The Development Puzzle

The Development Puzzle
Putting the Pieces Into Place

By Kelly M. Pyrek

Industry experts agree that the development of ambulatory surgery centers resembles the working of a gigantic jigsaw puzzle. While separately, the positioning of numerous pieces can seem overwhelming, it usually just takes a little strategy to make them fall in place to create a comprehensive whole. The secret is to keep an eye on the completed picture while carefully evaluating the individual components of the puzzle to ensure success.

Robert J. Zasa, MSHHA, FACMPE, partner and co-founder of Woodrum Ambulatory Systems Development, LLC, says the future of outpatient healthcare development rests on what he calls the “Big MACCs,” the multiservice ambulatory care centers that emphasize ancillary services such as diagnostics and imaging, women’s health-related tests such as mammograms, bone densometry and ultrasound and sports medicine-related services such as metabolic testing and oxygen uptake.

Zasa points to a Woodrum project, a muscular- skeletal center currently underway in Houston, as an example of what’s in demand, development-wise. “We’re seeing not just big multi-specialty surgery centers, but a proliferation of limited-specialties centers focusing on specialties that are symbiotic such as plastic surgery, ENT and dermatology-- surgeries that are oriented toward aesthetics. Musculoskeletal centers bring together neurosurgeons, pain doctors, orthopedic surgeons, podiatrists and physiatrists, and many are expanding into rehab centers or sports medicine centers. And the gastrointestinal and eye centers also are adding services.”

“The type of development can depend on state regulations,” explains Amy Glover, vice president of surgery center development and operations for Indiana Surgery Center North, part of Indianapolis-based Community Health Network. “Indiana ASCs can only keep patients up to 24 hours, so one overnight stay is the max. Some states, like Ohio, are taking a very strong stand against boutique hospitals.

"The common thread is that surgeons want to benefit financially and have more control and decision-making power, and provide their patients with the best in comfort and expertise. ASCs are known for their efficiency, convenience and hassle-free method of operation that results in more productive use of the surgeon’s time.”

As the birthplace of outpatient surgery more than 30 years ago, it’s appropriate that the Phoenix, Ariz. market mirrors the nationwide explosion in ASCs.

“The demand for physician office/ambulatory surgery center space has been increasing here,” says Colleen McPherson, a medical office properties specialist in the Phoenix office of CB Richard Ellis, Inc. “Our latest research indicates more than 50 surgery centers are owned currently in the Phoenix metro area. National companies such as Surgis, Inc. and HealthSouth have invested in a number of these facilities in recent years and have then offered physician ownership up to 49 percent. There is even an orthopedic hospital being built in Chandler, Ariz., that will open later this year.”

McPherson attributes this explosive growth to the low cost to finance these endeavors, the reduced profit margins and therefore, an opportunity to earn more income rather than support hospitals’ bottom lines.

She adds that investors are looking for lease suites in medical buildings or standalone office condominiums with surrounding single-owner office available for sale for the physicians.

“I am working with a group of physicians that is interested in owning the center completely; however, most are joint ventures of physicians and management companies,” McPherson says.

She notes strong interest has been in the development of surgery centers providing services in orthopedics, plastic surgery, pain management, LASIK and OB/GYN.

Another aspect of outpatient facility development involves targeting what Zasa calls condition-specific services, such as muscular-skeletal, aesthetic or women’s health.

“The market has become very segmented,” Zasa remarks. “There are a lot of single-specialty centers emerging, one- or two-room outpatient centers that are operating inexpensively. Reimbursement rates and the site-of-service differential have driven some clinicians to do this.” Zasa adds that even with the proliferation of small centers, offering ancillary services still makes sense. “You have to have something other than professional fees to make a living these days.”

Zasa also points to the growth of surgical hospitals as an emerging trend in healthcare facility development, despite current proposed legislation to curb such facilities. Zasa says he sees robust activity among surgeons who have built ASCs and are converting them to surgical hospitals to adapt to the demands of the healthcare consumer and to take advantage of various economic opportunities.

“We are seeing this conversion of existing surgery centers in states that don’t require certificates of need (CON), and where they have licensing for specialty-hospital status,” Zasa says. “Many neurosurgeons, for example, are saying to themselves, ‘With my kind of patients, I’m the perfect 72-hour situation; why should I be giving that (revenue) to the hospital? This is my opportunity.’ So specialty hospitals have neurosurgeons who have often gone into business with orthopedic surgeons to create a muscular-skeletal hospital.”

“There is no sign of a slowdown, and perhaps even the opposite, especially in states that have dropped their CONs, such as Ohio and New York, says Glover.

“Even though Michigan has a CON, it has been overlooked and undeveloped and is an example of a state that is taking off (in surgery center development). Indiana has almost doubled its FASCs in the last three years.” Glover says rampant development is being triggered by the desires of physicians and the needs of patients. “The majority of ASCs have doctor ownership because they want control of their surgical schedules and involvement in issues that affect them. They also want financial profitability, especially as they see their insurance premiums increasing and their professional fees decreasing. Patients want choice, and they want a comfortable, non-institutional environment. Hospitals are getting in the action and realizing that they can lose 100 percent if their surgeons build an ASC without them. They are realizing that sharing the pie is better than losing their outpatient business.”

“The majority of interest seems to be groups of surgeons or hospitals and surgeons in a joint venture,” says William Carpenter, vice president of business development for Voluntary Enterprises Inc. (VEI), a subsidiary of Community Health Network, the largest provider of ambulatory surgery services in Indiana. “The ability to do even a single-specialty center requires at least four physicians just to obtain the necessary volume to make a go of it.”

Although many surgeons are craving the clinical and business freedom, Zasa agrees that a significant number of them are hooking up with hospitals in joint-venture deals to create new outpatient facilities.

“It’s a game of ‘capture the flag,’” Zasa emphasizes. “Some of the more aggressive administrators are embracing the idea as the least expensive new beds they can buy, while bonding the doctors to them forever because they are essentially building for the surgeons a specialty hospital, a wing in the existing hospital, or a surgery center.”

Zasa says joint-venture opportunities are encouraging hospitals to find new uses for older facilities to capitalize on the burgeoning outpatient marketplace. “Some hospitals are opening floors that had been closed previously and are converting and leasing them to new LLCs that are dedicated to a particular market segment of patients. We are seeing wings devoted to rehab, women’s health, aesthetics -- it’s a chance to offer those valuable ancillary services and create specialty hospitals within hospitals.”

Zasa points to a client hospital in Michigan that had 150 beds but was so old, it was losing business. Zasa says the hospital didn’t want to close and be forced to lay off its healthcare staff. “They wanted to fix the facility and turn it from a general facility to a specialty facility. That’s a concept we are seeing more frequently - an ER may be transformed into an urgent care center; instead of the radiology department there might be a freestanding imaging center; a large OR may be completely redone into an outpatient surgery center; and some of the patient rooms can be converted into doctors’ office space. Even the old kitchen can become a new cafeteria or coffee shop. Almost everything can be reconfigured to become more like outpatient facilities.”

Whatever the configuration of an outpatient facility, the focus is on financing. Zasa says the recent flurry of development activity has everything to do with attractive interest rates, but more importantly, it’s a reaction to a dour stock market.

“Because the stock market went down and their financial portfolios got cut in half, an increasing number of surgeons now realize that instead of retiring, they have to practice another 10 years,” he says. “And instead of investing in the stock market, we’re seeing them start surgery centers and put their money into ancillary services. There’s real growth in the number of new services being added to outpatient practices. Money is being reinvested into doctors’ practices and ancillary services are producing revenue streams that augment their income. They are betting on themselves vs. getting back into the stock market.”

Healthcare facility development seems to be a much safer bet than the market right now, experts agree. “The market continues to grow,” says Peggy Davidson, vice president of surgery center development and operations for Indiana Surgery Center South, also part of Indianapolis-based Community Health Network. “The interest could be a factor but I believe the key drivers are the growth of outpatient surgery and investment opportunity.”

“The market activity has been very active in the past several years,” agrees Carpenter. “I think it will continue to be active since the majority of surgery today is done on an outpatient basis. These centers are much more convenient and efficient than traditional hospital surgery departments. Although low interest rates make the development more attractive, that is not the main reason that physicians, hospitals and private surgery center firms are developing such centers. The major reasons for the development of such centers are the efficiency to patients and physicians plus the ability of physicians to have ownership in the facility and therefore some control over the operations.”

When it comes to financing the development of outpatient facilities, Zasa says financiers are “going wild.”

“The rates came down so much, they are half of what they were three years ago,” he comments. “A lot of financing firms have entered and re-entered the market very aggressively. Hospitals are typically getting non-recourse financing, guaranteed by the accounts receivable of a surgery center because everyone understands this kind of healthcare facility is a good business - especially if the developers are organized right and there’s a solid business plan. Basically what we have is a situation where financing has come down really low so it’s affordable to do a project and you don’t have to assign a lot of the debt because of the way it’s structured; however, the money is not easily there if the project is not planned properly. If there’s not a good feasibility study and business plan, lenders are easily saying no because there are a lot of other good deals out there. So not everybody is going to get financing; you can’t just throw it against the wall and expect it to stick. But if you prepare properly, the money’s there.”

Zasa doesn’t see a wide margin for rampant default on deals. “I think lenders are so sophisticated now and they have seen enough of these deals that they demand high levels of due diligence,” he says. “As a result, a lot of these bad deals are being weeded out before they get started. I know doctors who can’t get financed because they are conducting business in a very haphazard way. By just throwing numbers together, they are wasting everyone’s time. If the project planning and financing are not done properly, it’ll go down in flames.”

Zasa advises would-be developers to be select in their choice of lender. “Local banks will loan anyone money if you have the assets and that’s a problem. Sophisticated financing companies like DVI, CitiCapital, Marcap and GE Capital have seen a lot of numbers and they are not letting the bad deals get through. As asset lenders, banks only care about the fact they have your house as collateral. They can’t offer nonrecourse financing on equipment, which is three-quarters of project financing, unless you are building a brand new building and then it’s half.”

“Banks don’t know how to fix problems and resolve issues like other lenders can,” says Terry R. Gill, vice president of sales in the ambulatory surgery center segment of GE Capital. “It’s also important to have a certain comfort and trust level between financiers and developers; lenders want to mitigate risk and developers want a financing entity with experience in the healthcare development industry. They also want the concept of one-stop shopping to streamline the process.”

One of the biggest pieces of the puzzle is doing the appropriate financial homework and the kind of soul-searching that ensures everyone is on the same page.

“The beginning of a development project is what eats up the most time,” Zasa reports. “It’s the front end that requires a lot of hand-holding; developers must understand all the assumptions, they have to run the numbers, they have to do the business plan and investment summary outlining all the business points. It takes two to three months per deal, typically, from start to finish; Once that is done we can turn it over to the attorneys and say, ‘Here’s the business, you need to put the legal part around it.’ Once the attorneys draw up the documents and you sell the deal, it takes six to eight weeks. By this time you should have the critical mass necessary; if not, you’re not ready to move forward.”

Davidson says physicians are trying to anticipate potential roadblocks to their ASC development and are definitely creating business plans, but “in some instances not enough consideration has been given to securing volume. In addition, payor negotiations may be difficult and access to all payors has not been possible.”

Carpenter identifies other possible pitfalls. “I would say estimating the need for working capital for start-up costs and the need for enough committed physicians who will being the necessary number of cases are the biggest mistakes made. Another issue would be the ability to get into all of the managed-care plans at competitive payment rates. Volume and price are critical for success in the business.

"I think the majority of centers are doing a good job of both feasibility studies and the development of a sound business plan,” says Carpenter. “Since the most new centers are in partnership with either hospitals or for-profit firms, the financial planning is much better than in the early stages of surgery center development.”

SYMBION
Symbion develops and operates ambulatory surgery centers (ASCs) in partnership with physicians and hospitals throughout the country. Each partnership is custom-tailored to meet the needs of its partners. The company’s management team has a wealth of experience in clinical operations, business office management, human resources, managed care contracting and business development and design and construction. In-house resources include information systems (IS) experts who are available for onsite IS conversion, training and troubleshooting. A practice development department provides marketing research, physician recruitment and media-relations consultation. Project managers assist with space and equipment evaluation and de novo development management. Quality outcomes experts can assist centers with achieving accreditation from the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) and the Accreditation Association for Ambulatory Health Care (AAAHC). (615) 234- 5900 or www.symbion.com

MARASCO & ASSOCIATES
Marasco & Associates, Inc. is an architecture and consulting firm composed of professionals who are dedicated to providing quality technical and facility development assistance for outpatient medical facilities, private physician groups, hospitals and institutional clients. The firm was founded more than 25 years ago on the premise that commitment to clients, and successful fulfillment of that commitment, will be the criteria by which its performance will ultimately be judged.

The firm is nationally recognized for developing creative architectural solutions that are functionally efficient, enhance the user’s productivity and meet the client’s budgetary requirements. The firm’s associates believe that because there is no such thing as a standard physician, there is no such thing as a standard design. Every project is unique and reflects the best attributes of clients and staff. Marasco & Associates strives to remain current on the most recent developments in the medical arena, including technologies, reimbursement rates and legal/regulatory issues. (877) 728-6808 or www.marasco-associates.com .

NATIONAL SURGICAL HOSPITALS
National Surgical Hospitals (NSH) is the innovative healthcare partner that empowers physicians to thrive in a changing marketplace. NSH is a leader in partnering with local physicians to develop successful freestanding surgical hospitals. The company has the experience, resources and commitment to help its partners reach their goals. NSH is one of the most highly capitalized surgical hospital companies with access to the growth capital necessary to remain competitive by adding services and investing in the latest technology. National Surgical Hospitals partners with physicians to convert existing surgery centers or to develop surgical hospitals concentrating in orthopedic surgery, spine and back, pain management and more complex general surgery cases.

Once a partnership is formed, NSH negotiates with regulatory groups, managed care providers and governmental agencies to hammer out the contracts and agreements necessary to open a surgical hospital. NSH provides services in all aspects of surgical hospital operations including facility development, day-to-day management and financial reporting. (888) 805-8250 or www.nshinc.com

ROWLAND COMPANIES
Rowland Companies is a construction and development manager/general contractor serving healthcare customers throughout the West, Southwest and contiguous states since 1984. Rowland has built an international reputation as a quality builder handling construction and development projects for owners and investors from around the world.

Rowland is known in the industry for its excellence in execution of comprehensive service to clients, its technical expertise, its use of a team process, its contribution to creative leadership, its business integrity, its track record of timely performance and its respect for the individual.

As construction managers, Rowland provides the skill, judgment, business administration and management services needed to move a project from concept to completion. As development managers, Rowland offers services such as on-site development, infrastructure projects and other real estate development activities and its experience includes total project management, development cost estimation, development activities, schedules, feasibility analysis, site feasibility/site selection analysis, environmental services, entitlement acquisitions and financial analysis services. As general contractors, Rowland performs all contracted work as specified with the assistance of qualified subcontractors. (480) 477-8300 or www.rowlandcompanies.com

ASCs Inc. helps physicians identify potential corporate partners for new ambulatory surgery centers (ASCs) and obtain the highest possible price for existing ASCs.

The company provides ASC strategic partnering, sales, purchase, valuation and merger and acquisition services to physician-owners of ASCs to help the physician-owners obtain top value through the sale of all or a portion of their ASC to a multi-facility ASC corporation. ASCs Inc. helps physician-owners identify potential corporate partners and obtain the highest value for their ASC by creating a professional sales environment for the ASC and by soliciting and negotiating purchase proposals from leading ASC corporations.

ASCs Inc. assists clients by creating a strategic sales plan for marketing the new or existing ASC; by creating an ASC operating summary that documents financial performance, asset value, and growth opportunities; and the solicitation of partnership or purchase offers from carefully selected qualified prospective purchasers.

(760) 751-0250 or www.ascs-inc.com

SURGERY CONSULTANTS OF AMERICA, INC.

Surgery Consultants of America provides a comprehensive scope of services including accurate, center-specific feasibility analyses; turn-key ambulatory surgery center development, hospital joint-ventured or physician owned, offering equity and nonequity models; management of new or existing surgery centers; billing, coding and collection services for ASCs.

The firm’s principals and consultants have strong backgrounds in the ASC healthcare market with expertise in operations, development, finance, marketing, billing and management. SCA assists in maximizing the center’s profit potential by focusing on the financial and management aspects, as well as the regulatory and operational issues. (888) 453-1144 or www.surgecon.com