Do Physician-Owned Facilities Consistently Underestimate Their True Operating Cost?

Physician-owned procedural facilities consistently underestimate their true operating cost, and the underestimate is not random. It follows a pattern rooted in how independent ASCs and OBLs measure cost in the first place. Most independent facilities measure what they spend. Very few measure what they should be spending relative to what comparable facilities at their volume and specialty mix actually sustain. The gap between those two figures is the operating cost underestimate. For most physician-owned facilities, it has never been formally calculated.

The Underestimate Is Not About Oversight. It Is About Comparison.

When a physician-owner reviews their operating costs, they are looking at actual expenditures: what the facility paid for drugs, supplies, staffing, facility costs, and administrative overhead during a given period. The numbers are accurate. What the real question probes is whether those numbers reflect an efficient cost position for an independent facility at that volume and specialty mix, or whether they reflect a pricing structure that has never been tested against the market.

A facility that opened three years ago, established its distributor relationships, and has renewed contracts without a formal peer comparison may be tracking its costs with complete accuracy while systematically underestimating how much of those costs are recoverable. Accurate tracking of above-market costs is still underestimation. The facility knows what it spends. It does not know what it should spend. Those are two different numbers, and most independent physician-owned ASCs and OBLs have only ever calculated one of them.

According to VMG Health’s multi-specialty ASC benchmarking data, the average ASC allocates 26.3% of its operating budget to drugs and medical supplies, the second largest cost category after staffing. However, the variance in that figure between facilities at similar volume is material. Facilities at the 25th percentile and those at the 75th percentile of supply cost as a percentage of revenue can differ by 10 percentage points or more, driven not by clinical differences but by the purchasing position each facility holds relative to its distributor network. That gap between percentiles is where the operating cost underestimate lives.

Three Mechanisms That Produce the Underestimate

Contrary to how it appears from inside the facility, the operating cost underestimate is not produced by a single oversight. It accumulates through three distinct mechanisms that operate simultaneously and reinforce each other.

The first is the original cost model. When a physician-owner builds the financial model for an independent ASC or OBL, they use pricing data available to an independent operator at that moment. That pricing reflects what the market will offer an operator of that size and volume at that point in time, without the benefit of comparative intelligence from peer facilities at similar volume and procedure mix. As examined in prior work on why operating costs exceed original facility models, the original model captures a snapshot of costs under conditions that do not hold over time. Underestimation begins at the model itself.

The second mechanism is incremental cost movement. After a facility opens, commodity supply costs reprice on distributor contract cycles in amounts too small to individually flag. Each adjustment is defensible within the contract language and requires no formal review. However, the cumulative movement over 24 to 36 months creates a gap between what the facility pays and what the market bears for comparable independent facilities. Spend tracking remains accurate throughout this process. What it does not capture is the growing distance between actual spend and market rates.

The third mechanism is the absence of a peer comparison. Without invoice-level pricing data from comparable independent facilities at similar volume and specialty mix, there is no reference point against which the underestimate becomes visible. Prior period comparisons are the only benchmark available inside the facility’s own reporting. A cost that has risen consistently from one period to the next looks like a stable trend rather than an accumulating gap. Rising costs do not surface as a problem. They simply remain unmeasured.

What the Underestimate Costs in Practice

The practical consequence of underestimating true operating cost is that strategic decisions are made against an inaccurate baseline. Procedure mix decisions, volume targets, staffing models, and growth projections are all built on a cost foundation that has not been tested against what the market actually bears. When those decisions underperform, the facility adjusts clinical or operational variables without addressing the cost position that is making every case less profitable than it would be at market rates.

Furthermore, the underestimate has implications beyond the P&L. For a physician-owner who intends to maintain independence, grow the facility, or eventually exit at full value, the operating cost position directly affects enterprise value. A facility carrying commodity supply costs 20 to 31 percent above market rates for comparable independent facilities suppresses its per-case margin and consequently its EBITDA multiple, without the financial visibility to understand why. The gap between what the facility is worth and what it could be worth is not a clinical gap. It is an informational one.

The Measurement That Closes the Gap

Closing the operating cost underestimate requires one measurement that does not exist inside the facility’s own reporting infrastructure: a formal comparison of the facility’s actual commodity supply costs against documented market rates for comparable independent facilities at equivalent volume and specialty mix. Without that comparison, the underestimate remains intact regardless of how carefully the facility tracks its own spending.

Physician-owners who have had that comparison run against their own purchase data have, without exception, found a gap between what they were spending and what the market bears for facilities like theirs. For most of them, the gap had been present since the original distributor relationships were established. Costs were tracked correctly throughout. They simply had never been measured against what they should have been.

If you want to know what your facility’s true operating cost position looks like relative to peer independent facilities, request your complimentary supply cost analysis at vantumpartners.com. You see your actual costs against documented market rates. No obligation.

Frequently Asked Questions

Do physician-owned ASCs and OBLs consistently underestimate their operating costs?

Yes, and the underestimate follows a consistent pattern. Most independent physician-owned facilities measure their actual expenditures accurately. What they do not measure is whether those expenditures reflect market rates for comparable facilities at their volume and specialty mix. The gap between what a facility spends and what it should spend based on peer benchmarks is the operating cost underestimate. For most independent ASCs and OBLs, that comparison has never been formally run against their own purchase data.

Why do independent procedural facilities underestimate their true operating cost?

The underestimate accumulates through three mechanisms: an original cost model built without comparative peer intelligence, incremental commodity supply cost movement inside distributor contracts that reprices below any individual review threshold, and the absence of invoice-level peer pricing data that would make the gap visible. Each mechanism operates independently. Together, they produce an operating cost position consistently above what the market bears for comparable independent facilities, without producing a clear indication inside the facility’s own financial reporting.

How does the operating cost underestimate affect enterprise value in a physician-owned ASC?

When a physician-owned ASC carries commodity supply costs above market rates for comparable facilities, every case produces less per-case margin than it would at market pricing. Lower per-case margin suppresses EBITDA. Suppressed EBITDA, applied against a standard valuation multiple for independent procedural facilities, reduces enterprise value. The underestimate is not simply a cash flow issue. It is a valuation issue. A facility that closes its operating cost gap moves both its annual profitability and its enterprise value simultaneously.

How long does the operating cost underestimate typically persist in an independent facility?

The operating cost underestimate in an independent physician-owned ASC or OBL typically persists for as long as the facility has been operating without a formal peer benchmark comparison. For most independent facilities, that means the underestimate has been present since the original distributor contracts were established. Without a mechanism inside their financial reporting to compare costs against what peer facilities pay, there is no internal trigger that surfaces the gap. It remains unmeasured until an external comparison is run against actual peer pricing data.

What is the difference between tracking operating costs accurately and knowing your true operating cost position?

Tracking operating costs accurately means recording what the facility actually spends in a given period. Knowing your true operating cost position means understanding how those expenditures compare to what comparable independent facilities at your volume and specialty mix actually pay for the same inputs. A facility can track its costs with complete accuracy while systematically underestimating its true cost position, if those accurately tracked costs have never been measured against a peer benchmark. Accurate tracking and market-competitive cost positioning are different measurements. Most independent physician-owned facilities have achieved the first without ever attempting the second.