Implementing a Successful Spine Program ……….Pitfalls, Perils and Successes

Presented By: Danny E. Bundren, MBA, CPA, JD Surgery Partners 615-275-5112 dbundren@surgerypartners.com

22nd Annual Meeting The Business and Operations of ASCs October 22-24, 2015

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2

Agenda

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Agenda

I. Overview

II. Things You Were Always Told – Keys to Success

III. Things They Forgot To Tell You

Overview

0

1,000

2,000

3,000

4,000

5,000

6,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

3,028 3,302 3,545

3,848 4,140

4,362 4,608

4,879 5,095 5,217 5,316 5,344 5,387 5,423

Number of Medicare Certified ASCs

9.0%

7.4%

8.5%

7.6%

5.4% 5.6%

5.9%

4.4%

2.4%

1.9%

0.5% 0.8% 0.7% 0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Growth Rate of Medicare Certified ASCs

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Overview

3.1

3.0

2.6

2.7

3.0

3.1

2.3

2.4

2.5

2.6

2.7

2.8

2.9

3.0

3.1

3.2

2007 2008 2009 2010 2011 2012

Median Cases per OR per Day

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Overview

36

32 31

29

26

23 21

20 19 19 19 19

18

0

5

10

15

20

25

30

35

40

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

# of Eligible Physicians per ASC

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Overview

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2002 2003 2004 2005 2006 2007 2008 2009 2010

% of Practices Employed by Hospitals

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Overview

5%

8%

15%

24%

18%

22%

31%

40%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2000 2004 2008 2012

Specialists PCPs

Current Hospital Employment

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Overview

0

5000

10000

15000

20000

25000

2004 2006 2008 2010 2012 2014 2016 2018 2020

Number of Physicians Projected to Retire

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• ASC Reality Check – VMG 2011 ValueDriver ASC Survey

Overview

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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%

• ASC Reality Check – VMG 2011 ValueDriver ASC Survey

Overview

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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

• 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

Overview

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Overview

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2nd Largest and Fastest Growing Short Stay Surgical Facility Operator

Industry-Leading Same Store Revenue Growth

National ASC Operators

FY 2014 Same Store

Revenue Growth

Growth

Source: Public filings.

0.7%

3.1%

5.0%

9.0%

AmSurg

SCA

USPI

SurgeryPartners

Market Data

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Key to Success - Looking Everywhere

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• 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

Overview

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• Spine Program – Impact on ASC

Overview

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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 Contracted

Spine Out of Network

$ 6,000 to $ 15,000

$ 35,000 to $ 75,000

• Spine Program – Impact on ASC

– A small % of volume can translate into a much larger % of revenue

– Center sold 50% interest for $19.0 million

Overview

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Number Of

Specialty Cases %

Pain 2,400 50.0%

GI/ENT/Podiatry 1,200 25.0%

Orthopedic 720 15.0%

Spine 480 10.0%

Total 4,800 100.0%

Net Revenue

Spine

Other

Cases

Spine

Other

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Migration of Spine to ASC

0

100,000

200,000

300,000

400,000

500,000

600,000

2005 2010 2015

Inpatient Cases Outpatient Cases

Estimated Migration of Spine Surgery from Inpatient to Outpatient

Spine Surgery 2005 2010 2015 CAGR

Inpatient 523,629 417,770 348,150 -4.0%

Outpatient 27,559 179,044 284,850 26.3%

Total 551,188 596,814 633,000 140.0%

Outpatient % 5.0% 30.0% 45.0%

Agenda

I. Overview

II. Things You Were Always Told – Keys to Success

III. Things They Forgot To Tell You

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• 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?

Keys to Success

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• 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

Keys to Success

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• Spine Equipment Cost

– Equates to ~ $ 8,200 per month debt service

Things You Were Always Told

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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$

• 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

Keys to Success

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Keys to Success

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Primary CPT Description

Projected

Cases Per

Year % BC BS OON BC BS OON

Laminotomy, s ingle cervica l 33.5 0.18 1,319.50 1,757.88 24,783.50 242.88 323.56 4,561.80

Laminotomy, s ingle lumbar 54 0.30 1,319.50 1,757.88 24,783.50 391.50 521.57 7,353.35

Arthrodes is , anterior interbody technique, include minimal diskectomy

to prep interspace (other than decompr); cervica l below C2 - Level 1

54 0.30 12,296.50 10,757.88 44,100.00 3,648.41 3,191.90 13,084.62

Arthrodes is , anterior interbody technique, include minimal diskectomy

to prep interspace (other than decompr); cervica l below C2 - Level 227 0.15 14,813.00 12,757.88 58,100.00 2,197.53 1,892.65 8,619.23

Arthrodes is , anterior interbody technique, include minimal diskectomy

to prep interspace (other than decompr); cervica l below C2 - Level 313.5 0.07 15,329.50 12,757.88 58,100.00 1,137.08 946.33 4,309.62

182 1.00 7,617.40 6,876.01 37,928.61

Payor Mix Case Rate Wgtd

Blue Cross of CA 0.26 7,617.40 1,980.52

Motion Picture (Blue Shield) 0.26 6,876.01 1,787.76

Blue Shield of CA 0.11 6,876.01 756.36

Aetna 0.11 37,928.61 4,172.15

Screen Actors Guild (Blue Cross) 0.06 7,617.40 457.04

Medicare** 0.00 0 0.00

Writers Guild (Blue Cross) 0.03 7,617.40 228.52

Director's Guild (Blue Cross) 0.06 7,617.40 457.04

Other 0.11 37,928.61 4,172.15

1.00 14,011.55 <---- Blended Case Rate

Wgtd Service Case RateCase Rate

Keys to Success

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Pro Forma

T12M T12M

9/30/2010 Spine Cases 9/31/2010

Cases

Existing Cases 6,911 - 6,911

New Cases - 182 182

Total Cases 6,911 182 7,093

Utilization Growth

Net Revenue 8,098,902$ 2,550,102$ 10,649,004$

Net revenue per case 1,171.89$ 14,011.55$ 1,501.34$

Net Revenue Growth

Operating Expenses:

Salaries and Wages 2,507,997 101,178 2,609,175

Contract Labor 418 - 418

Employee Benefits 386,987 20,671 407,658

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 - 341,748

Medical Related Fees 226,414 4,953 231,367

Leases & Rentals 1,004,419 - 1,004,419

Department Allocation 170,026 - 170,026

Repairs & Maintenance 180,293 - 180,293

Utilities 120,477 - 120,477

Internal Management Fees 366,733 115,473 482,206

Insurance, Taxes, & Licenses 28,174 - 28,174

Bad Debts 152,497 48,017 200,514

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

• 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

Keys to Success

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• 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

Things You Were Always Told

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Agenda

I. Overview

II. Things You Were Always Told – Keys to Success

III. Things They Forgot to Tell You

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• 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

Things You Were Not Told

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• 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

Things You Were Not Told

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• 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

Things You Were Not Told

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• 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

Things You Were Not Told

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• 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

Things You Were Not Told

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• 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

Things You Were Not Told

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• 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

Things You Were Not Told

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• 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

Things You Were Not Told

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• 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

Things You Were Not Told

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• 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

Things You Were Not Told

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• 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

Things You Were Not Told

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Company Overview

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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

Thank You and Questions

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