Office Ambulatory Surgery Centers: Creation and Management Neal C. Small, MD, and Jack M. Bert, MD Abstract Since the introduction of arthrosco- py to North America in 1965, the de- velopment of minimally invasive or- thopaedic surgical techniques has steadily progressed. 1 As a result, be- ginning in the 1980s, 2 some ortho- paedic procedures were moved from the hospital environment to the free- standing ambulatory surgery center and, more recently, to the ortho- paedic office ambulatory surgery center (OASC). Early concern for pa- tient safety led to preoperative eval- uation, intraoperative monitoring, and postoperative care being de- signed into the centers. 3,4 The cost-effectiveness of OASCs soon became evident to third-party payers, as well as to surgeons and patients. Payers became less reluc- tant to preauthorize surgery in the office environment once the issues of facility charges and patient safety were addressed to their satisfaction. The emphasis on cost containment, which heightened in the early 1990s, accelerated the development of OASCs in the mid to late 1990s. 5 However, without state licensure, Medicare certification, and accredi- tation, anesthesia restrictions lim- ited the types of procedures that could be done in an office operatory. General anesthesia could not be ad- ministered in a nonlicensed facility, and even when local anesthesia or monitored conscious sedation was used, 6 most third-party payers would not preauthorize procedures. These payers stipulated Medicare certification as a requirement for placing the OASC on their panel of approved facilities. In addition, licensure by both the state and Medicare and accreditation by the Accreditation Association for Am- bulatory Health Care (AAAHC) or the Joint Commission on Accredita- tion of Healthcare Organizations re- quire appropriate design and con- struction of these facilities. 7,8 Owners of OASCs responded to these concerns. Obtaining state li- censure allowed the use of general anesthesia, so that the number of surgical procedures done in the li- censed OASCs increased. 9 With Medicare certification and AAAHC accreditation, virtually all payers, in- cluding workers’ compensation, would then reimburse for facility use in a licensed OASC. 10 Recent studies have confirmed that outpa- tient ambulatory orthopaedic sur- gery is safe, efficient, and cost effec- tive, 3,5,9 leading to wider acceptance of OASCs by orthopaedic surgeons. Benefits of a Licensed OASC The proximity of the operating room to the clinic in an OASC (Fig. 1) im- proves productivity, efficiency, and convenience. The surgeon can exam- Dr. Small is Associate Clinical Professor, Ortho- pedic Surgery, University of Texas Southwestern Medical School, Dallas, TX. Dr. Bert is Clinical Professor, University of Minnesota School of Medicine, Minneapolis, MN, and President and Medical Director, Summit Orthopedics, St. Paul, MN. One or more of the authors or the departments with which they are affiliated has received some- thing of value from a commercial or other party related directly or indirectly to the subject of this article. Reprint requests: Dr. Bert, Suite 307, 17 West Exchange Street, St. Paul, MN 55102-1034. Copyright 2003 by the American Academy of Orthopaedic Surgeons. Among orthopaedic surgeons, the popularity of in-office ambulatory surgery has steadily increased. Changing practice patterns, including utilization of office sur- gery centers, have resulted in improved efficiency and increased revenue. However, accurate feasibility and market analyses are necessary before considering the addi- tion of a surgery center to an orthopaedic practice. The legal requirements to op- erate a center include state licensure, Medicare certification, and accreditation. In addition, approved construction design and effective operations management are essential. J Am Acad Orthop Surg 2003;11:157-162 Perspectives on Modern Orthopaedics Vol 11, No 3, May/June 2003 157 ine patients and provide office care while the operating room is being prepared for the next procedure. Some surgeons have reported a sav- ings of as many as 8 hours per week because of this single improvement in practice efficiency. 11 Patient satisfaction is usually quite high among those who have undergone a procedure in an OASC. 12 Patients may feel less anx- ious in the office environment as op- posed to that of the hospital. Results of satisfaction surveys indicate that patients appreciate the amount of personal attention they receive, par- ticularly in postanesthesia recovery (Fig. 2). Patients’ families also report a high satisfaction rate. The OASC appears to be more cost effective than either the hospital operating room or the hospital out- patient surgery department. 5,9 The fees for freestanding OASCs, which are scheduled to take effect on July 1, 2003, have been published in the Federal Register. 13 OASC facility fees are to be reimbursed at a lower rate than hospital facility fees because the cost to deliver a procedure is less for an OASC than for a hospital. An example of the difference be- tween Medicare-allowable facility fees for the hospital outpatient sur- gery department compared with those for the OASC can beillustrated using Current Procedural Terminology (CPT) code 29881 (arthroscopic men- iscectomy). The Centers for Medi- care & Medicaid Services published a proposed ambulatory payment classification group payment rate of $1,048 for CPT code 29881 when the procedure is done in the hospital outpatient surgery department. 14 The facility reimbursement to OASCs published in the Final Rule of the Centers for Medicare & Med- icaid Services is $630. 13 This differ- ence in facility fees is a direct result of the substantially lower costs re- quired to perform surgery in non- hospital facilities. 15 Even though most third-party payers reimburse for facility use at a higher level than Figure 1 A, Single operating room. B, Double operating room. Figure 2 Postanesthesia recovery area. Office Ambulatory Surgery Centers 158 Journal of the American Academy of Orthopaedic Surgeons the Medicare-allowable rate, payers nevertheless perceive the OASC to be cost effective compared with hos- pital operating rooms and hospital outpatient surgery departments. Creating an OASC Individual state laws regarding health care facilities development must be studied before creating an OASC because some states require a certificate of need, which allows the physician group to construct the proposed facility. Obtaining a certif- icate of need may involve local or statewide political issues because of possible resistance to physician- owned surgery centers by local hos- pitals. Some states have dropped the certificate of need requirement, are in the process of doing so, or are re- viewing the law; other states have exemptions for single-specialty OASCs. Several states have certifi- cate of need exemptions allowing fa- cilities to be constructed with expen- diture limitations. Despite strong opposition by hospital lobbyists, it appears that certificate of need re- quirements are being steadily re- duced. 7 The process of planning, design- ing, and building an OASC, as well as obtaining licensure, certification, and accreditation, takes approxi- mately 1 year to 18 months to com- plete and can be divided into five phases: phase 1, feasibility and mar- ket analysis (approximately 1 month); phase 2, legal issues and de- sign (3 months); phase 3, construc- tion and staffing (6 months or more); phase 4, licensing and Medicare re- quirements (2 months); and phase 5, accreditation (optional but recom- mended). Phase 1: Feasibility and Market Analysis A feasibility analysis should be done to determine whether a clinic should build an OASC. A limited preliminary analysis can help deter- mine whether the clinic should ex- pend the time and incur the expense of a full feasibility analysis and pro forma. The detailed feasibility analysis involves evaluating the explanations of benefits for the surgical proce- dures as well as analyzing by CPT code the procedures done by each surgeon. The subspecialty mix of the surgeons and the average operating time per procedure of each must be assessed. Fee schedules and collec- tion percentages must be analyzed. In addition, local construction costs must be reviewed. Many other fac- tors, including a cost analysis for the facility, are used to determine likely gross revenues and net profitability of the OASC. When the feasibility analysis is complete, the analyst can determine if the practice entity is an appropriate candidate for an OASC. A market analysis is critically im- portant, as well. By reviewing the marketplace, assessing the competi- tion, and performing a payer analy- sis, the practice will be able to deter- mine whether it should proceed with development or whether the market forces and payers in the area will restrict the practice from refer- ring patients to its surgical unit. Be- cause the cost of an OASC can be sig- nificant, the importance of the feasibility and market analyses can- not be underestimated. These analy- ses provide the necessary informa- tion to decide whether the OASC should be built and, if so, what size the facility should be. Phase 2: Legality and Design Before proceeding with design and construction, the practice may wish to form a new legal entity, such as a limited liability corporation, to own and operate the OASC. Legal counsel should study the ownership alternatives and create the entity. Also, the new entity should have a billing number different from that of the practice itself. A medical architect will work with the state licensure board to ensure that the OASC is designed according to state guidelines and within Medicare-specific design re- quirements. This design process var- ies considerably depending on the size of the facility and whether it will require remodeling of or addition to existing space or necessitate new construction. Phase 3: Construction and Staffing The construction phase may last from a few months to a year or more. An architect and construction firm familiar with code requirements for medical facilities can eliminate cost- ly revisions. Contracting with third- party payers also must begin during phase 3. The OASC staff should be hired during this phase. The nurse manag- er should be brought on early to as- sist in ordering equipment, materi- als, and supplies appropriate for the procedures to be done in the facility. Consultants can aid in this process. The OASC owners can either direct- ly hire staff necessary for payer rela- tions and financial management or use the services of a company with experience in OASC management. The anesthesia staff should be se- lected during this phase to assist with the installation and testing of an- esthesia machines and monitoring equipment, as well as related items. Some practice-owned centers provide ownership interests for some or all of the anesthesia staff, but most work with independent anesthesiologists who have no financial interest in the OASC. Sometimes the anesthesiolo- gist is employed by the center, which then bills for anesthesia professional services provided during surgery. Phase 3 concludes when a certificate of occupancy is obtained. Phase 4: Licensing and Medicare Phase 4 includes the state licen- sure process and Medicare certifica- Neal C. Small, MD, and Jack M. Bert, MD Vol 11, No 3, May/June 2003 159 tion. State licensure is required for Medicare certification. To achieve state licensure and eventual Medi- care certification, requirements must be met in several areas, including fa- cility design and construction. De- tailed documentation of such items as appropriate committee meetings and staff credentialing also is neces- sary (Table 1). Phase 5: Accreditation Accreditation is optional, but some payers require accreditation in addition to licensure and certifica- tion. Accreditation can be obtained from the AAAHC or the Joint Com- mission on Accreditation of Health- care Organizations. Anticipating and Correcting Potential Problems Substantial preliminary payer nego- tiations, accomplished payer mar- keting, and professional manage- ment are necessary for a successful OASC. Because of stringent state li- censure, Medicare, and AAAHC re- quirements, problems for the OASC rarely involve issues of patient safe- ty or operating room quality. The usual reasons that facilities do not function at maximum capacity are management difficulties with such procedures as contracting, schedul- ing, or billing. Underutilization may occur because of problems with pay- er contracting, scheduling, patient flow, and inventory management. Contracting difficulties should be minimal or nonexistent because cost savings and patient preference for the OASC have led to acceptance by most payers. Although scheduling and pa- tient flow issues may be a potential problem, software programs can elim- inate much of the complexity for the nurse manager and scheduler. Sup- ply inventories often are inappropri- ate for the OASC caseload; many OASCs struggle with either inade- quate stock or an overabundance of certain supplies. Inventory control software can helpwith these problems. Staffing inconsistencies are among the most common difficulties encoun- Table 1 Medicare Requirements for OASC Certification Structural The design must comply with state health facilities commission structural guidelines. The operating room must be at least 250 sq ft. The OASC must have a separate recovery room and waiting room. The OASC must meet Life Safety Code standards of the National Fire Protection Association. Policies and procedures The OASC must have a governing body. The OASC must perform ongoing quality assurance. All medical staff must be credentialed by a credentialing committee. Medical privileges must be periodically reappraised by the OASC credentialing committee. Policies and procedures must exist for nonmedical personnel. Patient safety All OASC personnel must be trained to use emergency medical equipment. A registered nurse must be in attendance whenever a patient is in the OASC. Awritten transfer agreement must be in effect with a local hospital, and all surgeons using the facility must be on the staff of that hospital. Emergency equipment The OASC must have comprehensive emergency equipment, including emergency call system; oxygen; mechanical ventilatory assistance, including airways, manual breathing bag, and ventila- tor; cardiac defibrillator; cardiac monitor; tracheotomy set; laryngoscopes and endotracheal tubes; suction equipment; and other emergency medical equipment specified by the medical staff. Ancillary services and contracts The OASC must provide pharmaceutical services under the supervision of a pharmacy director. The OASC must have its own laboratory or must use a Medicare-certified laboratory. The OASC must use a Medicare-certified radiology facility. Administrative Medical records identical to hospital records must be developed and maintained. Random surveys of the OASC by the Centers for Medicare & Medicaid Services must be anticipated. The OASC must maintain accurate financial records containing data that enable the Centers for Medicare & Medicaid Services to determine payment rates for covered surgical procedures. Office Ambulatory Surgery Centers 160 Journal of the American Academy of Orthopaedic Surgeons tered by newly opened OASCs. De- spite the fact that staffing usually be- gins in phase 3, some clinics are unable to hire qualified personnel quickly enough. Many OASCs per- form 200 or more procedures per month soon after obtaining licensure, certification, and accreditation. The OASC nurse manager may be unable to provide adequate staffingif person- nel needs are not fully addressed well in advance of opening. Understaffing risks inadequate patient care, while the expense of overstaffing impairs OASC profitability. The use of part- time employees may be advisable. Also, continuing education for OASC personnel is important to maintain quality patient care and employee morale. Some facilities have problems with CPT coding, billing, and collec- tion of OASC facility fees, particular- ly in the first several months after opening. Difficulties with CPT cod- ing and collection of facility fees can severely compromise a clinic’s over- all cash flow. The facility fee revenue represents at least one third of the gross revenue for a typical ortho- paedic group practice with an OASC. Some practices have been overwhelmed by the additional bill- ing volume and frustrated by a cash flow shortage during the start-up phase. This problem can be avoided with proper forecasting, training, and preparation. 11 Many practice entities do not ad- equately anticipate the debt service and other ongoing overhead expens- es that begin even before the OASC is opened. These anticipated costs necessitate that the center secure a line of credit several months before opening. It can take at least 90 to 180 days before the facility fee reim- bursements compensate for ongoing expenses such as salaries, rent, and other costs. Because payers often are unfamiliar with the new billing en- tity, the claims process is slower than when the professional fee claims are reviewed. This collection window for accounts receivable decreases considerably once payers become fa- miliar with the new facility. Allowable facility fees must be well understood, and in some in- stances it is beneficial to accept out- of-network benefits for facility use because of improved reimburse- ment. Discounted contracts usually are not advisable unless they repre- sent significant volume and the re- imbursement is greater than the cost of the service provided. Hiring or consulting with a contracting spe- cialist familiar with the nuances of OASC reimbursement can be of great benefit. Enjoying the OASC The quality of professional life that the OASC provides surgeons is be- yond the expectations of most. 16,17 The importance of operating in a comfortable, well-conceived envi- ronment of one’s own design should not be underestimated. The surgeon can make reasonable changes with- out dealing with the layers of ad- ministration and committees typical of the hospital environment. Sur- geons who have completed an OASC often wonder why they wait- ed so long to simplify their profes- sional lives and enjoy improved practice profitability. As technology progresses and appropriate facilities are completed, and if insurance re- imbursements are allowed, many minimally invasive procedures now performed in the hospital may be done in an OASC. This is also a trend in other specialties, such as ophthal- mology, otolaryngology, plastic sur- gery, and urology. Summary Office ambulatory orthopaedic sur- gery has become an increasingly widespread method for delivering certain types of orthopaedic surgical care. In many states, there has been a transition from traditional hospital-based and freestanding am- bulatory surgery centers to practice- owned OASCs. States requiring a certificate of need may delay or pre- vent the development of OASCs, al- though certain exemptions may be available in some states with certif- icate of need requirements; these ex- emptions should be carefully re- searched. Legislative changes are under way in many states to modify or eliminate the certificate of need process. Orthopaedic surgeons should be aware of the stringent re- quirements for securing state licen- sure and Medicare certification for the OASC. In addition, a somewhat lengthy process from feasibility analysis to facility completion should be anticipated. However, an OASC can help a practice contain medical costs, improve efficiency, control the surgical environment, and enhance patient satisfaction. The practice group can help ensure a high quality of orthopaedic care by hiring their own surgical staff. Properly managed, the OASC can provide an additional source of rev- enue to offset declining reimburse- ments. Neal C. Small, MD, and Jack M. Bert, MD Vol 11, No 3, May/June 2003 161 References 1. Small NC (ed): Office Operative Arthros- copy. New York, NY: Raven Press, 1994. 2. Hall MJ, Lawrence L: Ambulatory sur- gery in the United States, 1996. Adv Data 1998;12:1-16. 3. Rohrich RJ, White PF: Safety of outpa- tient surgery: Is mandatory accreditation of outpatient surgery centers enough? Plast Reconstr Surg 2001;107:189-192. 4. Williams BA, DeRiso BM, Figallo CM, et al: Benchmarking the perioperative process: III. Effects of regional anesthe- sia clinical pathway techniques on pro- cess efficiency and recovery profiles in ambulatory orthopedic surgery. J Clin Anesth 1998;10:570-578. 5. Novak PJ, Bach BR Jr, Bush-Joseph CA, Badrinath S: Cost containment: Acharge comparison of anterior cruciate ligament reconstruction. Arthroscopy 1996;12:160- 164. 6. McGuire DA, Sanders K, Hendricks SD: Comparison of ketorolac and opi- oid analgesics in postoperative ACL re- construction outpatient pain control. Arthroscopy 1993;9:653-661. 7. Becker S, Biala M: Ambulatory surgery centers: Current business and legal is- sues. J Health Care Finance 2000;27:1-7. 8. Small NC: Building a successful practice- owned, office-based ambulatory surgery center. Am J Knee Surg 2000;13:241-244. 9. Nogalski MP, Bach BR Jr, Bush-Joseph CA, Luergans S: Trends in decreased hospitalization for anterior cruciate lig- ament surgery: Double-incision versus single-incision reconstruction. Arthros- copy 1995;11:134-138. 10. Brown S:Accreditationofambulatorysur- gery centers. AORNJ 1999;70:814-818, 821. 11. Bert JM: Pros and cons of practice-owned and office-based ambulatory surgery cen- ters. Am J Knee Surg 2000;13:245-248. 12. Small NC, Glogau AI, Berezin MA, Far- less BL: Office operative arthroscopy of the knee: Technical considerations and a preliminary analysis of the first 100 patients. Arthroscopy 1994;10:534-539. 13. http://a257.g.akamaitech.net/7/257/ 2422/14mar20010800/edocket.access. gpo.gov/2003/pdf/03-7236.pdf. Ac- cessed April 18, 2003. 14. McLelland M: The financial effect of ambulatory payment classifications. Manag Care Interface 1999;12:67-70. 15. Owings MF, Kozak LJ:Ambulatory and inpatient procedures in the United States, 1996. Vital Health Stat 13 1998;139:1-119. 16. Bert JM: The efficient, enjoyable, and profitable orthopedic practice. Clin Sports Med 2002;21:321-325. 17. Bert JM: Office based arthroscopy cen- ter. Outpatient Surgery 2000;1:11-13. Office Ambulatory Surgery Centers 162 Journal of the American Academy of Orthopaedic Surgeons