Cover Story

Ambulatory surgery centers becoming more sophisticated

by John Andrews

Materials managers scouring the Help Wanted ads lately may notice a new employer seeking their services: ambulatory surgery centers.

Indeed, as part of their maturing process, ASCs are finding that they want their organizational structure to resemble their larger acute care counterparts, market analysts say. This trend includes hiring supply chain specialists, seeking medical supply contracts equivalent to hospitals and adopting sophisticated IT systems.
“The good news is that ASCs are now sensitive to the fact that they have to be better business people in supply replenishment,” said Bill Bartoccini, president and CEO of Cornerstone Consulting Group, Mount Pleasant, SC. “They are paying attention to materials management at a rudimentary level. They realize they can’t just rely on outside salespeople to take out a catalog and order supplies for them.”

In response to the burgeoning interest in formalizing supply chain operations, Bartoccini is conducting a nationwide seminar tour along with George Puckett, executive vice president of Valley Forge, PA-based drug and medical supply distributor AmerisourceBergen. The objective of the program – tailored for American Association of Ambulatory Surgery Center (AAASC) members – is to help healthcare facilities implement conventional materials management principles.

Bartoccini and Puckett have spent months reviewing data from a comprehensive survey of more than 50 ASCs. Several key points have emerged from respondents, but one in particular stood out, Bartoccini said.

“More than anything, they want to know more about pricing administration,” he said. “They want to know how they can tell if they are being billed by the supplier at the contract rate.”
ASC staff members also want to know more about advanced materials management concepts like virtual inventory, cycle counts, activity-based costing and automation, Bartoccini said. “I’m pleasantly surprised that they want to learn about methods of replenishment,” he said.

The ASC market by the numbers
The Centers for Medicare and Medicaid Services counted 3,147 ASCs in 2001, an 8 percent rise from the 2,894 tallied in 2000. To be sure, the ASC market has become fertile territory for med-surg product manufacturers and distributors like Mundelein, IL-based Medline Industries.

“The market has grown considerably and incrementally,” said Karen Scott, who runs Medline’s ASC division. “It now represents about 8 percent of our total revenue.”

Richmond, VA-based consultant Hal Walsh helped develop the ASC business for Richmond’s McKesson Medical-Surgical, the medical supply distribution arm of San Francisco-based McKesson Corp., and reports that revenues surged at a compounded 50 percent rate in the first three years. “We had strong partnerships and a fantastic sales team,” he said.

Although there is disagreement regarding the actual definition of a “true” ASC, there is little doubt about one opinion concerning this growing segment: Surgical procedures are continuing to migrate away from the hospital OR into the outpatient sector at a rising pace. Several factors are driving ASC growth, including payer outpatient mandates, surgeon preference and advances in pharmacology and medical equipment, said Susan Kizirian, executive director of the Southeast Surgery and Urological Center in Tallahassee, FL.

“Because of reimbursement changes, the ASC is the site of service for control and efficiency,” said Kirzirian, who is president-elect of the Medical Group Management Association and AAASC treasurer. “Surgeries performed at ASCs are less costly, more accessible and safe.”
That said, there are fundamental differences in the types of surgeries performed at ASCs compared to the inpatient setting.

“Generally, ASC procedures are not as intense,” Kizirian said. “Where hospitals take trauma cases, ASCs don’t have an ER. ASCs don’t handle critical care or multiple instability cases, either. Some patients can stay up to 23 hours, though.”
One example of what might be described as a “typical” ASC is Olathe (KS) Regional Medical Center. Jan O’Dell, director of ambulatory services for the Olathe Regional, said her facility focuses on ear, nose and throat procedures, such as tonsillectomies; ear and sinus surgeries; orthopedic operations like arthroscopic knee and shoulder surgeries; ophthalmologic surgeries and a variety of cosmetic surgeries.

“We standardize with products used in the main hospital OR, but there are some products specific to the types of procedures done exclusively in the ASC,” O’Dell said. “Overall our inventory and line items are fewer than what is found in the main OR.”

Even though ASCs aren’t receiving emergency or critical care cases, there are obvious signs that the facilities would benefit from restructuring their operations, Scott said.

“The number one expense at the hospital is FTEs and the second is materials – and it’s the same at surgery centers. That’s why they’re paying attention to it,” she said. “ASCs finally understand that saving money is as important as revenue generation.”

Medline says it provides products to approximately 1,700 ASC customers, ranging in size from small freestanding facilities to multi-specialty surgery centers owned by national chains like HealthSouth and HCA. One thing they all have in common, Scott says, is that the delivery needs of ASCs are different than hospitals.

“They [ASCs] don’t have a lot of storage space and they struggle with that,” she said. “We have to make more frequent deliveries to them as a result. We don’t require them to place a minimum order and they can order as often as they like.”

Does size matter?
As Bartoccini nears completion of his ASC survey, MGMA is in the throes of processing data from its own separate survey conducted in tandem with AAASC. Now in its fifth year, the 2003 survey canvassed nearly 100 ASCs about various aspects of their operations. The purpose is to give ASCs some figures to benchmark against their own performance.

Although Dan Stech, director of MGMA survey operations, says it’s too early in the review process to gauge new trends, a key finding from previous surveys is that size does matter when it comes to ASCs.

“To a certain extent there does seem to be an economy of scale in the ASC environment,” Stech said. “There is a certain size where they maximize profitability and productivity, but then they reach critical mass. Being really big is not necessarily better in terms of net margin.”

Historically, the MGMA survey found that ASCs handling between 2,000 and 3,000 cases per year report the highest net income from surgeries – $315 per case. Facilities in this size range reported a median net income of $864,283, a median caseload of 2,412, and a median number of procedures totaling 2,778. 

By contrast, larger ASCs with 5,000 or more cases reported a return of only $210 per case. Facilities in this category had higher median income ($1.4 million), but had to increase their median caseload and number of procedures by 167 percent and 183 percent respectively. Even so, Kizirian says questions linger over what constitutes the ideal size.
“There is a size that is most profitable, but it’s inconclusive,” she said. “There are questions about whether an ASC with 12 ORs is too big or an ASC with one OR is too small. It depends on the strategy. Once you get beyond six or seven ORs, you’re getting beyond the small environment. If you can’t make the revenue to get it going, it’s probably too small. It’s difficult for ASCs with one or two ORs to maintain profitability.”

Large ASCs do enjoy certain advantages, particularly with regard to pricing administration, Kizirian said.

“Volume plays a big role in pricing administration and many ASCs aren’t large enough to get high volume discounts,” she said. “But those who belong to national chains usually do.”

ASCs owned by larger entities such as hospitals, professional management companies and multi-specialty physician practices can typically get access to contract pricing through the national GPOs. Industry data shows the majority of ASCs to be independent, however, and it is this segment that appears to be clamoring for GPO pricing.

“They realize they need to belong to buying organizations, but whether it’s national or local doesn’t really matter,” Bartoccini said. “Many are joining subsets of the nationals, such as AmeriNet’s [shareholder] Intermountain Health System.”
Scott adds that she’s seen more independent ASCs joining GPOs, but that they’re also becoming savvier at getting discounts “because they’re buying the same things week in and week out.”

Getting IT together
In order for ASCs to formalize their purchasing and inventory management operations, they need to look at how their information technology systems can integrate materials management with other functions, Bartoccini said. 

“Right now it’s a mixed bag – there can be a variety of different systems operating separately,” he said. “Anything IT related usually involves an accounting and scheduling software package. Some scheduling systems have modules for materials management, but they’re very rudimentary. There are also systems for personnel management and payroll management, but very little for materials management.”

The Olathe ASC has a perioperative IT system called ORSOS developed by Atlanta-based Per-Se Technologies that director O’Dell hopes can turn inventory management into an exact science while at the same time automating other manual processes. As she explains, Olathe’s previous system was on the primitive side.

“Inventory was not being re-ordered based on what was actually used, but instead on a guess of what had been used,” O’Dell said. “Someone would go in and look at the current supply and take a guess at what we needed.”

Implementing the ORSOS system in March 2002, Olathe’s goal was to get its inventory under control while simultaneously monitoring surgical costs, matching surgeon costs with specific procedures, identifying cost reduction areas and using the data to set budgets, not coincidently data-driven functions that have become common at many acute care facilities.

“Not all of our ideals have been met to date, mainly due to a lack of interfaces and a few glitches in the ORSOS system,” O’Dell conceded. “But this data has been vital in helping us make good financial decisions.”

Versatility reliant
No matter how sophisticated ASCs become in the future, market watchers believe they will continue to operate with lean resources, requiring staff to have versatile skill sets.

“They are multi-taskers – they have a variety of jobs to do,” Bartoccini said of ASC personnel. At the same time, senior management is exploring areas that could benefit from specialists and materials management seems to fit the bill.

“When I started serving this market, none of the centers I saw had a structured materials management position,” Medline’s Scott said. “It was a hodge-podge. That is definitely changing. They are hiring personnel dedicated to materials management.”

Walsh, however, isn’t convinced that hiring specialists will become a trend among ASCs. As is usually the case with providers, it boils down to economics, the consultant said. “We haven’t seen a high degree of specialization in ASCs to date because they haven’t had the financial wherewithal,” Walsh said. “If they can’t afford to do it, they won’t.”

HPN

October
2003