Developing A Low Cost Ambulatory Surgery Center

By Ronald Blair

Introduction

We are constantly asked the following question: What is the minimum number of cataract surgeries required for an ASC to be successful? This article was prepared for the purpose of documenting the process of the development of a freestanding ambulatory surgery center for an ophthalmic practice. This discussion is based on a single ophthalmic surgeon performing 400 cataracts per year. This is the actual development process of one of our centers. We wanted to share our experience so that others might be encouraged to take on this process. The process we follow was dictated in part by the rules and regulations of the Department of Health in this state. Be sure to check the rules and regulations in your own state, as they can vary considerably.

Overview

The development of an ambulatory surgery center can be a great addition to the physician’s practice. An ASC can improve a physician’s lifestyle, dramatically affect the quality of patient care and the patient experience, and provide an ancillary income stream for the practice.

This article will break the ambulatory surgery center development process into five phases. This will make it easier to categorize what needs to be accomplished at each step of the development process.

Phase I: Feasibility Analysis

The first step in considering the development of an ambulatory surgery center is understanding if it is economically feasible to develop one in the first place. This process begins with the collection of data. You will need to know the number and type of cases you expect to perform in your ASC. If you have a practice computer system, you can request a report of all surgical procedures for the last twelve months by CPT Code and annual volume. The next step is to identify which ASC facility payment group applies to each of these procedures. Once this is completed, a simple calculation can be made to determine what the total value of the procedure will be.

Here is an example:

CPT Code Description Volume Facility Group Payment Annual Revenue
66984 Cataract 400 8 $973 $389,200
66821 YAG 135 2 $446 $ 60,210
Total Revenue $449,410

Once we have estimated the ASC revenue, the next step is to calculate the cost of building the ASC. If you are going to construct a new building from the ground up, you will need to add the cost of the land plus the cost of the building shell that will run about $60 per square foot. You can feel comfortable using a cost of $128 per square foot for the cost of the build out of the ASC if you include architectural, engineering, and consulting fees. I would also figure on a 10% reserve for contingencies.

ASC Financial Feasibility Summary
Cases Performed Cost Per Case Year 1 Year 2 Year 3 Year 4
Cataracts 400 412 424 437
YAG Lasers 135 139 143 147
Other Procedures 60 62 64 66
Revenue
Cataracts surgery $973 $389,200 $400,876 $412,552 $425,201
Yag Lasers surgery $446 $60,210 $61,994 $63,778 $65,562
Oculo-Plastics Revenue $468 $28,080 $29,016 $29,952 $30,888
Total Revenue $477,490 $491,886 $506,282 $521,651
Supplies
Supplies – Cataract Procedures
IOL’s $85 $34,000 $35,020 $36,040 $37,145
Other surgical supplies $22 $8,800 $9,064 $9,328 $9,614
Total Supplies $42,800 $44,084 $45,368 $46,759
Income Before Operating Expenses

and Debt Service

$434,690 $447,802 $460,914 $474,892
Operating Expenses
Accounting $2,000 $2,000 $2,000 $2,000
Insurance $9,500 $9,785 $10,078 $10,380
Legal $1,500 $1,500 $1,500 $1,500
Maint/Repairs $9,500 $9,975 $10,473 $10,997
Miscellaneous $16,500 $16,500 $16,500 $16,500
Office expense $8,000 $8,000 $8,000 $8,000
Rent (1) $40,000 $40,000 $40,000 $40,000
Salaries (2) $75,168 $78,926 $82,872 $87,016
Salary Burden (3) $15,033 $15,785 $16,574 $17,403
Other Expenses $8,500 $8,500 $8,500 $8,500
Utilities $9,500 $9,500 $9,500 $9,500
Total Operating Expenses $195,201 $200,471 $205,997 $211,796
Income Before Debt Service

and Depreciation

$239,489 $247,331 $254,917 $263,096
Debt Service
Equipment & Tenant Improvement (4) $97,543 $97,543 $97,543 $97,543
Working Capital (5) $18,128 $18,128 $18,128 $18,128
Total Debt Service $115,671 $115,671 $115,671 $115,671
Net Cash Flow $123,818 $131,660 $139,246 $147,425

Assumptions:

  1. Rent is based upon utilizing an existing space of 2,000 square feet for a one operating room ASC @ an annual rate of $ 20/sq. ft.
  2. Assumes receptionist @ $12/hr x 18hrs/wk x 48weeks,RN for pre-op and admin @ $30/hr x 18hrs/wk x 48 weeks.

    RN/Circulator & PACU Nurse @ $24/hr x 9hrs x 48 weeks hrs, three techs @ $14/hr x 9hrs x 48 weeks,

  3. Salary burden is assumed at 20% of salary and includes payroll taxes and benefits.
  4. The equip & tenant improv. debt service assumes a prin. amount of $ 525,000 which is fully amortized over 7 years @ 8% interest.
  5. The working capital debt service assumes a prin. amount of $ 75,000 which is fully amortized over 5 years @ 8% interestSalaries increase by 5% per year

    Repairs and maintenance increase 5% per year

    Insurance increases 3% per year

    Cataract & Laser volume increases 3% per year

    Supplies increase 3% per year

Phase II: Legal Considerations

Once you have determined that it is feasible for you to build an ASC, you must next consider the legal structure of the ASC. Are you considering owning the ASC with individuals outside of your medical practice? Many ophthalmologists choose to partner with others when building an ASC. Before you make this decision, determine if you are willing to assume the legal risks associated with joint ownership of an ASC. For instance, if your prospective partners are investigated for billing matters, then your ASC will likely be investigated as well.

You must also determine whether to own the ASC within your practice or in a separate legal entity. While many ASC’s are owned as separate legal entities, you should consider the licensing and CON implications. In some states, owning an ASC within your practice may alleviate the need for you to obtain a CON.

If the ASC is going to be built on land you own, evaluate how that land should be owned. Should it be in its own legal entity or part of the ASC entity? Will all of the owners of the ASC own the real estate? Owning the real estate in a separate entity may make the cost of the ASC more affordable for others. Separate ownership of the real estate may also provide you with an income stream for years to come. If the real estate is not going to be owned by the members of the ASC, then make sure to negotiate a long term lease now. Personal guarantees should be avoided, if possible.

Your legal counsel should review with you the legal issues surrounding the building of an ASC. They include at a minimum, HIPAA, Stark issues, fraud and abuse issues, and antitrust considerations. You may wish to familiarize yourself with guidance published by the Office of Inspector General regarding ASC’s. This information can be obtained through the OIG’s website located at www.oig.hhs.gov. You should also evaluate your state’s CON laws to determine if CON approval is needed. If your ASC is owned in a separate entity, you should consider the tax implications with receiving income from more than one employer.

Once you have evaluated the legal considerations and determined the structure of the organization, your legal counsel should prepare a number of organizational documents. You will likely have an Operating Agreement which details how the business of the ASC will be run. The Operating Agreement will clearly define the initial and supplemental capital contributions of each member of the ASC as well as how supplemental capital contributions will be required. The Operating Agreement may also contain a non-competition provision prohibiting investors in the ASC from owning an investment interest in a competing ASC within a specific geographic area. You should consult with your attorney regarding the enforceability of non-competition covenants. The Operating Agreement will also detail how new partners are admitted, and the buy-out of existing partners. A valuation formula for the Member’s ownership interest should be included in the Operating Agreement. The Operating Agreement should also contain a conflicts of interest provision which requires members of the ASC to disclose potential conflicts or business opportunities to the ASC.

Phase III: Development and Design

Now that we know we have a viable project, it is time to turn our attention towards the next step, which is to contact the state where the facility will be constructed to determine the steps necessary to complete the project and comply with the necessary state and federal requirements. Most states will send you a packet of information detailing this process and advising you of the significant building requirements.

This is also the point where interviews should take place to hire an architect. In the process of interviewing candidates, be sure to qualify each one based on their experience designing ASC’s in the state you intend to build in. ASC’s can be complex structures with significant engineering required. Do not proceed without a qualified architect and engineer who commit to providing you with a fully engineered plan. If an architect advises you to proceed on a “design build basis” where the contractor and his subcontractors provide the engineering, you will be inviting many delays and problems in getting your center built.

The basic decision of what is to be built is largely based on what procedures will be performed at the ASC. Since it will be a single specialty ASC for ophthalmology, this gives us direction for the layout of the ASC. Certain spaces are required inside the ASC to support the surgical procedures you intend to provide. The list of all of this space is called the program. Once a program has been developed, the floor plan layout can be done.

Most states, but not all states, either offer or require floor plan review prior to proceeding with the final construction plans and start of construction. It is wise to check early with the appropriate state agency to determine if an appointment is required as this can delay the process up to 60 days in some cases. Once the floor plan has been approved by the state agency, your architect can proceed with the construction drawings.

Phase II of the project is the point in the project where significant amounts of time can be gained or lost. This process can be completed in less than 90 days. Unfortunately, if this process is not managed, it can take up to six months, so be careful.

Phase IV: Bidding and Beginning Construction

Most owners are not comfortable if they do not bid out their projects. However, the industry is seeing some increase in the number of projects, which are being done under a construction management agreement. The advantage to construction management is that if you have a general contractor you want to use on your project, he can sometimes save you money by being involved in the design process. The contractor can provide a valuable engineering function, which may save you money in the long run by recommending less expensive ways to construct the building or by recommending less expensive materials for the project. This is the route we have decided to take.

If you decide to bid out the ASC project, we recommend you get bids from three contractors. We recommend three because we find that two bids is not enough to get a good number and more than three bidders causes contractors to spend little time on their bids as their chance of getting the job drops to 1 in 4 rather than 1 in 3.

Your architect and consultants should make a recommendation as to which bidder wins the contract. It should be the owner’s decision ultimately, although the architect and consultant’s recommendation should be taken into consideration since they know what to look for.

Once the contract is awarded, be sure to sign a contract for the construction of the project. Also be sure to set out expectations for payment to the contractor at the start of the project so everyone knows what is expected of them. You should expect multiple requests for payment during the project based on a percentage of the project that is completed.

The architect and / or consultants should provide regular onsite visits. A report should be available on a weekly or bi-weekly basis to the owner by the architect and / or the consultants to keep everyone apprised of the progress being made. Construction meetings with the subcontractors, general contractor and the owner’s representative should be held at least bi-weekly and should continue throughout the project.

Phase IV: Equipment Selection and Acquisition

Equipment for the ASC should be considered at the start of construction. The selection and acquisition of equipment for your ASC can be a time consuming and frustrating process. The best way to avoid this is to use a consultant who has the experience to research the required equipment options for you and make a recommendation as to what ASC equipment should be used in the facility. Remember, you are not trying to duplicate the appearance of your hospital here. There are many lower cost options such as state of the art tabletop sterilizers, which can save you 50% of the cost of traditional gravity sterilizers.

Once word gets out that you are constructing an ASC, sales people who want your business will be contacting you on a regular basis. Direct the sales people to contact your consultant who can field these calls on your behalf and make recommendations as to who you should do business with. This will save you endless amounts of time and interruptions. The one exception to this rule is the selection of your phaco machine. We would encourage you to meet with the various company representatives in order to sample the latest technologies out there. In many instances, these companies have supply programs and equipment programs you should be aware of. This is the one instance where meeting with these folks first hand will be of benefit to you in making a decision as to which company you will go with. We found it helpful to understand exactly what services we were looking for ahead of time. That way we were able to compare what each company was offering us fairly.

The selection process should be completed 90 days before the ASC is to open. Your equipment consultant should prepare a final list of equipment and furnishings for the ASC and the owner needs to approve the list prior to ordering. Ordering should take place no later than 75 days from completion of the project, as many items can have long lead times.

It is recommended the equipment be received in outside storage like a moving and storage company so it can be accounted for upon receipt and staged for delivery to the ASC as soon as the Certificate of Occupancy is received. This minimizes congestion at the building site and makes it less likely that equipment will be damaged if it is stored on site.

Phase V: Licensure & Certification

One of the essential components of developing your surgery center is the licensure and certification process. Be sure to use a consultant who has a proven track record in managing through this process. It will be a disaster if you get your facility constructed and fail to gain acceptance as a CMS approved facility since you will not be able to bill for the cases you perform at your center.

Licensure and Certification is a complex process, which begins four to five months prior to the completions of your ASC project. It is a good idea to contact the appropriate department that handles this process in your state. Make an effort to establish a relationship with the people who will ultimately provide the certification for your ASC. They can be a wealth of information and are usually pleased to be asked for assistance and will share their knowledge willingly if you just take time to ask. A bit of understanding is also in order regarding the challenges these state agencies are facing today. Most of these agencies are operating on restricted budgets with fewer people than they have had in the past so patience will be rewarded.

A filing of the CMS 855 Form is required to get paid in an ASC by the Federal Government. This is a good time to fill this form out. Remember, you will be billing for the facility fee in your ASC; you will bill as you always have for the professional fee. Since the ASC is a provider of services, it is required to register with CMS for this service. An approved 855 Form is essential for approval of the facility and will be required by the state-licensing agency. Without the approved form, you will not receive a CMS billing number.

A good set of policy and procedure manuals is a must if you intend to certify your ASC. There are many attorneys and consultants who can provide this service or you can get a copy of the requirements from CMS and design your own books, but we do not recommend that you do this. The policy and procedure manuals will become your owner’s manual and if used correctly, will be your guide to operating your ASC and maintaining compliance for future inspections.

There are a number of key points that need to be considered as you move towards the day of your licensure and certification visit. You will be required to have credentialed all surgeons who intend to use the ASC and certain documents such as a CLIA Waiver will be required in most instances. Employee files will need to be established as you hire your staff and protocols and procedures specific to your center will need to be documented in your manuals. There will also be requirements to document the various meetings you will be required to conduct prior to their visit.

The process for the initial inspection process varies from state to state but in general, the contractor will produce a document known as a CO or a Certificate of Occupancy when construction is completed. This document allows you to move into the facility and begin the placement of equipment and the ordering of supplies. This process generally takes two weeks during which time the State Fire Marshall will make a visit to determine if the ASC is safe for a patient to be treated in. This is called the “Life Safety Inspection”. Once you have the approval of the State Fire Marshall, the State Department of Health, Licensing will be notified and they will either set a date or come unannounced to make their inspection. Once you are approved, you can begin performing cases as of the date they place on the certificate. Any cases performed prior to that date cannot be billed for so be careful about the date.

Conclusion

We have given you an overview of what our experience has been to develop a low cost ophthalmic surgery center. There are many more details, which we have not discussed, which are important to the process but we do not have the space here to discuss. Above all, we want to convey to you that while this process is complex and requires considerable effort on the part of everyone involved, the end result is well worth the effort.

You will find for the first time in your practice history, you will have complete control of your patient’s experience in our practice. The lifestyle improvement for the surgeons will be simply amazing, as they no longer have to fight for block time and worry about cancelled cases. Turnover time will be reduced considerably as you develop your own “Eye Team” for each and every case you perform. Anyone who desires to take control of the destiny of his or her practice should consider whether the addition of an ASC is the right move for them.

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