In the first portion of this series (supplement to the April 2002 issue of Cataract & Refractive Surgery Today), we explained the potential benefits of ambulatory surgery centers (ASCs) and detailed the preliminary steps involved in development. This month, we focus on choosing a legal entity, equity partnership, the design and construction process, as well as strategies for managing an ASC.
CHOOSING YOUR LEGAL ENTITY
The participating physicians must form legal ties in order to initiate the development process. There are four basic types of legal entities that may be used to form an ASC partnership: C-Corp, S-Corp, Limited Partnership (LP), and Limited Liability Company (LLC). Although the C-Corp is very common in business (the majority of corporations listed on Wall Street are C-Corps) and they do an excellent job of protecting owners from financial and legal liability, they may not be the best choice for an ASC. The primary reason is that their profits are taxed twice—first at the corporate level and again at the personal level, when owners receive distributions in the form of dividends.
The S-Corp is more appropriate for ASCs because they are taxed at the personal level only. However, it should be noted that the income of the S-Corp is deemed taxable to the owners at their personal income tax rates, based on their percentage of ownership. Individuals pay tax on the profits whether money is distributed or not. During the early years of the ASC, it may have been necessary for the S-Corp to retain money for working capital, but 100% of the income would still be taxed at the personal level.
At one time, the LP was the most popular legal entity for an ASC, but it has since been replaced by the LLC. The main disadvantage to an LP is that the general partners may be held personally responsible for the debts and legal ramifications of the partnership. However, some states do not allow LLCs; therefore, the LP is still a good option in suitable locations.
Currently, the LLC is probably the best legal entity for an ASC. LLCs are very similar to S-Corps but offer some additional advantages. While an LLC does not normally pay federal or state income taxes, and the owners of the LLC pay taxes at their personal tax rates based on their percentage of ownership, this type of entity is similar to an S-Corp in that individuals pay tax on the profits regardless of whether money is distributed. LLCs resemble C-Corps, however, because they both protect the individual owners from personal liability. The advantages of LLCs are that interest in one is not limited to individuals and may be extended to corporations as well, and all members can participate in management.
ASSESSING THE NEED FOR AN EQUITY PARTNER
Physicians must weigh the pros and cons of developing an ASC independently or with an equity partner. There are several companies that will partner with physicians in ASC development and ownership, and they will share both the risks and the returns from the surgery center.
One advantage of having a corporate partner is that you can benefit from his experience and expertise in developing and managing ASCs. The process of planning, building, certifying, and operating an ASC is complex and time-consuming. When physicians put forth efforts toward developing and managing the ASC, they take time away from their practice, and from family and personal time. The corporate partner should provide the healthcare business expertise so that the physician partner can focus on providing quality patient care. Corporate partners can also provide additional capital resources during the development phase of the ASC project, thereby limiting the individual physician's indebtedness. Corporate partners require an ownership interest in the ASC. Even with a majority ownership interest, the corporate partner should maintain a position for the physician owners in the center's governance.
Physicians must also assess the option of having a hospital partner or affiliation, which can be difficult to create. Hospitals often seek to own at least 51% of the partnerships they conduct with physicians. This situation can become problematic, because if the hospital has too much operating influence, the ASC will be run like one of its departments. This produces a negative outcome in an ASC, where margins are slim. Structuring some form of minimal ownership or affiliation is ideal. Sometimes with a Medicare HMO product in a particular market, there is danger involved with not having a hospital affiliation because the Medicare HMO may only contract the facility component with a hospital system. When this happens, the doctors remain on the panel and may see patients, but the surgeries must be performed in a hospital or an ASC affiliated with the hospital.
THE DESIGN AND CONSTRUCTION PROCESS
Developing an ASC involves a variety of administrative, clinical, and regulatory elements, and goes beyond the mere construction of the physical facilities. One primary consideration in the development of a new center is the CON process. Many states still require this approval prior to the construction of a new healthcare facility (Figure 1). In some states, the CON status is in flux, and the state agency regulating healthcare facilities can provide the definitive answer on whether or not a CON is necessary. Obtaining a CON is often a lengthy process with no guarantee of success that will add significant additional expense and time to the development process.
Two regulatory milestones—state licensure and Medicare certification—serve as the fundamental organizing criteria for the development of an ASC. Medicare regulations contain several “environment of care” requirements but do not dwell on the physical facilities. One of the Medicare Conditions of Coverage states that the facilities shall “comply with state law,” the net effect of which is the adoption of the state's licensure regulations by reference.
The construction of the physical center itself represents the greatest expenditure of time and money. In nearly every case, ASC construction is highly regulated and engages local, state, and federal review agencies, each with their own process and submission requirements. Two primary documents (the AIA Guidelines for Construction and Equipment of Hospitals and Healthcare Facilities and the NFPA 101 Life Safety Code) outline the physical requirements of an ASC and have been widely adopted by state regulatory bodies and the various accrediting organizations. The state licensure authorities enforce various editions of each of these documents, and both are commonly accepted design criteria for an ASC. In some cases, however, the state licensure law outlines the physical facility requirements without reference to the Guidelines or the Life Safety Code.
Designing the center may take as long as 6 months depending on the size and complexity of the facility. Preparation of construction documents follows the design phase and may take as few as 6 weeks or as many as 6 months, again depending on the complexity of the project. Licensed professional designers are fundamental to the design process, and we highly recommend engaging an architect with specific ASC/eye center experience. General healthcare experience is an asset, but specific eye center design experience should also be sought, as the physical attributes and equipment requirements of each center are unique. The mechanical, plumbing, and electrical engineering subconsultants should also be experienced with ASC construction.
Sanders M. Benkwith, MD, of the Montgomery Eye Surgery Center in Montgomery, Alabama, offered this advice regarding the design phase: “We think each ophthalmic group has its own kind of personality, but it's important to visit other surgery centers and view their plans. Each group has its own unique aspects they want to accomplish in their surgery center, so see some places, but also put your own ideas into it,” he said. “You have to put your primary goals into place and be an integral part in the design of your own surgery center.”
The review and approval of design documents by the various state and local agencies can take as many as 3 to 6 months. Once these documents are approved, the construction phase of the process should be routine. However, a construction partner with ASC experience is a true asset. We highly recommend using standard AIA contracts and contract documents, as they have been carefully and specifically planned and proven over time.
The types and quantities of procedures to be performed in the ASC directly affect the design and equipment for the center. For example, cataract surgery using a phacoemulsification machine in a sterile environment requires all of the attributes of a fully functioning operating suite. YAG laser procedures, however, may be performed in a special procedure room and are preferably located outside the sterile corridor in order to facilitate patient flow and staff utilization. These varying clinical requirements directly affect the complexity of the environment and resultant cost of the facility. Therefore, careful programming of the facility's space is critical (Figure 2).
Based on his experience, Dr. Benkwith offers the following design suggestion: “As we've gotten busier, and as we've increased our volume and utilization of the facility, we wish we had built more space for storage. Space is always important in the planning and it's expensive, but it's worth it to plan for storage.”
By the nature and length of the design and construction schedule, other elements of development normally coincide with the construction schedule. All efforts focus on the eventual opening of the center, which of course depends on completing the construction, obtaining a certificate of occupancy, and subsequently undergoing the state licensure survey. Sometime during the design/construction sequence, compiling all other components required for licensure/certification should begin. It is essential that educated and experienced clinical, administrative, and regulatory personnel coordinate the process, because compliance varies widely in its scope, is cross-disciplined in nature, and is extremely rigorous.
Hiring a qualified center director early in the development process is an important first step, as the director will ultimately run the center and maintain compliance. To be fully effective in this operational post in the future, the center director must demonstrate complete understanding of the process, policies, and procedures for licensure and certification. Hiring staff and maintaining employment files; developing medical records standards; defining and documenting policies and procedures; credentialing physicians; and establishing the various contracts and agreements for ancillary services must be undertaken during the construction phase and prior to the licensure survey.
Leslie B. Cunningham, MD, of the Eye Surgery Center of East Tennessee in Knoxville, emphasizes the importance of hiring for the success of the ASC. “The best advice is to hire the absolutely best people you can find and pay them enough to keep them,” he said. “The staff is the absolute key to patient satisfaction. The quality of the physicians and their surgical skills has to be a given. What separates us from other surgery centers in our area is the quality of our staff.”
The manner in which anesthesia will be administered in the ASC is another staffing issue. Depending on state regulations and physician preferences, anesthesia may be provided by Certified Registered Nurse Anesthetists (CRNAs), anesthesiologists (MDs), or a combination of both. Ophthalmic ASCs can normally be staffed completely with CRNAs. Medicare recognizes CRNAs for all levels of anesthesia in an ASC. However, some commercial insurance companies do not recognize the credentials of CRNAs at all. The other issue concerning anesthesia is deciding whether to employ the anesthesiologist or to contract with the anesthesiologist to supply services. Employing anesthesiologists has several advantages. First, the patient receives only one bill from the ASC because anesthesia is included. It can be very confusing for the patient to get one bill from the ASC for facility fees and then another from the independent anesthesiologist. In addition, the ASC staff would have twice as much work to make copies of all insurance and demographic information for the anesthesiologists so that they can process insurance claims and bills.
The development phase also entails identifying, purchasing, delivering, and installing furniture and equipment. In order to ensure a smooth opening, all of these elements must be fully coordinated with the construction schedule so that all arrangements are finalized by the time construction is complete and ready for inspection.
State inspection teams vary widely in the comprehensive nature of their reviews, but every state licensure inspection should be considered critical. Thorough preparation is essential to success. The center should have an established and documented process, procedure, and/or plan for everything. The Medicare survey is equally important and comprehensive, and it generally occurs a month or so after opening.
Following the licensure and certification process, many centers desire to enhance their patient care credentials through accreditation by the Joint Commission for the Accreditation of Healthcare Organizations, the Accreditation Association for Ambulatory Health Care, or the Association for the Accreditation of Ambulatory Surgery Facilities. These accrediting bodies have no official status insofar as licensure or state law is concerned. However, Medicare regulations recognize an accredited center by means of “deemed” status with the accreditation serving as a legitimate demonstration of compliance with Medicare's standards. In addition, some payors require accreditation as a prerequisite for contracting. The requirements set forth in these accrediting body surveys are rigorous, and the ability of an entity to meet the standards is a clear indication of their dedication to quality patient care. When establishing a center development program, it is advisable to look past licensure and certification and focus on accreditation. Generally speaking, if the center can meet the accreditation criteria, it will meet the licensure and certification criteria. The development of the center using this strategy will streamline the process for all three surveys and ultimately set the groundwork for a well-planned and well-organized operational ASC.
MANAGING THE ASC
Once the ASC is open and operational, the physicians and center director will focus on efficiently managing the center. Ongoing management issues will include establishing clinical processes; negotiating contracts with third-party payors; establishing and nurturing relationships with referring ODs; establishing contracts with suppliers (perhaps through a purchasing organization) and negotiating discounts to control costs; initiating and following compliance processes; and putting business and management systems into place in order to ensure the successful operation of the center.
Looking forward, eye surgery center management issues will include implementation and compliance with HIPAA regulations; Medicare updates to the rate setting methodology, payment rates, payment policies, and list of covered surgical procedures; monitoring of and adherence to the regulatory environment, including Stark regulations; and questions about the surgical treatment of cataracts in patients after LASIK surgery. Overall, the outlook for eye surgery centers seems positive as the aging Baby Boomers enter the “inevitable cataract years.” With physicians, payors, and patients preferring the ASC setting, eye surgeons should seriously consider developing a surgery center.Daniel Buehler, AIA, is a registered architect with more than 15 years experience in ASC development and is VP for Center Development at AmSurg in Nashville, Tennessee. He may be reached at (800) 945-2301; firstname.lastname@example.org.
Jim Denning is CEO of Discover Vision Centers in Kansas City, Missouri. He may be reached at (816) 478-1230; email@example.com.
Dana Mayberry of AmSurg also contributed to this article.