FEASIBILITY ANALYSIS: The Critical First Step

FEASIBILITY ANALYSIS: The Critical First Step

By Caryl A. Serbin, RN, BSN, LHRM and Jeffery S. Eckert, AIA

I want to build an ambulatory surgery center (ASC), but do I have enough cases? Can I get insurance contracts to reimburse my ASC? Will my expenses be higher than my income? These are all valid questions and the answers can be obtained in part by doing an in-depth feasibility analysis to determine the viability of your dream.

REASONS TO DO A FEASIBILITY ANALYSIS

• Identify the center's potential. Your feasibility analysis should be based on the potential investor's cases and show realistic reimbursement rates for your area

• Determine the viability of the project. The feasibility analysis should show potential income (or loss) based on your caseload, your reimbursement rates, the number of operating rooms and expected expenses

• Secure funding. Banks and lending institutions require an accurate, up-to-date feasibility analysis to determine eligibility for construction and line-of-credit loans for your ASC

• Private Placement Memorandum (PPM). One of the requirements in preparing a PPM for investors is a feasibility analysis showing the project's viability

• Determine cash requirements. The feasibility analysis will assist you in determining the size of your loans and the amount of cash investment required by each investor

• Avoid financial disaster. The single greatest mistake is not doing an accurate, in-depth feasibility analysis. An accurate feasibility analysis requires research, time and effort -- there is no shortcut.

WHO SHOULD DO YOUR FEASIBILITY ANALYSIS?

Choose an operational consultant with extensive ASC experience to perform the feasibility analysis with input from you. A good operational consultant develops a feasibility utilizing a CPA, architect and equipment planner with healthcare and ASC experience. Choose wisely, as this company can make or break your project. Ask them the following:

• Are references available?

• Do they perform a custom feasibility vs. a boiler-plate study?

• How many of the last 10 feasibility studies they performed resulted in feasible and non-feasible projects?

• Who is involved in the feasibility analysis?

• What is the time frame needed to complete the feasibility analysis?

WHAT'S INCLUDED IN A FEASIBILITY ANALYSIS?

A full and thorough feasibility analysis should provide but not be limited to the following information:

• Five-year financial projections

• Volumes by specialty

• Supply cost by specialty

• Gross and net revenues

• Equipment budget

• Clinical/administrative staffing

• Variable and fixed assets

• Capital requirements

• Schedule of debt services

• Pre-opening expenses

• Working capital needs

• Assumptions

YOUR RESPONSIBILITY IN OBTAINING AN ACCURATE FEASIBILITY ANALYSIS

Determine your core group of investors. Decide specialties you want included in your surgery center. Consider personalities when choosing investors; make sure they share your philosophies. Determine whether you want the hospital as a joint-venture partner. Choose the right number of investors, considering space and OR time. Too many and it will limit individual profits, too few will make it less likely to be feasible.

Things you must take into consideration when deciding to build a surgery center include:

1. The general population in your area seeking/needing service -- your patients and potential patients

2. Industrial/company contracts -- what your practice currently has and whether these contracts would extend to the surgery center

3. Competition -- are there other hospitals or surgery centers in the area where you want to build your ASC? How will this affect your volume? Can you access all contracts or are some exclusive with your competitors? Will you have to reduce facility fees to be competitive?

4. Potential for growth -- will your partners/fellow surgeons use the surgery center even if they are not investors? Will having a surgery center increase your referrals?

5. What specialties you want to include in your surgery center

6. What percentage of inpatient cases you currently perform is eligible for outpatient conversion

7. Your area's case mix -- do you have a primarily geriatric population, i.e., retirement areas (Medicare reimbursement rates)? If your practice is located in an industrial urban area, do you have an unusually large managed-care saturation (HMO, PPO reimbursement rates)? If your practice is located in a rural area, are there sufficient potential patients and is the managed-care saturation low (higher reimbursement rates)?

A feasibility study is only as good as its components. The investors and potential users of the surgery center must make a concentrated effort in obtaining accurate caseload information. Assign a liaison from your office to work with the company preparing the feasibility analysis. All involved physicians will need to have their office provide the number of cases they performed in the past year by CPT code, distinguishing between primary and secondary codes. The following information must be obtained from each physician's office:

1. Number of cases (patients) done on an outpatient basis or that could have been done on an outpatient basis during the last calendar year

2. Primary CPT procedure code for those cases

3. Secondary/tertiary CPT procedure codes for those cases

4. Case mix -- what percentage of your cases are Medicare, Medicaid, workers compensation, HMO, PPO, indemnity, self-pay, etc.

5. Fee schedule from current managed-care contracts (reimbursement rates)

6. Name, telephone number, contact person for managed-care companies

Remember to provide accurate information, not wishful thinking.

In addition to the number of cases, it is important to know the type of procedures that you plan to perform in your surgery center. The American Institute of Architects Academy Architecture for Health has developed new guidelines for the design and construction of ambulatory surgery centers. These new guidelines allow the size of the operating room (OR) to be determined by the types of procedures being performed in that room. This also carries over to the ancillary spaces, e.g., the number of pre- and post-op rooms per OR.

Be careful during the evaluation phase. It is very easy to become mesmerized by dollars and make assumptions that will not allow your building to expand with the number or types of cases. The construction of your facility, either freestanding or improved tenant space, will probably be the highest single cost you incur. It is important to have a clear understanding of the type and number of cases that are being proposed for your surgery center. This information will have a direct impact on the size of your facility, which will impact the size of the building and number of parking spaces, which will ultimately have a direct impact on the size of the property and the bottom-line cost. Factors affecting facility size include:

1. Number of ORs, determined by caseload, single specialty vs. multi-specialty, specialties included and number of pre- and post-op rooms required

2. Ownership: single group of physicians, mixed group of physicians, hospital joint-venture or chain.

3. Location: attached/unattached to medical office building or in same building with most utilizers

4. Architecture: size and layout of space, arrangement of work area, technology, potential for growth and additional services offered, such as MRI, lab, etc.

5. Equipment needs: different specialties require diversity of equipment. Have your physician investors make a "wish list" for the types and amounts of equipment for each specialty to be included in your ASC. Your caseload and required equipment will have a direct impact on the number and size of your OR.

6. Staffing needs: this will be dependent on caseload, specialties, and physician preferences. To find out the hourly rate for your area, talk to nurses in your local hospital and examine national averages.

STEPS IN CREATING YOUR FEASIBILITY ANALYSIS

1. CASELOAD. After receiving all requested information from physician's offices, the data will be sorted to determine:

• Primary CPTs (cases)

• Secondary/tertiary CPTs (lesser reimbursement rate)

• Eligibility for freestanding ASC facility reimbursement

• Payor mix

2. REIMBURSEMENT RATES. Your top third-party payors will be contacted to determine their willingness to contract with the new facility. Determination will be made on your managed-care climate regarding exclusivity of contracts, need for accreditation to obtain contracts, panel open or closed. Reimbursement specific to your area will be evaluated by obtaining a sampling of proposed facility reimbursement rates from top payors. Many payors base their reimbursement rates on a percentage above (or below in some areas) Medicare rates. Make sure the company preparing your feasibility analysis does not utilize a national managed-care rate for your estimates. Frequently, reimbursement rates vary widely even in markets that are geographically close.

3. ESTIMATING EXPENSES. These include:

• Staffing expense. To estimate staffing costs, it's necessary to estimate the overall man-hours needed, both clinical and administrative. Evaluate number of full time, part time, PRN employees needed for caseload, specialty requirements and administrative duties. Determine competitive compensation for your area, as well as a proposed benefit package.

• Supply expense. This is dependent on specialties and volume. The need for implants and physician requirements for special equipment will be determined. Having copies of the surgeon's preference cards can be helpful in determining these costs.

• Other expenses to be estimated include: rent/lease, contracted services, repairs/maintenance, marketing, management fee, insurance, linen, laundry, uniforms, utilities and depreciation/amortization.

4. WORKING CAPITAL. Needs will be assessed including the following:

• Property costs: purchase or lease

• Construction costs: probably the largest fixed cost will be debt service from the loans that you took out for the new building (or build-out), equipment and followed by your working capital. As there are no such things as "typical" cost, there are some rules-of-thumb that we utilize as barometers to estimate construction costs for planning purposes. First, a full-service ASC, consisting of two Type "C" ORs (400 square feet each) will require a facility of approximately 6,000 to 8,000 gross square feet. A facility with three Type "C" ORs will be approximately 8,000 to 11,000 gross square feet. However, we have planned, developed, and worked in facilities that are easily 10 percent to 20 percent larger and 10 percent smaller than these figures. Prior to developing the construction cost for a facility of this type, you must first understand that the construction cost is a direct correlation between the size of the facility and its quality -- quantity x quality = cost. You do not want to construct a facility that is either too expensive or too inexpensive. A good cost estimate would be in the range of $150 to $180 per square foot for new construction and $70 to $100 per square foot for tenant improvement. To estimate your bricks and mortar, work with an architectural firm who has ambulatory surgery center experience. The architect should be able to provide you with a better understanding of the size of the facility and provide you with good construction cost estimates for the build-outs, adjusting them for your location and/or building improvement.

• Development costs: cost will vary greatly depending on the services offered by the ASC operational development company. Work with an experienced ASC development company, as they will be aware of cost savings in all areas.

• Equipment costs: these costs will be estimated on caseload and specialty requirements. In preparing a feasibility analysis, an equipment planner should be consulted to assist in determining equipment costs, typically 30 to 40 percent of the project cost. This results in a rough estimate of what equipment will be needed, as early in the project physicians will not have fully identified all equipment preferences.

• Legal expenses: these fees can vary widely depending on your state's legal and regulatory environment. If your state requires a certificate of need (CON), attorney's fees may range from $30,000 to $100,000.

5. DEBT REQUIREMENTS. You can typically finance 75 percent to 80 percent of your construction and equipment costs. Your feasibility analysis will include information about estimated loan amounts and interest rates. It should also include an estimate of cash contributions or line-of-credit loans to cover:

• 20 percent to 25 percent of construction/equipment costs

• Medical supply inventory

• Operational consultant fees

• Equipment planner fees

• Interior design fees

• Legal syndication

• Pre-opening payroll and benefits

• Malpractice and liability insurance

• Office supplies/printing

• Licenses and fees

• Three to six months of expenses post-opening

• Miscellaneous expenses

6. CASH-FLOW ANALYSIS. This is an estimate of how much money you will have in your bank account at any given time. Remember, reimbursement by some third-party payors requires accreditation before they will contract. Also, at start up, under the best of circumstances, collections will take at least 75 days. More typically, they take 120 days. Most experts recommend that you have at least three to six months' worth of operating capital on hand when you open.

At the end of the feasibility analysis, you will have a reasonably accurate pro-forma income statement, complete with case flow. Personal expectations of a center's profit potential will vary, however, at a minimum, your facility should earn enough to pay off start-up costs within five years.

The single greatest mistake is not doing a full feasibility analysis. All operational development consultants have horror stories about facilities that are over-built, under-built, and never-should-have-been built. When you are planning to invest in a project of this magnitude, a shortcut in the feasibility analysis phase can lead you down the road to disaster.

Caryl A. Serbin, RN, BSN, LHRM, is president/founder of Surgery Consultants of America, Inc. and Surgery Center Billing, LLC. Jeffery S. Eckert, AIA is a senior principal and a founding partner of Eckert Wordell, an architecture, engineering and interior design firm.