Why Ambulatory Surgery Centers Fail and How Syndication Can Help

The ambulatory surgery center (ASC) business is a fickle one indeed. In addition to treating patients, ASC’s must navigate a range of competitive business pressures, with the added stress of strict healthcare regulation. In my twenty plus years in the industry I’ve seen the peaks and valleys of ASC evolution, from moratoriums, to changes in billing requirements, to private equity consolidation, to waves of de novo facilities popping up – followed by more moratoriums.

An ambulatory surgery center is a serious investment in both time and money. Even in a non-CON state, it typically takes two years from inception to open an ASC, and along the way it costs many millions of dollars. Once up and running, the staffing and overhead costs are also very significant, and a five-room ASC will require managing a team of 40+ employees. Despite this, ASC developers and founding physicians continue to go through the process because of the expectation that their center will be full of happy physicians and generate a good return. So, why do we keep seeing ASCs that have gone through this arduous process, and are underperforming?

According to AORN, one-third of ASCs are operating at a loss, and one-third are break-even. This means that two-thirds of ASCs are struggling. Why is this?

ASCs are high-fixed-cost businesses. They require a lot of space and a sizable lease, they are filled with very expensive equipment, and often need to make payments on the money used to finance the center – a monthly interest expense. These costs are largely fixed. Whether you are doing 3,000 cases or 9,000 cases in your four-room facility, you will find that rent, equipment leases and interest are pretty much the same. Supplies on the other hand are completely variable, while staffing is somewhere in between (there is some scalability to volume, especially if you increase cases per room, but as you open up new rooms, you need more staff). For these reasons, high volume centers that fully utilize their block times tend to be high-margin and successful. We’ve seen ASCs that are in-network and operate at a 50%+ margin, but we’ve also seen similar ASCs that lose money, primarily because they are underutilized.

Often these struggling centers were once profitable, but over time their volume decreased for many reasons, with some common themes emerging:

·         There is an aging group of physician members who slow down and eventually retire, and the cases are not replaced

·         Physician members become disgruntled with their low ownership and look for better opportunities then leave

·         A provider’s practice is acquired by hospital and their cases no longer come to the ASC

·         An ASC aggregator acquires a majority stake in the ASC, which creates a dual issue: the doctors who received a pay day may work less or retire, and the increase in ‘dead equity’ means that physician distributions go down, causing further dissatisfaction

It is when these centers are underperforming, struggling to make a profit and wondering if they will be viable long-term, that they come to us for help.  The solution to decreased case volume is to create increased volume. In theory this is simple. We call bringing doctors to an ASC (usually as partial owners), ‘syndication’, and it is one of our key services.

Syndication is the lifeblood of any ASC: growing or maintaining your physician base and their case load is imperative to having a sustainable business. But healthcare being healthcare and doctors being doctors means that syndication is something of specialized subject. It’s a blend of high-level data analytics, outreach through referrals and cold-calls, a soft touch to create trust with potential new Members, and knowledge of how to facilitate transaction structure, documentation and onboarding. All of this means that successful syndication takes time, and is more of an art than a straightforward service.

How to Successfully Syndicate

A successful syndication (one that that results in bringing new doctors to the center) has some key elements:

A sensible narrative and a compelling story: doctors are generally savvy as well as cautious and will do their own diligence before making a significant decision – and deciding the site-of-service and facility where they treat their patients is indeed a significant decision. If you are asking a doctor to partner with a center and its physicians, and that center isn’t currently offering ownership, or is offering ownership, but it is not profitable, then why would a physician leave their current arrangement? Successful syndication requires an attractive, and credible proposal.

Strong data analytics: to companies such as Sapient, modelling out projected revenues and expenses, charting assumptions for reimbursement by CPT code and payor, and making assumptions on utilization and efficiency are all a standard part of our work, but to physicians, it is an unfamiliar area that can be daunting. It is important to provide the detail behind a model to show that the assumptions are credible, but to also explain this in a simple and plausible narrative (e.g. explain why, if you come in along with these other doctors, the center will thrive).

Considered structure: Will the physician become an owner in a facility, and if so how much will they buy? What anti-kickback laws need to be considered and what is Fair Market Value? Do you want the buy-in price to be burdensome and demonstrate commitment, or do you want to facilitate easy entry and help provide financing for membership units? There are many other considerations, but it is vital that the terms of the new partnership are structured to create an arrangement that is fair and stable and results in long-term partnership.

Develop trust: Many doctors have had bad experiences with former partnerships: they have left practices, unwound collaborations with hospitals, and rebuffed proffers from private equity. Becoming a partner in an ASC doesn’t mean giving up your practice, but it is a real partnership – as we like to say: less than marriage but more than dating. Taking the time to develop relationships with physicians, show them the center and introduce them to all the Members, will allow both sides to decide if it will be a good fit.

Syndicating an ASC can be difficult, but when it works, it is often magical. Zero-sum, win-win situations can be hard to come by. But if a syndication event is successful, the new Member(s) will be providing better care to their patients while receiving greater distributions, and existing Members will also experience increased distributions; but most of all the ASC will be stronger and remain a viable business for its providers, patients and its employees.