Video Transcript

What are the challenges when your facility is trying to add total joint procedures to the surgery schedule?

Well, first, I’ll give you some context. We have a 10-room free-standing ASC in Rhode Island. We’ve been operating now for about three years. It’s a very successful operation. We added total joints, both hip and knees. We’d already been doing shoulder and elbow prior to that, but hip and knees about six months ago.

The biggest problem for us, and I’m sure a lot of people have the same pain, is that we built a facility, not understanding of the volume of supporting trays that are required to do a hip and a knee efficiently and correctly with patient safety in mind. This has taxed our ability to do these cases.

We are currently limited to doing them in the mornings only because we do not have the sterilization capacity to run the eight to 12 trays through that are required to do this type of surgery and still get enough trays for all the other procedures that are being done. We run the sterilization units 24/7 and we don’t have any extra space to build sterilization units, so it’s a bit of a log jam.

When you built the facility, is that just more a function of not thinking about total joints, or was it just to conserve capital on the way in, or some function of all of that?

No, we had plenty of capital. What happens is you allocate space to different areas. Sterilization tends to get on the lower end of the totem pole, to be honest with you.

We underestimated our capabilities for how long each of these takes and then we underestimated the capabilities of how many trays are required to actually do a total joint surgery, especially if you’re going to do a lot of cases a day. We will usually do two to four a day, one to two rooms. That’s stressing our capacity with the other nine rooms running. Even if we had known this, I’m not sure we could have built out the capacity in our footprint that we had and not severely hampered another area of the surgery center operations.

The sterilization is the most, I would say, portable option. It’s something that you just need the instruments sterilized, but you really don’t care how they get sterilized as long as they’re done correctly, so I think a lot of people who have already built ASCs or are planning on building ASCs tend to underestimate as we did, how much you actually need for each of these items and you learn by your mistakes.

How would access to an offsite sterilization facility change the daily operation of your surgery center?

Well, it would certainly allow us to expand the capacity to some degree because if we could offload the tray-heavy procedures, and that tends to be total joints and some spine cases, to an offsite place, we would actually have plenty of capacity to do the smaller trays that are required for a lot of the procedures that are done in our facility.

There’s another group of 12 people joining us July 1st, so it’s just going to get worse. As your group grows, you can’t predict that, but as the market changes and you start consolidating and things like that, even if you didn’t anticipate that problem, now you have 75 surgeons trying to get into a place that was built for 50, so offloading in a predictable, safe manner, sterilization just frees up real estate, and the real estate gets more and more valuable the bigger you get and the busier you get.

How valuable are these total joint cases to your surgery center?

Well, they still today, because we can do these as outpatients where the hospital systems, where they’re mainly still inpatient one-night stays, the bundles, the insurance bundles for these and even the Medicare reimbursement is substantially higher than what our break-even point is at a freestanding surgery center, so as long as you can do it safely and efficiently, there’s a reasonable amount of profits still to be made to take these very expensive cases out of a very expensive setting and doing them just as safely, and to, frankly, patient satisfaction, in a freestanding facility, so these are extremely valuable from a revenue standpoint.

When you look at an offsite idea, do you foresee any real challenges with the policy of the facility as an owner?

I think as long as we could vet the offsite facility, see how they run their operations, make sure they have backup systems, they’re predictable, they have tracking of the trays, there are ways to make sure the trays come fully sterilized and haven’t had a hole in them or things like that, I don’t think a policy of the freestanding ASC, there wouldn’t be a policy issue with that. We just want to make sure that all the checkmarks are predictably checked. I think then we would feel fairly comfortable. I don’t think there’s any negative implication to that.

So as long as your clinical team sees that such a facility is in standard or above what they would normally expect to see, this will make it through your administrative levels?

Oh, yeah. Yeah. I think it’s no different than any other vendor who provides a product. If the product is predictable, on time, cost-effective, and safe, it’s going to be well-received.

Can access to an offsite sterilization improve patient care in a facility?

Well, I think, the patient care, it’s a multifactor answer, really. Patient care comes down to the surgeon’s capabilities, comes down to the flow of the facility, comes down to the care of the nursing team and the scrubs that are working there. But in a small part, offsite sterilization can really be helpful because you reduce the stress on the operating room system instead of having folks who work in the sterilization room burning the midnight oil, being stressed out about needing to get trays done on time, that kind of leads to job stress.

It’s very high turnover in these positions and if you could offload some of that, I think it makes it a better working environment and a better working environment makes for better predictable patient outcomes.

What elements of a service would you require as a physician that the service would bring to your facility?

The main thing is predictability. I mean, what we would not want to hear is that we have a case booked and there’s some kind of message that says, “We can’t bring the tray today. Something happened. Our truck broke down. We have no backup.” That just can’t happen no matter what.

I think having a facility that can track well, whether it’s by barcode or RFDI chip, or however they track their items, know where they are, know that they’re being delivered on time, and that there’s not a problem with the sterilization pack. We wouldn’t want to find a hole in the sterilization pack of one tray for a 12-tray case and have to cancel that case because it wasn’t protected during the transport, so I think predictability of the operation and sanctity of the sterilization of the item being delivered would be the two main components.

What do you think it’s going to take for a facility, and yours is a larger one than many that we see across the United States, any particular issues with implementation beyond policy that you see organizing around it?

I think there’ll be a little bit of bumps because it’s a new format, it’s not something that’s really done currently, and so the staff will have to learn how to manage the inflow of the trays: What time they come in? Where do they go? Which loading dock? How do they get upstairs? How do they coordinate? Where do they put them in the meantime, the morning of the surgery, or from the evening before, to the morning of the surgery?

It’ll take some logistical planning, but none of that is particularly rocket science. It just takes working through the system. I think the offsite sterilization company should have a well-thought-out plan for how to onboard the facility and its employees to the process. I think if that’s on, I don’t think it’s going to be very hard at all. The learning curve will be extremely steep.

What is it about the Genesis team that appeals to you to run this kind of model with the sophistication you just described?

Well, I’ve come to know them and I’ve known a couple of the folks for a very long time, decades even, and I know that they’re innovative and careful thinkers, they’re very good at processing.

Some of them were engineers. I think that’s a really helpful thing because engineers think through problems in a very methodical manner. That’s going to be extremely important for moving a company like this along at a relatively rapid rate.

I think in three to five years, you’re going to see this area mature quite quickly and the people who have the knowledge of running companies, which Genesis certainly does, varied companies, which they certainly do, some of them are related to implants, some of them related to process some of them related to a lot of different things related to healthcare, that experience and the breadth of experience, or a lot of folks on the team, will certainly help SPDx be able to move this company forward and make it a very attractive acquisition target.

You seem to be very positive about the scalability of this type of model as it goes into other geographies?

Yeah. I think once you figured out all the nuts and bolts, it should be a very reproducible model and it’s going to require two things, capital, because with capital, you can scale this up extremely quickly, and people. There’s going to have to be an expansion of the company to be able to… Let’s say you’re trying to open six places at the same time.

One person who could do that when it was one place can’t do that when it’s six places, so you’re going to need people on the ground. These would probably be in cities that aren’t that contiguous to each other because people are going to go to the bigger cities with lots of ASCs first, and so it’s going to be a rapid growth curve and there’ll be some pain with that, but timing is the key. You want to be ahead of the curve on this one.

Do you see this type of logistic model moving into hospitals as well for vendor trays?

At some point, I certainly do. Hospitals are notoriously slow. It’s like working with the government. They have to go through numerous committees and this and that and, “Should we do this?” They also like to control things. They say they want to co-venture, but really, hospitals like to co-venture as long as they control everything, and they aren’t always the best or most efficient market leaders in that area.

But I think if they want to compete on a cost basis or an efficiency basis and offer things like outpatient total joints the patients are going to demand and the payers are going to demand, they’re going to need to expand their facilities as well.

Now, they may do that themselves at some point, but it will be a local operation. But quite frankly, I think if they actually analyze the cost, it might be a lot cheaper for them to utilize a well-run free-standing company that has matched their model to an efficient product for the hospital to buy. It’s just cheaper for them, rather than building and having employees and things like that, so I do think they will wake up to that.

There’s certainly some systems that have built these facilities for themselves, but there’ll be a lot that either don’t want to spend the money or don’t want to spend the time to do it well, or don’t want to have the additional manpower, so I think there’s a huge opportunity there, but it’ll probably be adopted in freestanding ASCs more quickly, I would think.