Ambulatory surgery centers are gaining in popularity because they can be lucrative investments and do not take huge amounts of money to start.
Often, financing an ambulatory surgery center is no more difficult than securing a home mortgage. Just as individuals need only a down payment to move into a home, physicians looking to get into the outpatient surgery business do not need all the money up front-just the assurance they will make good on the loan.
Readily available financing has helped fuel an ASC boom, financiers say.
"It's growing because it's kind of predictable," says Stephen Larson, managing director of Cornerstone Equity Investors, a private equity firm in New York.
"We like that, and banks like that, too."
Investors and physicians also are attracted by the relatively quick return on investment and the overall efficiency of freestanding surgery centers.
"A hospital OR is never as efficient doing outpatient surgery as a surgery center can be," says Dick Evans, M.D., medical director of Blount Memorial Hospital in Maryville, Tenn., and a board member of the 3-year-old multispecialty Maryville Surgical Center.
MedCath Corp., Charlotte, N.C., a developer of heart hospitals in partnership with physicians, focuses on inpatient care but offers an economics lesson for any sort of freestanding surgery center.
According to MedCath President and CEO David Crane, the typical not-for-profit hospital can spend up to half its net revenue on labor costs, while for-profit hospitals average 40%. In contrast, just 29% of MedCath centers' revenues go to salaries and benefits because they typically require less administrative staff, Crane says. Likewise, ambulatory surgery centers tend to be much more efficient than comparable in-hospital facilities.
A well-planned ambulatory surgery practice ought to realize a 50% return on practice-related investments-everything except the real estate-during its first year and recoup the entire investment within 18 months, says Kevin Standifer, vice president of marketing and business development for surgery center developer ASC Group of Shawnee Mission, Kan. By year three, Standifer expects an annual ROI of 150% or better.
On the real-estate side of the equation, experts say a return of 20% to 25% per year on a 10-year mortgage with 20% down can be expected. However, many surgical groups prefer to lease rather than own the property.
According to Larson, private investment firms look for strength of management and the amount of equity physicians bring to the table. He says a bank likely would loan 50% of the cost directly to the physicians if an investment firm covers the other 50%.
Larson says a basic rule of thumb is that a physician should get a 10% to 15% stake just on professional standing, but "we would only support a guy who has a book of business."
The risk is much higher for a physician investor without existing patients, he says. "The thing that is in shortest supply is the good doctor with the good opportunity."
Covering first-year costs
Luke Lambert, CFO of Norwell, Mass.-based Ambulatory Surgical Centers of America, a company that operates about 20 surgery centers in partnership with small and medium-sized physician groups, says lenders want to see categorized investment outlays and projections of income statements, balance sheets and cash flow.
Up front, Standifer says, a surgery center needs to raise about $700,000 to $1 million to cover start-up costs and provide three to four months of operating capital to fund operations during the lag time before receivables start flowing in. Another "year zero" cost is paying support-staff salaries prior to opening.
Actual requirements vary according to the size of the center, complexity of procedures and payer mix. So before approaching investment partners, physicians should do their homework.
"Turn to an accountant to help develop a pro-forma," essentially a feasibility study, Lambert says.
And read the terms of any financial agreement carefully. Banks may be forthcoming with loan offers, but, according to Lambert, they often require joint-and-several obligation. In other words, all the partners in a group are on the hook should one of them default.
Hospitals as partners?
Hospitals, fearful of losing revenue, often broach the idea of partnerships with physician groups planning freestanding surgery centers, with varying motives.
"Often it's just a charade for the hospital to slow down or stop a project," Lambert says. "What is maddening about this is that they give one face to a physician, but behind closed doors they are working to stop the project."
Evans, as a hospital medical director, says the 35% stake that Blount Memorial has in the Maryville Surgical Center--an ASG Group facility--is "very unusual."
Blount got involved after a small group of orthopedic surgeons got a certificate of need to build a two-room surgery center and approached the hospital about financial assistance to establish a center in a building they wanted to lease.
But, Evans says, hospital officials determined the building was in poor condition; they also were afraid other specialists would want similar deals.
Blount appealed the CON to state regulators but later agreed to build and equip a multispecialty center and lease the building and the equipment to the physicians.
"We are cooperating and working very well together," Evans says.