The Feasibility Study and ASC Development
When developing an ASC project, planning ahead is crucial, from financing the project, to building the actual building, thinking far ahead is crucial to the success of a project. One starting point that is encouraged in the field is the feasibility study.
A feasibility study encompasses a lot of aspects to review and validate a successful project like an ASC. A lot of people refer to it as your pre-development cultivation. Basically, the success or failure of an ASC is really established during this pre-development, according to Charles Dailey, Vice President of ASD Management.
Dailey says that when his business works on feasibility studies for projects, they look at it from a number of steps and phases. Dailey says this phase in the specific period has got to be very methodical; it has to have careful planning, there needs to be discussion of key issues that are going to impact the project. Another component of that is giving attention to formulating very sound financial projections.
“The first thing is to actually identify the type of ASC you are building. You can have a physician only ASC, a single specialty ASC, you could also have a hospital-physician joint venture ASC. Depending on the project you are looking at, there are certain aspects of the feasibility study that can change. The next thing is to actually validate the business and build a solid proforma. You also have to have a very comprehensive and very accurate business plan. Both of those actually vent out the operational structure,” Dailey says.
“To drill down deeper on the proforma, you are actually validating that there is a volume of business, there is going to be revenue that is generated that is going to support the expenses of building and operating a surgery center. Our firm knows what it takes money-wise to build a surgery center, and we know the figures of the operating costs. When we go into the feasibility, study, we need to uncover if there is volume to support it.”
Dailey says in this area the owners break that down on how many cases and what type of cases occur between certain disciplines. Certain cases are valued differently between specialties. Basically, they have to identify the out-patient cases that could come to the facility, and need to know the number count.
“At the same time, you need to drill down closer as to what those cases are, because we have a process where we give value to each case. When we count at the end of the day, and put a revenue per case next to it, our calculations are showing the money that is going to be generated. The next phase after the proforma calculations is to also look more closely at the area’s payor mix. You need to take the payor mix and put that in your formula for your financial projections. It makes sense. If you did 100 Orthopedic cases and they are all commercial, that is going to pay more than if you did half commercial, and some were Medicare and Medicaid,” Dailey says.
“Next, we would estimate supply, drug cost, and staffing for that particular facility. We would also take those estimates and put that in our proforma to support our financial projections. Step three in a feasibility study is a needs assessment for the facility.
It is very critical to plan what type of facility you are going to have to support the business. That leads to one of the biggest mistakes when you are trying to put together an ASC project; overbuilding. A common mistake is overbuilding. In your study you need to really look closely at what is the business, how much is the business, and then look at your design and planning. You need to make sure that the plan you are designing is going to match your needs.”
Also, during a feasibility study owners are going to want to sub-contract out an architect that specializes in healthcare brand ASCs. They are going to be able to not only draw up some plans that would fit the project, but it also gets granular on the actual costs of what it is going to take.
David McLemore, Executive Vice President, Healthcare Practice Leader with Kirksey Architecture says that as far as ramping up the project to look at the viability of a site, when architects are approached by owners regarding feasibility for a project, generally, it falls into one of two categories.
“One, they want to retrofit an existing building and turn it into a licensed ASC, or two, they want to build a new building entirely. We try to establish that first because you need a set of criteria when trying to understand the adaptability of an existing structure versus a green field site,” McLemore says.
In either case, McLemore says states have established certain criteria relative to what are unsuitable sights.
“For instance, they won’t let you put an ASC in a building that is too close to high powered electrical transmission lines, or too close to buried high pressure gas transmission lines,” McLemore says.
McLemore says that the eagerness of clients to start the process of construction can be an issue for the success of a project if they jump in head first without a thought or proper consultation like in a feasibility sudy.
“We advise our clients to not get too far ahead in the process only to find out that the building or dirt that they are looking for, because of those broad brush requirements, is not suitable,” McLemore says.
Dailey says owners also really need to determine the location. Where is the site going to be? Is it going to be on a hospital campus etc.? It really needs a good location, a facility that has easy accessibility for the patients as well as being very accessible for the physicians. Particularly, if they are in clinic and seeing patients, or if they are performing procedures inside of the hospital, how far away is this ASC in relation to their every day operations?
“When you say a good location you need to look at convenience for the patient but also how efficient the location will be for the doctor on their day to day routine,” Dailey says.
Step five, which will be reflected in the proforma is that owners need to determine their sources and uses of funds.
“You need to have a conversation on your sources of funds. If it is a hospital venture, usually a hospital will own a majority share and then allow the physicians to buy the remainder of the equity. Or, it could just be physicians without a hospital on the equity side. You are always going to have an equity side, and then you are going to have a finance side. You might be financing the rest out through a lending institution. A lending institution can provide the financing for things like working capital. You are going to have to have working capital on hand, you are going to need money to purchase equipment,” Dailey says.
John Alan Lewis, member of the healthcare regulatory practice of law firm Mitchell, Williams, Selig, Gates and Woodyard says that one way to approach the funding process in the feasibility process is to look at syndication.
“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.
“You really have to determine where the money is coming from, how much it is going to be physician owned, if it is part hospital entity owned, and if you are going to finance out through a lending institution, how much,” Dailey stresses.
The uses of funds is actually in pre-planning in the feasibility study. A rough breakdown for uses is equipment could be X million; the land could be X thousand, construction could be another X thousand. Owners want to be as conservative as possible so that they don’t undercut yourself.
“Salaries, we build at about 100,000, supplies at about 150,000, you are going to need some legal and accounting services and that is another 50,000, we have miscellaneous in there for 100,000, then we like working capital at about 700,000 reserved. That even goes further when you examine if you are going to be able to get financing from a lending institution,” Dailey says.
“The proforma will tell the story. You will know if this is a feasible project, and if based on all of the information, if the ASC will be successful. A lot of firms like us will do a feasibility study, present it back to the client where they will have to either rethink the project or we follow through with development and management.”
If you would like to learn more about the concepts covered in this article, want to sell your business or discuss how Ambulatory Alliances, LLC might be able to help you out, contact Blayne Rush, (469)-385-7792, or Blayne@ambulatoryalliances.com.
If you have suggestions for future topics, email Blayne@ambulatoryalliances.com.