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Should You Make That Investment?
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Sean Hartzell is a Managing Director at VMG Health, where he advises healthcare organizations on strategy and capital planning. Sean joins us this week to break down how ASC leaders should think about funding growth. He walks through the key differences between debt and equity, how to calculate the “true” cost of major investments beyond the upfront price, and what factors can make or break a new initiative.
In our data segment, we’re talking all about spine. Spine is being called one of the fastest-growing ASC service lines, driven by a combination of CMS policy changes, payer pressure, and continued advancements in minimally invasive techniques. We’re going to spend the episode focusing specifically on spine ASCs and the potential opportunity for growth based on data-driven insights.
Resources Mentioned:
HST’s Specialty Data Report: Spine
Brought to you by HST Pathways.
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Transcript
Introduction to Podcast Format
00:00:00
Speaker
Welcome to this week in surgery centers. If you're in the ASC industry, then you're in the right place. Every week, we'll start the episode off by sharing an interesting conversation we had with our featured guest, and then we'll close the episode by recapping the latest news impacting surgery centers.
00:00:16
Speaker
We're excited to share with you what we have. So let's get started and see what the industry's been up to.
Financial Growth Strategies for ASC Leaders
00:00:24
Speaker
Hey, everyone. Here's what you can expect on today's episode. Sean Hartzell is a managing director at VMG Health, where he advises health care organizations on strategy, capital planning, much more.
00:00:36
Speaker
He joins us this week to break down how ASC leaders should think about funding growth. He walks through the key differences between debt and equity, how to calculate the true cost of major investments beyond the upfront price, and what factors can make or break a new initiative.
00:00:55
Speaker
Sean also shares how centers can prioritize competing opportunities using data and, in some cases, fund growth through operational improvements instead of raising capital.
00:01:10
Speaker
After in our data segment, we're talking about SPINE. SPINE is being called one of the fastest growing ASC service lines, and it's driven by a combination of CMS policy changes, payer pressure, and continued advancements in minimally invasive techniques.
00:01:29
Speaker
We're going to spend the episode focusing specifically on SPINE ASCs for this segment and the potential opportunity for growth based on those insights.
00:01:41
Speaker
And if your center isn't performing spine procedures, that's okay. The themes that are covered in this segment will also be applicable to you.
00:01:53
Speaker
Hope you enjoy the episode and here's what's going on this week in surgery centers.
Understanding Financial Performance and Planning
00:02:05
Speaker
Hey, Sean, it's great to have you on the podcast today. Can you give our listeners a brief background on yourself? Certainly, and thanks for the invitation. yeah My name is Sean Hartzell. I'm a managing director with BMG Health, and i lead our ambulatory surgery specialty practice and membership service lines.
00:02:28
Speaker
It's mouthful, but basically, I am helping to grow our ambulatory surgery growth and optimization prac component or service line that we'll talk about a little bit more we've got a group that does specialty practice management focused a lot right now in aesthetics ophthalmology and other cash-based elective specialties that have a heavy clinic and procedural component and then We also have some membership tools focused on ambulatory surgery, aesthetics, ophthalmology, those types of practices and virtual board of director education.
00:03:10
Speaker
So I've got a collection of service lines at BMG. Thanks for that overview. So when ASC leaders start thinking about growing their ASC Sometimes that means adding specialties or expanding ah ORs or potentially buying new equipment before they do that. What do they need to understand about their current financial performance for making that investment decision? For instance, EBITDA, looking at their budgets, forecasts, et cetera.
00:03:46
Speaker
Yeah. So I think you touched on part of it. I grew up, I started my career with a health system here in Northern Virginia. focused on financial planning and analysis. So a big component of that was developing an annual operating and capital plan for the system and for each hospital, and then structuring conversations with each business unit to really understand how they're performing versus their budget.
00:04:16
Speaker
What is what's causing any variances and are there any places where they can either learn from their colleagues to improve or just improve overall. So can they put together any sort of improvement plans? I think when I look at and think about your question, I think it's really important to understand how you are doing from an operational and financial perspective because that frames where you need to go, right? You can either, if you're doing well, you can start to look outside and look at some external opportunities, but if you're not doing well,
00:04:51
Speaker
It's really time to turn insight into the practice, into the surgery center and really say, okay, what are we doing well? What aren't we doing well? And what can we do better? So it's, I really think that you need to have a grounding in your financial and operational performance as you consider, whether it's building a new OR, bringing a new service line or a new procedure in, recruiting new doctors who may not be doing the same work that your doctors are doing, or even any sort of large scale and enhancements or additions.
00:05:24
Speaker
Right. That makes sense. So before an ASC goes out to raise debt or equity of some sort, how should their leaders determine whether they actually need outside capital?
Capital Planning and Investment Considerations
00:05:38
Speaker
I think it's important. And this goes back to my underpinning to get a really strong business plan in place. And when i think about a business plan, i'm thinking about both the qualitative side, like why we should do this.
00:05:51
Speaker
And then the quantitative side, which says, how much do we have to invest? What's the volume look like when we make that investment? And when do we think that volume is going to come? And what do we think the, the margin is on each case, which really then says, when are we going to generate a positive cashflow to be, to pay off that investment that we made? And so, gosh, I go all the way back to Inova and some of the first work that I did in And with ambulatory surgeries is we built a monthly financial statements to understand we were building an ASC and we looked at the cashflow for that ASC, how much we had to put in and when we would start getting that money back out.
00:06:32
Speaker
So we could actually understand how much debt do we want to bring in? How much equity do we want to bring in? And if we, if we built this equity model and this debt model, What would all all the different components be, whether it's short-term debt, long-term debt or equity, right? So how do we move those levers around to build an overall plan for that investment? Yeah, that's a great example. Do you recall any specific conversations or decisions you made for how to think about the debt versus equity there?
00:07:09
Speaker
Yeah, the the conversations that we had, and it sounds, it probably sounds self-serving from a VMG perspective, but we used VMG for all our all of our valuation work. And so we built this financial model, this business plan, and really took it to VMG to say, put let's put a value on this at startup to understand from a capital perspective, how much money do we think we could raise or how much, what what we could charge from a share price perspective.
00:07:39
Speaker
to potential investors. And that helped us build the equity component of our overall capital plan. And then we worked with bankers, we had conversations with bankers to say, hey we need an extra $5 million dollars to make this opportunity a reality. And we'd like to we'd like to put as much of that as possible into long-term debt because here's what the cash flows are going to look like but we also know we need to have a short-term line of credit to help with that initial 90 to 120 days worth of cash flow requirements until we could actually start generating some some revenue from procedures because that's how long it takes to get
00:08:24
Speaker
Medicare certification and get on all of the managed care payer contracts. So we, we worked with our bankers and we worked with our investors to really structure the overall capital profile and the liability and owner's equity component of the balance sheet.
00:08:41
Speaker
Appreciate that example. Very tangible for others to think about how they can apply that. So let's say a center is also wanting to take a similar approach. Maybe there are expanding or they're building new centers like you were just talking about, or maybe they want to add a robot or add a new specialty line such as cardiovascular.
00:09:06
Speaker
They're often going to focus on that upfront cost, but how should they think about the true cost beyond just the initial price tag for let's say a robot or the equipment you're hitting on it with that example with Nova.
00:09:22
Speaker
But I think we can extrapolate it to how others should look at the all-in cost as well. Yeah. So I'll throw out an example. We worked with a center in southeastern Virginia recently, and they were looking at bringing a robot into into operation at their center.
00:09:47
Speaker
And again, going back to a financial plan, We worked with them to say the offering cost is $200,000, but there were a couple of things, right? There was the revenue side of the equation, which is what rates are we going to get for the procedures that are now done with a robot?
00:10:08
Speaker
And how many of those procedures can we do with the existing capacity that we have? Right? Because sometimes robot cases take longer. so so we had to do an operational capacity assessment.
00:10:22
Speaker
to build that revenue side of the equation to figure out how much revenue we can generate at, I would say at full capacity from the robot perspective, and how does that fit into the rest of the existing capacity?
00:10:34
Speaker
So that was a revenue side. The expense side was really, okay, do we need to think about does our staff need extra training? Do we need to think about if these cases are longer or shorter, how does that affect our staffing ratios and our overall cost for staffing?
00:10:53
Speaker
Does the robot or the service, I use the robot as the specific, but the generic, the service, require a different anesthesia model? And we know that anesthesia, I just got back from a conference and every ASC administrator that I spoke to, and I spoke to 2030, they all started with, well, I asked them the question, what are the biggest issues you're seeing right now?
00:11:18
Speaker
And I eventually had to stop saying, just started saying outside of anesthesia because everyone started with anesthesia. so So we really think about what anesthesia looks like for this news new service.
00:11:29
Speaker
And then what are the other operating costs, be it implants, other medical supplies, gas, different sorts of items there to really understand what the variable cost is for each case done with a robot.
00:11:44
Speaker
So then you can you then you can do the math revenue less these expenses. Everything hopefully that remains contributes to overhead, which now that investment is part of.
00:11:55
Speaker
So so right. So really, we're building again, I go back to we're building a financial plan or an investment plan and a return plan for that equipment or for that service.
00:12:06
Speaker
Right. And so then that's going to help us understand. Can we finance that investment out of our current cashflow one, which then begs the question, do our owners want to do that because that could reduce their distributions in the short term or it is the better play or a different play to go out to the market and see, can we get either short term or medium term debt to pay for that equipment? And then that, that may reduce the distributions over time, as opposed to a big one-time hit in distributions.
00:12:42
Speaker
Or if this is a new surgeon or this new service, are there physicians who would want to invest in our center? Right? So so it always always goes back to build a plan, build out your plan, make sure that you've got upside downside or optimistic and pessimistic case volumes and thoughts around all the different variables that you have in there.
00:13:07
Speaker
And then that leads to how should we finance that growth opportunity? Is it new debt or is it bringing in new equity holders? And when you were talking there, you talked about a lot of factors that will help you think beyond just the one specific cost element.
00:13:27
Speaker
Can you talk about how you should think about partners and other parties involved here? For instance, you talked about anesthesia being an issue. We all know it's an ongoing shortage and struggle for ASCs.
00:13:42
Speaker
How should ASCs discuss this with their anesthesia partners? And another core constituent for many ASCs their management group owners. They may be minority or majority. How should they be involved in these conversations as well?
Collaborative Planning with Partners
00:14:07
Speaker
Yeah, I think engaging those parties earlier And during the planning process is important because it's with anesthesia, you don't want to get to the end game and purchase the equipment or bring in the new service and then say, oh, hey, guess what? We now have a new service that it's going to take you longer to do. And we need specialized CRNAs. That's a bad outcome because given the current power shift with anesthesia, I think they can control a lot of what flows through an ASC.
00:14:40
Speaker
Now, the nice thing is I think in a lot of ASCs, at least I've seen anesthesia is maybe the medical director or they're intimately involved anyways, but I think bringing them into that conversation early and understanding, helping them understand, getting understanding from them as well around what it's going to take to provide that service is critical because then that feeds into your financial plan.
00:15:04
Speaker
From a management company perspective, and depending on whether or not you have outside management or inside management, again, important to have the conversation with them early as well, because if they're helping out with managed care contracts, they're going to have to work with the payers to make sure that for a new service, the payers going to pay for that new service. Otherwise you're basically giving away free care, which is if you say, if you think ASCs are a great from a patient experience, payer experience and provider and staff experience, right? You,
00:15:38
Speaker
That sort of definitely helps the top the payers if they have pay for it and the patients who get for free. They love that, but that's really not always the name of the game is free care. So on the same over time, right? Exactly. Yes. Like going out of business sales is great, but yes, at one point in time you go out of business. It is, there is an end, there is an end line there.
00:16:01
Speaker
And so so I think working with the management company and working with your folks who help manage the center, yeah, it's critical. like And a lot of times the center management will actually helping to build that business case, whether it's internal management or external management.
00:16:17
Speaker
there good point they that They're responsible for helping to build that case. Otherwise, it's a bunch of positions and positions may not be the best with Excel and Word and PowerPoint, all things you have to use to to build that case. So, so bringing, bringing both parties in early is better than not bringing them early in early.
00:16:36
Speaker
Yeah, that's right. And many ACs are going to have multiple potential growth opportunities they could
Evaluating Growth Options and Frameworks
00:16:44
Speaker
consider. Maybe that's like we were talking about adding a robot, maybe it's expanding into new specialty service lines, ORs, et cetera.
00:16:55
Speaker
So if they have, let's say three, five, 10 different options, and maybe there's some level of a business case behind each with a good ah ROI.
00:17:06
Speaker
How should they think about prioritizing those competing investments and being more data informed? Yeah, but I think some of that goes back to what the overall goal of the center is and the mission of the center.
00:17:24
Speaker
Is it to provide increasing access to care? Is it to provide, to be on kind of the the leading edge of technology in using technology in a center?
00:17:35
Speaker
or something else and creating, i would say, create a consistent evaluation framework so that you can go down and as objectively as possible, say this is level one, a level two, level three, right? But good to bad, or putting the r ROI next to each other.
00:17:59
Speaker
putting the additional number of cases and the capacity you use next to each other. What are some of the additional costs? What's the payback time, right? so So it's, I would look at this framework as combining qualitative and quantitative components and matching that up against the vision of the center and the overall growth plan of the center.
00:18:23
Speaker
And then making the determination as far as which ones do we want to prioritize now? Because when I think about Making a strategic bet, you are, you are taking a limited amount of resources, usually capital and time and saying, what are the two or three things I'm going to do? That's going to help me get either get more capital and more time.
00:18:46
Speaker
Right. And so framing it in a certain way that you can compare the three or four opportunities consistently and as objectively as possible is critical.
00:18:57
Speaker
Yeah, I like how you are tying in the values of the center as well, because if you line up those few and the ROI is maybe we're all looking good, maybe the payback periods are similar, but then one hits on the value of some center, maybe they are really caring about patient care. Well, maybe they're going to choose that even if it's a slightly lower ROI return because it's matching their values in a stronger way. I appreciate you tying that in there.
00:19:33
Speaker
Yeah, I think that's, I think it's critical to to look at that. and i think it's also critical. So when you were talking, I was also thinking one of the, one of the values or maybe the mission of the center is to provide, let's say it's comprehensive some orthopedic care to the community, right. Or musculoskeletal care.
00:19:51
Speaker
Right. And so that, that points you with one direction that says, Oh, this is a foot and ankle procedure. Okay. We should look at that as opposed to this is a GI procedure. Well, GI may not fit in that center, even though it may be somewhat accretive or as accretive as the, or maybe slightly more accretive than the foot and ankle, but but you need to weigh what the center's doing and whether or not by bringing these different procedures or services in, are you fundamentally changing the mission of the center?
00:20:24
Speaker
Yeah, completely. So you've talked about how sometimes you can evaluate your current operations and see that, hey, if we can improve our operational performance by x percent, maybe we don't need to fund the growth through outside capital.
Operational Improvements and Financial Outcomes
00:20:44
Speaker
Can you share an example of how you've seen a center use operational improvements to fund growth rather than outside capital?
00:20:55
Speaker
Yeah, I know we, gosh, we have done numerous operational assessments in the past few years that have led to organizational transformations or turnarounds.
00:21:08
Speaker
We're working with a center right now that was generating five, 10, maybe 12% EBITDA returns for its shareholders.
00:21:22
Speaker
And in doing a comprehensive operational assessments where we went through everything that's going on in the center, we were able to find an additional, believe it was two to $3 million dollars in EBITDA.
00:21:35
Speaker
And although they weren't, they didn't necessarily have a series of capital investment opportunities. Before as we're going through this and we're finding this and helping the organization implement the initiatives to really actualize that two to $3 million dollars that sort of changes the trajectory of the center and now says, well, yeah, we now can, we now actually, we don't have to live out of our retainer or our line of credit anymore.
00:22:08
Speaker
We can start to build our day's cash and. provide healthy distributions so that now we're our owners are happier and we now have the internal capital and the internal flexibility to add new services and add new equipment where we don't have to go outside.
00:22:27
Speaker
Right. We're in a stronger and we're also in a stronger position, right? Cause the worst time to go to a bank or a lending agency is like when you need the money. It's like going to the scalpers, going to the ticket office and walking back to the scalpers to get the ticket. That's never a good sign.
00:22:46
Speaker
But now, when you're in a strong position from a capital perspective, banks are more willing to loan you that money at a slightly lower rate because you're not as much of a risk. right The risk return for them is a different a different profile.
00:22:58
Speaker
Yeah, certainly. Well, this has been great, Sean. We do this every week with our guests. What is one thing our listeners can do this week to improve their surgery centers?
00:23:10
Speaker
Yeah, again again, it's probably self-serving, but I think it's really important that you assess your operations and i would say bring in someone from the outside to assess your operations as you're looking at any sort of investment opportunity. So it's and I'll say it's I'll go with one A and one B, even though they're two, two different things, right? There's one, which is get an operational assessment to understand what you're doing well and we can do better.
00:23:35
Speaker
But then two, if you don't have a consistent framework for a business plan for new services, new products, new equipment, I think start to build that out so that you can compare different investment opportunities and review how you did against what you thought you were going to do so you can improve going forward. So I think it's really two things if you're not doing those already.
00:24:04
Speaker
Great advice. Thanks so much, Sean. ah Thank you so much. This was great. Thanks, man.
Impact of CMS Changes on ASC Procedures
00:24:17
Speaker
All right, so now I'm going to talk about what's going on in the world of spine surgery and what the opportunity is for ASCs. As you're all familiar with by now, CMS has expanded the ASC covered procedure list in a big way for 2026.
00:24:35
Speaker
And if you zoom in on where the volume of those new procedures landed, spine and musculoskeletal are two that really stand out there.
00:24:47
Speaker
Two procedures that ASCA and other lobbyists are most excited about are posterior lumbar interbody fusion 22630 and combined posterior lumbar and posterior lumbar interbody fusion 22633.
00:25:08
Speaker
But there are many others in addition to those two. Now that the rule is final and we know what's coming, it's good to be thinking about what to do with that.
00:25:21
Speaker
So before jumping into any action items, let's look at the financial possibilities. We analyzed at HST 131,000 plus spine cases across 300 surgery centers.
00:25:35
Speaker
And what we found is most spine ASCs are sitting on a massive untapped opportunity. The average spine ASC is only using 23% of their OR block time.
00:25:50
Speaker
Using an analogy we've used in the past, imagine being on a plane and only one in four seats are booked. Imagine how much money that airline is not capitalizing on.
00:26:02
Speaker
The same goes in the ASC setting. The good news is we also found the average net revenue per spine case is about 6,255, which is excellent compared to other specialties.
00:26:19
Speaker
Now imagine a world where you increase your OR utilization spine cases from 23% to 50%, which that's still below the recommended or utilization, but even just doing that could be, let's say having and a a couple additional cases per day. That would result in over $3 million dollars in additional annual revenue per OR.
00:26:46
Speaker
And that's the opportunity sitting inside your current schedule. Now, of course, it's easier said than done to improve ORR utilization. So let's look at some other data points for spine centers.
00:27:02
Speaker
From 2023 2024, case declined from 65 60 cases average month for cases. Cancellation rates are still around 22%. specifically insurance related cancellations are 9%, which is more than double industry averages.
00:27:14
Speaker
cancellation rates are still around twenty two percent and specifically insurance- related cancellations are nine percent which is more than double the industry averages Now, hopefully with these covered procedure list changes, that number should naturally start to improve.
00:27:36
Speaker
Now, we all know spine cases are complex. They're also typically longer procedures. Prior auth may be more difficult and patient stress can also be higher.
00:27:49
Speaker
But even with those potential challenges, growth is still possible. And it's possible even if you don't have spine as one of your specialties right now.
00:27:59
Speaker
But let's say that you do have it as a specialty. Here are three areas that I'd focus on. And you could extrapolate these to other specialties as well. One, fill existing block time. Try to speak with your surgeons. How can they maximize their time?
00:28:16
Speaker
Where's the friction? How can you remove it? What procedures can they move from the hospital to the ASC given these CMS changes?
00:28:27
Speaker
Number two, eliminate preventable cancellations. Focus on patient education, automated reminders via text, verify insurance more than once through automatic insurance verification tools, give patients clear financial expectations early,
00:28:49
Speaker
And then third, tighten your revenue cycle process. From 2023 to 2024, days to bill post-date of service improved from 10 to 8 days, 20% improvement.
00:29:03
Speaker
However, denial rates rose from 9% to 10%. So I'd encourage you to really look at every step of your process and try to spend one quarter improving one area, and then repeat into the next.
00:29:19
Speaker
And if you can find some operational gaps and take advantage of CMS expanding spine procedures, you'll be able to capture millions. It's really worth evaluating, even if you don't have this specialty right now.
00:29:35
Speaker
All right. That wraps up our podcast this week. Thanks as always for spending a few minutes with us. Would love it if you subscribe, leave a review. And most of all, if you could share this with someone you know, sharing is a great way to show others that you're thinking about them.
00:29:52
Speaker
Have a great day.