Implementing a Successful Spine Program.Pitfalls, Perils and Successes

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Mary Kelley Strickland
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1 Implementing a Successful Spine Program.Pitfalls, Perils and Successes Presented By: Danny E. Bundren, MBA, CPA, JD Surgery Partners dbundren@surgerypartners.com 22 nd Annual Meeting The Business and Operations of ASCs October 22-24,

2 Agenda 2 2

3 Agenda I. Overview II. Things You Were Always Told Keys to Success III. Things They Forgot To Tell You 3

Overview 6,000 5,000 4,000 3,000 3,028 3,302 3,545 Number of Medicare Certified ASCs 5,095 5,217 5,316 5,344 5,387 5,423 4,879 4,608 4,362 4,140 3,848 2,000 1,000 0 10.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.

4 Overview 6,000 5,000 4,000 3,000 3,028 3,302 3,545 Number of Medicare Certified ASCs 5,095 5,217 5,316 5,344 5,387 5,423 4,879 4,608 4,362 4,140 3,848 2,000 1, % 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Growth Rate of Medicare Certified ASCs 9.0% 8.5% 7.4% 7.6% 5.9% 5.4% 5.6% 4.4% 2.4% 1.9% 0.5% 0.8% 0.7%

5 Overview Median Cases per OR per Day

6 Overview # of Eligible Physicians per ASC

7 Overview 60.0% % of Practices Employed by Hospitals 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%

8 Overview 45% 40% 35% 30% Current Hospital Employment 31% 40% 25% 22% 24% 20% 15% 18% 15% 10% 5% 0% 5% 8% Specialists PCPs 8

9 Overview Number of Physicians Projected to Retire

10 Overview ASC Reality Check VMG 2011 ValueDriver ASC Survey Respondents were asked to reveal trends that present the greatest challenge to case volume growth and retention: Impact of the Economy on Elective Procedures 36% Competition from Other ASCs and Surgical Facilities 32% Increase in Hospital Employment of Physicians 23% Expected Retirement of High Volume Physicians 9% As it relates to new physician recruitment, respondents were asked what presents the most significant obstacle: Growing Shortage of Physicians in Many Markets 32% Competition from Other ASCs and Surgical Hospitals 24% Increased Employment of Physicians by Hospitals 24% Unit / Share Cost is Price Prohibitive for New Buy-in 20% 10

11 Overview ASC Reality Check VMG 2011 ValueDriver ASC Survey Finally, respondents were asked to provide their opinion on the greatest challenges that will face the ASC industry over the next 5 years. The most common responses included: 1 Saturation of the ASC market - too many ASCs chasing a limited physician pool 2 Further integration of physician groups with hospital systems 3 Medicare and Managed Care reimbursement challenges 4 Sluggish economy 11

12 Overview The average lifespan of a surgery center is 10 years 83% of ASC management companies have reported selling a controlling interest in a surgery center to a health system 73% of surgical specialists feel they are likely to affiliate with a hospital 34% of physicians are very or somewhat likely to leave their practices in the near future Price transparency is exerting pressure on ASCs 12

13 Overview 13

14 Market Data Growth 2nd Largest and Fastest Growing Short Stay Surgical Facility Operator Industry-Leading Same Store Revenue Growth Surgery Partners 9.0% National ASC Operators FY 2014 Same Store Revenue Growth USPI SCA 3.1% 5.0% AmSurg 0.7% Source: Public filings.

15 Key to Success - Looking Everywhere 15 15

16 Overview Spine Program. The Next Frontier Dr. Robert Bray, CEO of DISC Sports & Spine Center I believe firmly that spine over the next 3-5 years -10 years max- will transition nearly completely to specialty hospitals or outpatient centers. Rapid advancements in technology and treatment Procedures are becoming less invasive Only 5% of all spine surgeries are performed in an outpatient setting. Expected to increase by 300% over next 5 years 16

17 Overview Spine Program Impact on ASC Otolaryngology $ 1,849 Pain $ 840 Gastroenterology $ 788 Plastic $ 1,696 General $ 1,795 Podiatry $ 1,717 Gynecology $ 2,081 Urology $ 1,788 Ophthalmology $ 1,273 Orthopedic $ 2,618 Source: VMG Multi-Specialty Intellimarker 2012 Spine Spine Contracted Out of Network $ 6,000 to $ 15,000 $ 35,000 to $ 75,000 17

18 Overview Spine Program Impact on ASC A small % of volume can translate into a much larger % of revenue Cases Net Revenue Spine Other Number Of Specialty Cases % Pain 2, % GI/ENT/Podiatry 1, % Orthopedic % Spine % Total 4, % Spine Other Center sold 50% interest for $19.0 million 18

19 Migration of Spine to ASC Estimated Migration of Spine Surgery from Inpatient to Outpatient 600, , , , ,000 Inpatient Cases Outpatient Cases Spine Surgery CAGR Inpatient 523, , , % Outpatient 27, , , % Total 551, , , % 100, Outpatient % 5.0% 30.0% 45.0% 19

20 Agenda I. Overview II. Things You Were Always Told Keys to Success III. Things They Forgot To Tell You 20

21 Keys to Success Identify eligible ASC cases What can be done on an outpatient basis that is currently being done at the hospital? Contact key vendors Market assessment Will the market sustain the service? Is there a patient demand both from the procedure and the procedure performed in an outpatient setting? Are payors forcing migration to ASCs with incentives to physicians? Are there physicians to provide the services? 21

22 Keys to Success Build physician owner consensus Potential clinical risk with new service May require adjustments to their block time Must be willing to potentially provide equipment for the new service Spine physicians must have same goals as existing physicians Medical Executive Committee has to develop policies and protocols related to clinical care and patient selection Obtain anesthesia approval Need to develop proper pain management protocol 22

23 Things You Were Always Told Spine Equipment Cost Microscope $ 120,000 Pneumatic drill set 30,000 Headlamp 3,000 Instrument trays 75,000 Lumbar table 35,000 C Arm 150,000 Wilson frame 10,000 Total $ 423,000 Equates to ~ $ 8,200 per month debt service 23

24 Keys to Success Determine financial viability Identify reimbursement from payors May require renegotiation of existing contracts for carve outs or implant coverage Ideally accomplished prior to performing procedures Calculate all costs associated with procedure Salaries Supplies Equipment (lease vs. purchase) Facility improvements Variable costs Any fixed costs 24

25 Keys to Success Primary CPT Description Case Rate Wgtd Service Case Rate Projected Cases Per Year % BC BS OON BC BS OON Laminotomy, single cervical , , , , Laminotomy, single lumbar , , , , Arthrodesis, anterior interbody technique, include minimal diskectomy to prep interspace (other than decompr); cervical below C2 - Level 1 Arthrodesis, anterior interbody technique, include minimal diskectomy to prep interspace (other than decompr); cervical below C2 - Level 2 Arthrodesis, anterior interbody technique, include minimal diskectomy to prep interspace (other than decompr); cervical below C2 - Level , , , , , , , , , , , , , , , , , , , , Payor Mix Case Rate Wgtd Blue Cross of CA , , Motion Picture (Blue Shield) , , Blue Shield of CA , Aetna , , Screen Actors Guild (Blue Cross) , Medicare** Writers Guild (Blue Cross) , Director's Guild (Blue Cross) , Other , , , <---- Blended Case Rate 25

26 Keys to Success Pro Forma T12M T12M 9/30/2010 Spine Cases 9/31/2010 Cases Existing Cases 6,911-6,911 New Cases Total Cases 6, ,093 Utilization Growth Net Revenue $ 8,098,902 $ 2,550,102 $ 10,649,004 Net revenue per case $ 1, $ 14, $ 1, Net Revenue Growth Operating Expenses: Salaries and Wages 2,507, ,178 2,609,175 Contract Labor Employee Benefits 386,987 20, ,658 Employee General & Admin. 2,124-2,124 Seminars & Education 5,268-5,268 Dues, Fees, & Subscriptions 7,631-7,631 Travel & Entertainment 19,428-19,428 Office Supplies 91,996 2,423 94,419 Medical Supplies 898,623 1,076,034 1,974,657 Professional Fees 341, ,748 Medical Related Fees 226,414 4, ,367 Leases & Rentals 1,004,419-1,004,419 Department Allocation 170, ,026 Repairs & Maintenance 180, ,293 Utilities 120, ,477 Internal Management Fees 366, , ,206 Insurance, Taxes, & Licenses 28,174-28,174 Bad Debts 152,497 48, ,514 Total Operating Expenses 6,511,253 1,368,749 7,880,002 Total Op Expenses as % NR 80.4% 53.7% 74.0% Growth in Op Expenses Operating Income 1,587,649 1,181,353 2,769,002 26

27 Keys to Success Recruit physicians Committed physicians with center values Can be physicians at other centers Utilize vendor relationships to identify Solicit input on equipment selection Develop clinical and business office competence Staff training with dry runs Business office understanding of coding Consult coding company if outside coder is utilized Select the proper patients 27

28 Things You Were Always Told Physician recruitment sales pitch Enhance patient care with better outcomes and higher patient convenience Greater Physician efficiency Faster OR turnover More appealing block times More efficient workflow Consistent staffing Recruit spine surgeons who are comfortable operating in an outpatient setting Usually more difficult to recruit younger spine Physicians 28

29 Agenda I. Overview II. Things You Were Always Told Keys to Success III. Things They Forgot to Tell You 29

30 Things You Were Not Told Equity Management Must balance competing viewpoints Existing Owners Want to see results prior to diluting ownership and expending funds Spine Recruits Recognize program uncertainty Want immediate comparable ownership position due to ASC impact Do not want to pay later for increased spine program value 30

31 Things You Were Not Told Equity Management Potential Solution Initially Offer minimal number of units to Spine Physicians Issue Options to purchase additional shares at current Offering price Options must be at FMV Provide Spine Physicians with Put Option for short period of time Put Option must be at FMV 31

32 Things You Were Not Told Equity Management Example Fair Market Value of existing Unit is $3,000 Fair Market Value of Option to purchase additional Units in 12 months at $3,000 per Unit is $62 Fair market Value of Put Option to receive $3,000 in 18 months is $1,095 32

33 Things You Were Not Told Safe Harbor Extension of Practice Safe Harbor Procedures Test 1/3 of ELIGIBLE outpatient surgical procedures from Medicare covered procedures for an ASC What happens if Spine physician investor does not perform any Medicare procedures approved for an ASC? Left only to negotiate 33

34 Things You Were Not Told Negotiate In-network contracts while surviving with Out-of-Network cases Out-of-network situations typically result in greater overall costs to the system any ASC that builds its business model around unsustainable out-of-network reimbursement levels is bound to fail. Deutsch Bank 2008 Annual Report on ASCs Difficult to ignore the reimbursement differential for spine procedures which can be $ 6,000 vs. $98,000 34

35 Things You Were Not Told Negotiating with a Managed Care Payor BEGIN EARLY Initial discussions focus on safety of procedure in outpatient setting Requires industry statistics Site visit to ASC Document outcomes on cases performed Obtain data to document savings associated with the cases performed in the ASC Get your Physicians involved Attempt preauthorization approval for negotiated amount if discussions drag on Do not forget about implants 35

36 Things You Were Not Told Negotiating with Blue Cross and Blue Shield in California ASC was paid by BC Grouper and BS procedure Maximum BC rate $1,113, BS $1,858 ASC effectively subsidizing the Payors by performing surgery Easily documented cost savings with hospital case migration Attempted preauthorization of negotiated amount Contract process took 15 months Impacts ability to maintain existing Physician commitment to Spine program 36

37 Things You Were Not Told Alternatives Perform OON spine cases and Personal Injury cases Keep managed care cases at a minimum until contracts are completed Be very thorough on preauthorization of all cases 37

38 Things You Were Not Told Solidify Vendor Relationships With explanation of program limitations most will permit trial use of large purchases (i.e. Microscope) Can rent large items for short periods of time even on per day basis Involve Physicians with implant negotiations Utilize vendors for Physician leads 38

39 Things You Were Not Told Implement Marketing Plan Develop cross referral program with pain and orthopedic physicians Inform large primary care physician groups Utilize patient education videos on ASC web site with link to physician sites Obtain Patient testimonials Establish communication link with physicians with quarterly meetings Work closely with office schedulers to educate on appropriate procedures that can be done 39

40 Things You Were Not Told Patient Discharge Plan Develop program for home care Consider development of post operative care facility Hotel like accommodations with nursing, basic medical and treatment supplies, and meals for 2 days post discharge 40

41 Company Overview TEN GUIDING PRINCIPLES Act with Integrity Have a Plan Take Ownership Focus with Passion Show up and Never Quit Do not Blame or Judge Pitch in Be big Not little Laugh and Celebrate Be Grateful 41

42 Thank You and Questions 42

ACHIEVING PHYSICIAN INTEGRATION WITH THE CO-MANAGEMENT MODEL

ACHIEVING PHYSICIAN INTEGRATION WITH THE CO-MANAGEMENT MODEL Presented by: Joseph F. Corfits, Jr. FHFMA, Chief Financial Officer Unity Point Health Des Moines Stephen G. Taylor, MD Des Moines Orthopaedic