Evaluating freestanding ambulatory surgery center ventures
Dove, Henry G
Projecting revenues and expenses
reader take-away
* See how to conduct a payermix analysis and learn what opportunities can spring from the results
* Learn how to make initial projections of revenue
* Find out how to adjust expenses, including salaries and benefits, drugs and medical supplies, direct and indirect costs and capital expenditures
* Create a cash-flow summary to assess your financial position
This is the second article in a two-part series. Part 1, published in the September 2005 MGMA Connexion, described the rising popularity of ambulatory surgery centers (ASCs) and the basic elements of a feasibility study. This article discusses the projected revenues and expenses of a hypothetical ASC and analyzes the potential impact of a hypothetical new payment method by the Centers for Medicare & Medicaid Services.
In the following hypothetical scenario, a new ambulatory surgery center (ASC) facility under consideration has the following characteristics:
* Surgeons – Three gastroenterologists, two podiatrists and four orthopedic surgeons as part owners expect to perform all of their ambulatory surgeries in the new facility; and
* Other surgeons – Two ophthalmologists and two gastroenterologists who are not owners are expected to do 50 percent of their cases in the new facility.
Historical data are available from the nine investor surgeons; the other four surgeons’ caseloads are based on other data. A payer mix analysis projects the allocation of case volume by insurance class to forecast revenue. The distribution of insurance carriers may be analyzed in terms of case count, procedure count, gross charges or net receivables. Ideally, potential case volume (number of patients) can be anticipated by each insurance carrier.
The ASC payer mix may not resemble the payer mix of a clinic. It depends largely on specialty and ASC-eligible volume. In this scenario (see table on page 59), we assume that the payer mix percentages of the clinic are representative of the ASC. Any private insurance carriers that represent 3 percent or more of the total volume of a provider should be listed.
The total payer mix percentage indicates an opportunity to negotiate reimbursement rates with private insurance carriers, which represent approximately 39 percent of the business, or 2,580 cases. All other reimbursement is nonnegotiable because it is determined by government reimbursement methods and rates.
After completing the payer mix analysis, construct a three- or five-year pro forma and cash flow statement to project revenue and operating expenses. Capital expenditures will be projected on equipment needs, working capital requirements and building expenses. For purposes of this study, we used a three-year pro forma.
Making initial revenue projections
The model projects revenue assuming that the facility will commence operations on Jan. 1, 2006. We assume that the new payment system for Payer 1 is implemented on Jan. 1, 2007, and that private insurers adopt that system on Jan. 1, 2008.
To illustrate how we project revenue for a given specialist and the variations in reimbursement by specialty, we consider Dr. A, an orthopedic surgeon, and Dr. I, an ophthalmologist (see page 60). We base projections on the procedures that represent 90 percent of the potential ASC volume for each surgeon: eight procedure codes for Dr. A and two procedure codes for Dr. I. Ideally, the revenue analysis is based on a sample that represents 90 percent of the volume or procedures performed at least twice a month.
The impact on revenue of multiple procedures is accounted for in the revenue analysis. Therefore, the following assumptions arise from this example:
* Dr. A: On average, each case has 1.3 procedures performed, or a 30 percent multiple rate;
* Dr. I: On average, each case has 1.05 procedures performed, or a 5 percent multiple rate; and
* All insurance carriers reimburse primary procedures at 100 percent of the allowed rate and all subsequent procedures at 50 percent of the allowed rate.
The current reimbursement method uses a grouper system that classifies current procedural terminology (CPT) codes into payment groups. Our analysis uses hypothetical procedures with hypothetical grouper assignments. Reimbursement projections are based on payment allowances at 100 percent of the reimbursement rate for the applicable ASC payment group for primary procedures and 50 percent of the allowed rate for procedures in the multiple position with adjustments made based on multiple procedure incident rates. Multiple procedure incident rates are assumed and described in the table for each specialist.
We also assume that the distribution of multiple procedures is equitable because we don’t know volume for multiples by procedure. This assumption is often made because many billing information systems can’t run reports indicating the billing position of a procedure. However, a billing system can often provide the total number of patients (or cases) vs. the total number of procedures.
Thus, the projected average net revenue per case is the sum of the projected net revenue for primary procedures plus the incremental net revenue expected from the multiple procedures.
For Payer 2, the net revenue per case is projected based on percentages of Payer 1. We projected Payer 3 at rates equivalent to 70 percent of Payer 1, on average.
The New ASC reimbursement system is hypothetical (see page 60). It expands and changes the number of ASC payment groups. The multiple procedure principles and calculations for projecting average net revenue per case apply to the new methodology depicted in the table.
The table shows (without details) that hypothetically, the new ASC reimbursement system benefits orthopedic surgery and increases the expected net revenue 47 percent. However, for ophthalmology, the new reimbursement system results in a 20 percent decrease.
When completing the revenue analysis over the three-year period (see table at right), we assume that case volume will increase, on average, at 3 percent per year in addition to the changes in reimbursement by payer type as previously described.
As the three-year revenue-projection table indicates, the decreases in ophthalmology and gastroenterology result in a projected revenue decrease of $131,000 in year 2 due to the high percentage of Payer 1 and Payer 3 patients. However, in year 3, with the new reimbursement method and increases in reimbursement from Payer 2, orthopedics and podiatry realize substantial revenue gains.
Projecting expenses
The ASC will have four operating rooms. We assume the facility will run from 7 a.m.4 p.m., Monday-Friday. It may extend its hours until 6 p.m. as additional capacity is needed; the facility will be open on Saturday from 7 a.m.-5 p.m.
Variable operating expenses typically increase by the Consumer Price Index (CPI). For purposes of this analysis, we assume that variable expenses increase by 3.5 percent per year. Fixed expenses, such as rent or interest, typically have known escalators or decreasers to factor into the projections.
Salaries and benefits – Salaries and benefits are projected based on the number of full-time-equivalent (FTE) employees and hourly wages and/or salaries annualized (see table below). Benefits are calculated at 30 percent to 35 percent of wages based on geography. In addition, we adjust FTEs based on increasing volumes and case mix.
Drugs and medical supplies: Determined by specialty; a weighted average is calculated per case to project annual drug and medical supply expenses.
Other operating (direct) expenses: Prosthetics and implants, liability insurance, utilities, telephone, professional fees, books, dues and subscriptions, accounting, continuing education and travel.
Other (indirect) expenses: Depreciation and amortization, interest expense, property taxes and business taxes. Interest expense decreases over time until all debt obligations are fulfilled; this is reflected in the pro forme analysis summary.
Capital expenditures: Building costs, tenant improvements, equipment and instruments, information systems and working capital. After these data are collected and assumptions made, construct a pro forma analysis (see below).
Cash flow
Following the completion of the profit and loss statement, a cash flow analysis is executed to determine how long it will take to break even and generate a profit (see table below). For the first six months, we assume a 90-day lag between the date of services and date of payment, and a 60-day lag after that for receivables from payers. Because commercial and private insurance carriers are often slow to credential physicians, it’s critical that you account for lag times to forecast adequate working capital requirements.
The table shows that although the ASC has positive cash flow from operations in year 2, the negative cash flow in year 1 prevents the ASC from having cash on hand until year 3. Therefore, the ASC must allocate enough working capital to cover these shortfalls.
Most ASCs must initiate contractual discussions with insurance carriers at least six to nine months prior to opening. Successful ASCs have:
* A favorable case mix and payer mix;
* Understanding of their cost structure and case cost;
* Favorable negotiated rates allowing for losses that may come from government payers; and
* Rates that generate operating margins well above the total cost of doing business.
note
1. Cleverly WO. Essentials of Health Care Finance. Aspen Publishers Inc., Gaithersburg, Md., 3rd ed., 1992: 467-478.
By Henry G. Dove, PhD, and I. Naya Kehayes, MPH
about the authors
Henry G. Dove, PhD, MGMA Health Care Consulting Group consultant and principal, casemix Consulting LLC, Hamden, Conn., henry_g_dove@sbcglobal.net
I. Naya Kehayes, MPH, CEO, Millennium Health Consulting LLC, Issaquah, Wash., nayak@aol.com
Copyright Medical Group Management Association Publications Oct 2005
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