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Surgi-centers Are Skyrocketing – Financial and Growth Issues to Consider


5/13/14

With declining insurance reimbursement and decreasing out-of-network reimbursement in the midst of healthcare reform, there has been much discussion and uncertainty about the future of surgi-centers. However, significant variables paint a positive picture of the outlook on outpatient surgery centers, suggesting that they are an effective and efficient option in the delivery of healthcare and remain in high demand. Surgi-centers can also prove to be a lucrative business decision – if owners perform due diligence in their efforts to open and expand surgi-center operations.

From a business and strategic planning perspective, establishing a surgi-center creates an ancillary source of income for a physician, as the ability to provide a greater array of services through a surgi-center leads to multiple streams of revenue and increased profitability. Moreover, establishing a surgi-center or expanding upon an existing facility remains advantageous in that it builds a very lucrative asset – one that has potential to be purchased in the range of three to seven multiples of earnings, based on recent activity in the market. CohnReznick stresses that the key to a profitable outcome is to perform due diligence in the process of opening or expanding upon an existing facility.

When opening a new surgi-center, the following due diligence items should be considered:

  • Evaluate the historical number of procedures done by the prospective partners and ensure that your CPA advisor has access to such records so this information can be verified
  • If the surgi-center is multispecialty, ensure you have the proper mix of specialties to protect your return on investment
  • Evaluate the time constraints for performing procedures
     

When expanding, the following due diligence items should be considered:

  • Ensure you project out the volume required to support the investment made
  • Financing options
     

A Model of Success in the Delivery of Surgical Services

As the nation undergoes unprecedented healthcare reform legislation in an effort to reduce costs and improve quality of care, surgi-centers stand as a solid example of a successful transformation in healthcare delivery. Surgi-centers have provided a positive experience for both the patient and physician, effectively improving scheduling procedures, using teams of specially trained and highly skilled staff, as well as the best available equipment and supplies, and utilizing design facilities that are tailored to a specialty and specific needs of patients. According to the Ambulatory Surgery Center Association (ASCA), patients report a 92% satisfaction rate with the care and service they receive from surgi-centers.1 The primary reasons cited for the growing popularity of such facilities include safe and quality service, ease of scheduling, greater personal attention, and lower costs.

While physicians continue to have ownership in virtually all surgi-centers, many centers are jointly owned by local hospitals, indicating that hospitals are increasingly recognizing and embracing the value of surgi-centers. In fact, recent data shows that hospitals have ownership interests in 23% of all surgi-centers while only 2% are owned entirely by hospitals.2

An often significant hurdle in establishing a surgi-center is attaining the proper volume of procedures necessary in order to realize financial success. Accordingly, CohnReznick recommends performing a feasibility study which entails preparing a pro forma income statement that relies on full disclosure of records from all interested stakeholders. A pro forma income statement informs potential partners about the expectations, risks, and profits prior to launching the venture. Richard Puzo, Partner and CohnReznick’s Healthcare Industry Practice Leader, recommends that already established surgi-centers seeking to increase service offerings, such as opening more operating rooms or a multispecialty center, likewise prepare a pro forma statement for the same reasons.

Assembling a core group of physicians can also pose as a challenge to operating a successful surgi-center. To effectively recruit the right number of physicians with equal commitment, Puzo advises thoroughly understanding your competition, as well as networking with peers, to determine who may have the greatest interest in and reap the most benefit from such a venture.

Care at Significant Cost Savings 

In addition to a focus on quality care, surgi-centers provide cost-effective care that saves money for the government, third-party payors, and patients. The Medicare program and its beneficiaries share in more than $2.6 billion in savings each year, as the program pays significantly less for procedures performed in surgi-centers when compared to the rates paid to hospitals for the same procedures, according to the ASCA. Patient co-pays are also significantly lower when care is received in a surgi-center. Furthermore, studies have indicated the rate of post-surgery infection among surgi-center patients is relatively low3, encouraging future cost reductions.

Shifting Demographics Will Drive a Different Model of Care

Statistics show that roughly 10,000 members of the “Baby Boomer” generation will turn 65 every day until 20304, when all Baby Boomers (those born between 1946 and 1964) will have reached that age. The aging of this huge cohort of the population will dramatically change the composition of the country, increasing the percentage of Americans ages 65 and older from roughly 13% in 2010 to 18% in 2030, according to Pew Research Center population projections. A significantly older population will likely translate to an increase in the frequency of patient visits, thereby placing greater pressure on the healthcare system to provide more efficient and cost-effective services. Surgi-centers offer a model of care that can effectively manage this shifting trend.

Older patients are likely to utilize many of the procedures typically performed in an outpatient setting, such as orthopedic and pain management procedures, endoscopies, and colonoscopies. As baby boomers are remaining more active and engaging in athletic activities at ever-increasing rates, an uptick in surgical procedures is likely, many of which can be performed safely and affordably in a surgi-center setting. A cost comparison of procedures common among older adults illustrates the significant savings realized when these procedures are carried out in a SurgiCenter as opposed to a hospital. For example, the ASCA states that Medicare pays hospitals $1,670 for performing an outpatient cataract surgery, while paying SurgiCenters only $964 for performing the same surgery.

Advances in surgical techniques and anesthesia have also allowed for many cosmetic procedures to be performed in a surgi-center instead of a hospital. The increasing demand for such procedures due to greater affordability is likely to put further strain on hospitals, thereby driving some procedures to surgi-centers. As technological innovation continues to advance, more and more procedures will be feasibly and safely performed in an outpatient setting.

Surgi-centers are highly regulated by federal and state entities, with safety and quality of care evaluated by independent observers through three processes: state licensure, Medicare certification, and voluntary accreditation. 

What Does CohnReznick Think?
Whether forming a surgi-center, maximizing the profitability of an existing facility, or preparing for a liquidity event, there are many issues to take into account throughout the process. Considerations include the type of specialty offered at the surgi-center, due diligence, bank financing and operating agreements are all significant and should be carefully vetted. Irrespective of reductions in reimbursement, a surgicenter can be a profitable business with the potential to yield substantial gains upon sale if planned and operated properly.

Contact

For more information, please contact Richard Puzo, Healthcare Industry Practice Leader, at 973-364-6675. To learn more about CohnReznick’s Healthcare Industry Practice, visit our webpage.


[1] http://www.ascassociation.org/AdvancingSurgicalCare/aboutascs/industryoverview/apositivetrendinhealthcare
[2] http://www.ascassociation.org/AdvancingSurgicalCare/aboutascs/industryoverview/apositivetrendinhealthcare
[3] http://www.surgistrategies.com/news/2010/06/infection-rate-in-accredited-ambulatory-facilitie.aspx
[4] http://www.pewresearch.org/daily-number/baby-boomers-retire/


This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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