ASC Development and the Pitfalls that can Get the Drop on Physicians

developmentASC development can be an exciting journey for a physician owner.  However, while there is opportunity for success, there is equally ample opportunity for the development to fail before it can even break physical ground.  The Ambulatory M&A Advisor examines some of the larges pitfalls and areas of concern that physicians should look out for when developing an ASC.

Charles Dailey, Vice President of Business Development and Business Strategy for ASD Management states that there are several areas regarding the development process of an ASC that could prove to be possible project pitfalls. These possible pitfalls could bring the plans of a physician owner to a grinding halt.

“So many doctors get excited about their ambulatory surgery center projects, and rightfully so.  It’s a good business. Physicians have heard success stories of other ASC projects, so these physicians are attracted to the idea of developing their own facility.  The fact remains that many physicians over estimate their case volume to validate an ASC project. We really have to review past year case history at other single day surgery or hospital facilities. With that review, we would need to tease out only the outpatient cases for an accurate report,” Dailey says.

“Following the scrub of true outpatient cases, the next step would be to review and then assign weighting.  Different procedures own different values in the ASC market in terms of case profitability.”

Dailey says developers then have to examine a possible ASC project payor situation specific to the geography. The insurance contracts will support procedure reimbursements. This exercise will actually assign reimbursement rates to the various procedures.

“Once we have done all of that, we should have strong financial projections. A solid proforma provides a snapshot of the business. The developer would build off of the blueprint.  Success or failure is determined by having an accurate look at the project in regards to sound financials,” he says.

Scott Becker, partner with McGuireWoods says that as far as planning people really need to know if they have the right number of cases, and whether or not they will get paid for the cases.

“That is where you should start.  When we talk about failing to plan, it brings into question how much the surgery center knows regarding how many surgeons it has, how many cases it has, and the payor contracts for those cases,” Becker says.

“Also they need to make sure they are building the right size of center so that they are not too vulnerable. If some of the cases don’t show up, or some of the payors don’t work out, they will still be okay.  Those are things we look at as building blocks or starting points.”

All of this goes towards financing, because financing sources will not finance a company well unless they really think the company has taken the time to drill down on the previously discussed numbers.

Syndication and Financing

The idea of syndication can be a complex idea to understand to some.  John Alan Lewis, member of the healthcare regulatory practice of law firm Mitchell, Williams, Selig, Gates and Woodyard explains the process.

“Syndication means bringing in an outside investor or a group of investors for the purpose of putting capital to work in a healthcare facility. Typically that type of facility would be something in the nature of an Ambulatory Surgery Center, a Dialysis Center, some type of facility that offers either equipment related diagnostic procedures, and, or facility related diagnostic procedures. Typically the facility is certified by a state regulatory authority,” Lewis says.

According to Lewis, usually, the group that is sponsoring the syndication may be an outside group that needs physician investors to come in.

Lewis says during syndication participants don’t want to tie the investment of the physician or the capital of the physician to anything that is remotely related to the volume or value of certain referrals that the physician might make to the facility.

“Such that if he/she puts in capital and that is commiserate within 10 percent interest in the business, their return must be based upon the 10 percent interest in the business,” Lewis says.

Dailey explains that progressing through the development process, there may be pitfalls in regards to syndication and other financing. This part of the development continuum will serve as “the test” by validating who will invest vs those who will opt out of the investment.

A scenario provided by Dailey is the example of the ASC project that supports 15 physician investors but suddenly has a third of the interested owners pulling out for whatever reason. This would cut into case volume calculations drastically. “With this last minute change, the calculations might not support the business and the project might not be feasible”.

Dailey says that as far as raising funds, there is a process that supports a set timeframe.

“There would be a series of three meetings that would support the purpose of answering any/all questions regarding the ASC investment.  By decision time, all possible investors have reviewed the project very carefully, and there should not be any surprises for those involved,” he says.

In terms of financing, Dailey claims that after getting through the equity process, there would be a need for a portion of the project to be financed out.  Of course there could be successes or pitfalls in regards to obtaining outside financing. “It’s critical to obtain financing for possible construction, equipment needs, and/or a line of credit set up to plan for the unexpected.  At the end of the day, one would need an institution to provide financing. . Any issues with the approval process could set a project back” Dailey says.

“Also in regards to planning for the unexpected, it is critical to establish having at least eight months of working capital.  These funds are to pay the salaries, supply costs, etc., in start up mode. When the doors open, the project is not making money right away.  Many forget the need for working capital, and this oversight could present trouble.”

Overbuilding and Other Pitfalls

Dailey states that when creating an efficient design, owners must have a design that is going to match the business that would support the facility.

“During design/construction, the plan is to build only what the volume would support. A scenario provided by Dailey is the example of deciding to build a two OR room, three OR room, or a four OR room facility.  Many get carried away only to overbuild. This would lead to too much building with too little business to support the inflated design. One of the key signs of checking for overbuilding is to review square footage and base projections on the estimated volume.  We have a formula to determine the number of operating rooms plus the number of procedure rooms per facility,” he says.

Dailey also places overstocking and over-equipping in the same category as a build out. He states that physician owners have to be wary of the spend in these categories in regards to matching the supporting financials.

Dailey says that location can also be a pitfall, but not for the reasons that most developers may believe.

“One of the pitfalls is that everybody thinks that the location of the surgery center is dependent on patients being able to access it.  Yes, it is important to place a surgery center where patients can easily visit. But most ASC development projects only base the site location off of patient access.  What the projects seem to forget is the need for the facility to be convenient for the physicians.  At the end of the day, the physicians are the ones that determine where the case is going to be. It’s not really the patient’s decision because they will go to where the doctor directs.  If the surgery center is not accessible for the physician, then the physician will not send the business to the ASC, but rather schedule the cases at a facility that is close and would support the back and forth from clinic to/from surgery” he says.

If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.

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