Today's SurgiCenter - Financing a Surgical Center?

Financing a Surgical Center? Call in the Specialists

By Dan Koster and Anthony Mai

In just a few decades, stand-alone ambulatory surgery centers (ASCs) have evolved from a seemingly radical concept to become an essential component of the national healthcare-delivery system. Today, there are more than 3,500 ASCs in the United States. More than 7 million patients received high-quality, cost-effective treatment at an ASC last year alone.

The number of ASCs is expected to continue to grow at a steady pace in the years ahead. One reason is that the U.S. population continues to grow — and grow older. One of the 76 million members of the baby boom generation turns 50 every 7.5 seconds; that means the demand for healthcare services of all types will continue to expand; the number of surgeries performed each year is expected to grow 25 percent by 2006.

So it’s no wonder that some industry observers project that several hundred new ASCs will be built nationwide over the next several years. In addition, many more existing ASCs will be expanded to meet the growing demand for outpatient surgery facilities.

While there are several ownership models for ASCs, most centers are owned and operated either by a hospital, on or near its main campus, or by an independent limited liability company (LLC) established for the express purpose of operating the center. These LLCs are usually owned by some combination of local physicians, group practices and hospitals. Doctors and hospitals involved in the LLC are often primary — sometimes exclusive — users of the ASC.

Regardless of how the ownership model is structured, one of the keys to the success of an ASC development project is the involvement of an experienced developer with a proven track record. If you are investigating the possibility of building a new surgery center or adding on to an existing facility, you should look for a developer with a national reputation who has successfully completed several ASC projects of similar size and scope to the one being considered.

The developer will put together an effective team of supporting players essential to any successful project, including financing specialists. The earlier this team is put in place, the better job it can do of avoiding potential problems and making sure your project runs smoothly. In addition to playing the lead role in bringing key players in the project together, the developer often takes an ownership stake in the surgery center.

The growth in ASCs nationwide means many millions of dollars of capital investment by hospitals, individual doctors, group practices, developers and investor groups. After all, the total investment in an ASC, including working capital and equipment, can range from $2 million to $12 million, depending on the number of operating rooms.

When it comes to financing a new ASC or an expansion project, it pays to call in a specialist: a team of experienced financial professionals that understand the dynamics of the healthcare industry and the unique needs of surgery centers.

ASC partnerships and developers often find that banks and other traditional financial institutions don’t understand the characteristics of the surgery center business very well. They seldom have the industry-specific knowledge, expertise and flexibility to put together a custom solution for their ASC customers. Financial services companies, on the other hand, can provide a full range of products and services that work together to meet the specific requirements of surgery centers. They offer financial products and services including: real estate loans, construction loans, capital improvement loans, equipment loans and leases, refinancing packages, working-capital loans, and revolving lines of credit.

For an ASC project, owners and developers usually find it much easier to work with one financial services partner that can meet all their needs in an integrated package, rather than obtaining financing from multiple lenders. Advantages include a streamlined approval process, less paperwork, greatly reduced fees and administrative expenses, and far greater convenience.

To secure the financing for the new ASC, a knowledgeable developer will work with the other members of the LLC and support team to put together a comprehensive business plan. In our experience, potential financial service providers look for a business plan that is specific, realistic and grounded in fact. The best surgery center business plans we have seen include these core elements:

• Adequate local market research that does an effective job of establishing the community need for the new ASC, including historical ambulatory surgical procedure volumes for owner/physicians.
• Projections that include usage estimates — the more specific, accurate and up-to-date the estimates are, the better. These should include expected average reimbursement rates by specialty and number of cases projected to be handled per operating room per day.
• Unless the ASC will be used exclusively by its owners, commitments from local hospitals, individual physicians and groups to make referrals to the facility or use it themselves.
• A thorough description of the business model, including the size of the proposed facility, the types of treatment it will provide, the kinds of patients who will be treated there, how the center will be promoted in the community, etc.
• Description of the LLC, who will own shares or units in it, and how it will operate, and the like.
• Description of project funding, both initial funding by the partners and how additional capital will be raised, if necessary. An initial investment from the project owners in the range of 15 percent of the project cost is generally expected.
• Standard pro forma balance sheets, cash flow statements and other data that realistically project the surgery center’s financial outlook.

With a business plan in hand, the financer can partner with the developer and ownership group to develop a comprehensive financial solution that makes sense for the surgery center you are proposing. For example, the level of opening cash needed, as determined by the projected cash needs and the owners’ initial investment, may indicate a greater-than-anticipated equity investment from the ownership group. A financial partner with substantial experience in similar projects and the ability to offer a comprehensive suite of products may be able to carefully review the project and offer alternatives to equity injections.

Recently, CIT Healthcare Financing approved a multi-million-dollar financing package for a new surgery center to meet the needs of a severely underserved community in the Los Angeles area. The ASC will be owned by a three-way partnership that includes the developer, a major local hospital and a 29-member physician group. Management anticipates that more than 4,000 procedures will be performed at the center each year — most of them by the doctors in the group, who represent a wide variety of surgical specialties. For the hospital involved, the ASC will be a valuable resource and an important profit center.

On the other side of the spectrum, we also provided financing for a much smaller surgery center in Texas that opened last summer. The center is designed to meet the specific needs of a neurology group practice, which expects to be the only user of the facility. The group’s needs couldn’t be effectively met at local hospitals, which were feeling the pinch of overcrowding, and the doctors in the practice believe that they can perform enough procedures on their own to keep the ASC busy.

With the surgery center industry growing at an accelerated pace for the foreseeable future, now is a great time to look into building new surgery centers or expanding existing facilities to better serve the community’s current and anticipated needs. To reduce your risk and improve your chances of success, just remember to do your homework, build community support for your project, and call on the specialists — including the financial services experts — you need to get the job done.