hire staff members that have been around the block. Greene says someone with 10 years of experience is ideal.

Give staff members some type of ownership as well. Efficiency is everything in the ambulatory surgery business, and if employees are rewarded, they are more likely to be cognizant of costs and using supplies efficiently. Arkansas Surgery Center allows its employees to purchase stock in parent company Universal Health through payroll deduction, but a bonus or incentive plan that is tied to meeting budget projections also is an option.

Your research may find that starting an ambulatory surgery center isn’t a good idea in your market. Duluth, MN-based St. Mary’s Duluth Clinic was formed because physician leaders of the 300-physician Duluth Clinic determined that forming an integrated delivery system was the practice’s best chance of succeeding in managed care, says Philip Eckman, MD, medical director for development. "Over the years, we’ve considered at length opening an ambulatory surgery center. What stopped us is that we would have excised something from the hospital," he explains. "What we did was help the hospital bring their outpatient surgery capability to where it needed to be in order to be competitive in the market." Physicians have accomplished this through package pricing of several high-volume procedures and through physician representation on various boards and committees that make up the St. Mary’s Duluth Clinic system, he adds.