Expanding Into Non-Hospital Venues: The True Measures of Success
Jody Locke, MA
Vice President of Anesthesia and Pain Practice Management Services Anesthesia Business Consultants, LLC, Jackson, MI
The typical anesthesia practice now includes a combination of traditional hospital facilities and ambulatory surgery centers (ASCs), endoscopy centers and other outpatient venues such as doctors’ offices. With the continued migration of surgical cases from inpatient to outpatient place of service, a variety of service locations is considered essential to survival.
While the payer mix at hospitals may be eroding due to an increase in Medicare and Medicaid patients, the ASC often attracts a more favorable mix of patients, thus helping the practice maintain an overall average net yield per ASA unit billed that comes closer to supporting the practice’s financial needs. Rarely do these ambulatory venues require a financial subsidy. Since their call coverage requirements are limited to day-time activity, the inclusion of an ASC makes it easier for the practice to manage the manpower needs of the practice as a whole.
Ideally, the addition of ASCs enhances the practice’s overall financial picture, but not all ASCs are the same. Any student of economics knows that as you push out the supply curve, you experience diminishing marginal productivity. Those who pursue practice expansion must understand this principle and appreciate its significance for the practice’s future. Blind pursuit of all surgical venues in a given geography may not be the best strategy.
A summary of 30 ABC client practices throughout the U.S., that covers both inpatient and outpatient venues, highlights the potential advantages and disadvantages of such expansion (see Figure 1). We have focused on trends over a five-year period, from January 2012 to December 2016. All data has been compiled by date of service so that payments correspond to the charges to which they are applied.
In general, this has been a period of expansion for most of these practices; surgical volumes have increased year over year for both inpatient and outpatient locations. Generally, payer mixes have remained consistent, and despite the potential impact of Obamacare, most practices experienced slight increases in net yield per ASA unit billed.
For the purposes of this study, all activity was categorized as either hospital or outpatient, based on place of service. Thus, some outpatient activity is included under the category of hospital. The ambulatory data also includes endoscopy centers when they are performed outside the hospital. While some practices cover more outpatient venues than others, overall, non-hospital unit production represented about 15 percent of total unit production in 2012 and has increased slightly, but not dramatically, over time. Collections for these non-hospital services outstripped production levels. For the entire sample, non-hospital collections went from 19 percent of total practice collections to just under 22 percent.
What most practices focus on is the significant differential in the net yield per unit billed, which is an obvious reflection of differences in payer mix and which, as indicated in Figure 2, can be significant. Often, more inpatients are covered by Medicare and Medicaid than patients in the non-hospital venues, although this is not always the case; sometimes the actual yield at the outpatient facilities can be quite disappointing. Net yield per unit is only one part of the equation, and other metrics are far more relevant to the overall assessment of each venue’s value to the practice.
The Value of an Anesthesia Practice
The value of an anesthesia practice can be defined by three variables: the average number of surgical or obstetric cases performed; the average acuity of cases as defined in terms of average units per case; and the effective net yield per unit. Most practices track cases performed by month. Many also track the total ASA units billed each month. While these are important pieces of information to track, it is the ratio between the two that can be most significant. Average units per case should be tracked by line of business. The typical community hospital bills about 13 units per case for inpatient procedures, while the value for outpatient and ambulatory cases may be between eight and 10. The average endoscopy case only results in seven units per case, and this may drop if the proposed revaluation of the endoscopy codes goes into effect next year. (The proposal is to drop the base value of a colonoscopy from five units to four units.)
Unit production reflects the work associated with the line of business, but it is the net yield per unit billed that actually determines the payment. Given an average Medicaid rate of $15 per unit, an average Medicare payment of $21 per unit and an average PPO rate of $65 per unit, obviously, the more Medicare and Medicaid patients seen, the greater the limit on fee-for-service collections and the greater the need for financial support from the facility. Herein lies the challenge. Ideally, each new venue or line of business should contribute positively to the practice’s bottom line. This is not always the case. In fact, if practices were to implement a serious cost-accounting model, they might find that they should exit certain venues.
Strategy Gone Awry
One practice covered the primary hospital in a local market. As new surgery centers opened, the practice felt it was important to contract with all of them, until they realized they could not afford to compete in the local labor market. The problem was that their manpower was being deployed to unproductive centers. Once they cancelled a few contracts, their financial situation improved dramatically.
Figure 3 offers an example of this phenomenon. The practice represented here covers two hospitals, three surgery centers and one endoscopy center. The table provides normalized data for the first quarter of 2017. Production data is divided by anesthetizing location days. All data was limited to day shift activity, 7 am to 3 pm, so that hospital values could be compared to non-hospital values. It should be noted that if the practice relies on a physician-only model, the average actual cost per location day can be as high as $2,100. Medical direction of CRNAs tends to reduce this cost, but the results can vary significantly, from $1,500 to $1,800 per location day.
In this example it is clear that neither hospital generates enough revenue to completely cover the cost of care, thus necessitating financial support from the facility. The point is, though, that with two possible exceptions, the other locations are not generating sufficient revenue to completely cover the cost of care.
This is a very common phenomenon. There may be many valid and important strategic considerations to justify the contracts with the less productive venues, but it may also be that the practice has never carefully examined the profitability of its various lines of business. A snapshot perspective such as this does not tell the whole story. One or more of these venues may be in “ramp up mode,” i.e., expected to increase profitability over time. But what if this is not the case? Failure to track these subtle metrics could be seriously problematic over time.
There is a common saying in business that you cannot manage what you do not measure. As medicine becomes increasingly more competitive, it is essential for practices to judiciously manage their balance sheets. In the past, optimizing collections was the key to an anesthesia practice’s success, but now that success hinges much more on effective management of clinical resources and productivity. ABC clients: if you do not know or have access to the datapoints and values discussed above, feel free to reach out to your account manager for assistance in benchmarking your practice.
Jody Locke, MA, serves as Vice President of Anesthesia and Pain Practice Management Services for Anesthesia Business Consultants. Mr. Locke is responsible for the scope and focus of services provided to ABC’s largest clients. He is also responsible for oversight and management of the company’s pain management billing team. He is a key executive contact for groups that enter into contracts with ABC. Mr. Locke can be reached at Jody.Locke@AnesthesiaLLC.com.