Ambulatory Surgery Center Construction:
Financial Success Begins Here

By Fred W. Ortmann III, MHA

Not far from where I live in Columbia, S.C., is one of the largest U.S. Army basic training bases, Fort Jackson. When one enters the fort, the soldier at the gate greets you by saying, “Victory starts here!”

When considering the development of your ambulatory surgery center (ASC), victory, in terms of the financial success of the center, starts with the construction program. Generally, your construction costs will be the largest capital cost and represent the largest portion of the financing for the project. If the facility is financed by a loan which must be repaid over a period of years, the amortization of the loan and the interest will also represent a large part of your recurring costs. It is therefore critical that you assess the impact your construction program will have on both your short and long-term financial objectives, and that you don’t construct a facility so large that it will sap the profitability of the center. It is also important that you understand the complexity of building such a center. In many respects, you may be constructing a small hospital minus the patient rooms.

Before You Get Started

Before you get started, visit other ASCs in your area to find out what they liked about their facilities and what they would do if they were to re-build. Also, visit your state department of health or comparable office that has jurisdiction over ASCs. If the state has a regulation that governs ASCs, and all states do not have such regulations, get a copy of the regulation to make sure you know the entire state process for licensure and Medicare certification. Find out if the state reviews construction plans, and if they do, you will want to know how long it takes them to review your plans.

The Size of the Center ... The Single Greatest Mistake

The pro-forma is without exception the most important document in the development of an ASC. It should estimate the projected caseload and revenue, plus all projected expenses and capital costs, and then forecast the estimated profit or loss for the first four years of operations.

When the pro-forma is completed, it is often useful to develop a number of different planning scenarios and re-run the pro-forma for each scenario. After you estimate your square footage, re-run the pro-forma and subtract 500 or 1,000 feet from the building program and re-run the numbers. The cost to construct the shell and interior of an ASC can be between $165 per square foot to as much as $300 per square foot. And the cost to operate the ASC can be as much as $30 to $40 per square foot per year. The reduction of 1,000 square feet from your construction estimate could save you as much as $165,000 to $300,000 in construction costs, and $30,000 or more in annual operating costs. If the center is properly designed, the reduction in square footage may not cause any change in the function of the building. Each time you rerun your pro-forma, check your profitability and see what impact the size reduction has had. You likely will find that you can construct a much smaller building, improve the profitability of the center, and not adversely impact the capacity or capability. The single greatest mistake that people make in developing ASCs is building them too large. Once the ASC is constructed, there is no going back.

New vs. Existing Facilities

When you consider the location of your new ASC, you may well want to develop a completely new ASC on vacant property. By doing this, the architect has complete design flexibility and the square footage required can be properly calculated and designed. There are nonetheless some disadvantages to a completely new construction site. Before you settle on a site, ensure that your civil engineer has carefully inspected and tested the site for hazardous materials, such as old petroleum tanks, asbestos etc., as some sites may have been previously used as disposal sites. Also, with new construction you will have to pay for site development work, such as the installation of water and sewer lines, and many cities charge “impact fees” for such work, which can cost tens of thousands of dollars.

If you select a previously constructed building, the architect will have existing structures which may somewhat limit the facility design, but, conversely, all site development work will have been done and paid for, and construction time can possibly be substantially reduced. Further, some developers will offer new tenants an allowance to improve the space being leased. This is called a “tenantimprovement” or “up-fitting allowance,” and in some situations can provide you as much as $20 to $50 per square foot, which will dramatically reduce your building costs.

Construction Standards

Those who have not previously developed ASCs often believe that ASC construction is the same as medical office building construction, when, in fact, the two types of structures are different. The mechanical, electrical, and plumbing requirements for the ASC are much like the requirements in a hospital, and as a result are quite complex, requiring special knowledge to design. Because of the obvious life-safety concerns, a single city inspection is now replaced by multiple inspections at the city, state, and federal levels. The purpose of each inspection is to ensure that the regulations and codes directed by the various agencies have been met and that the environment is safe for patient care.

Federal Level Regulation

On the federal level, some limited construction information can be found in the Code of Federal Regulations-Title 42, Volume 2, Chapter IV, Part 416-Ambulatory Surgical Services. However, the majority of the federal construction requirements of concern in the construction of your ASC are found in the National Fire Protection Association “Life Safety Code of 2000” which is mandated by Medicare in Title 42 (referenced above). Some consider the “Guidelines for Design and Construction of Hospital and Health Care Facilities,” published by the American Institute of Architects, as the bible for construction of ASCs. The publication is not a regulation, however, and finds its value more as a reference except in those states which have adopted the entire guideline as a state regulation, giving this publication regulatory status in that particular state.

State Level Regulation

When you research the construction standards for ASCs, you will find, unfortunately, that there is little uniformity among the states. Some states have no regulations regarding ASCs, while other states have quite lengthy regulations which include many facility standards. For example, Florida has adopted many national construction codes and includes a listing of those codes in their ambulatory surgery state regulation.

On occasion, the standards may require items or space that you will never need, such as an OR light in an endoscopy room. If this happens to you, work with your architect and apply to the state or the Centers for Medicare and Medicaid Services (CMS) for a waiver of the requirement. It never hurts to ask, and a positive answer can save you thousands of dollars in some situations.

Local Regulation

As a general rule, cities or local political entities will not have rules or standards relating specifically to the development of ASCs; however, this does not mean that you can ignore local regulations involved with city zoning and planning requirements as well as all other city construction standards. Often the city or local entity will require that your construction documents be approved by the city construction office before you can receive a construction license. In some areas with significant development activity, this review can take months and should be closely monitored by the architect and general contractor to ensure that the project remains on schedule.

The Construction Team: You Can’t Afford Rookies

Often we tend to think of the construction team as simply the general contractor, when in fact the team has many members. The construction team consists of the architect, the engineer, and on occasion structural and civil engineers. In addition, the interior designer, the ASC consultant, the equipment planner, the information technology consultant, the infection control consultant and the communications consultant are key members of the team who should be selected before the design of the project begins. The cost for each of these team members should be reviewed as a part of the overall construction costs. An ASC is a complex facility, which requires special knowledge and experience on the part of the entire design team. No one can afford rookies on the team and the most experienced team available should be selected. To see what a delay of just one day will cost you, look at your pro-forma. It will clearly demonstrate that it might be better to go with experience than the low-cost beginner or novice.

Selecting a General Contractor

When selecting a contractor, always look for one who has done medical projects, preferably ASCs. In the last 12 years, the most common construction problems I have encountered dealt with the heating and air conditioning system, and the medical gas system. Check not only the references of your general contractor, but the references of the proposed sub-contractors as well to ensure they have had experience meeting healthcare requirements. The construction process can be an adversarial process, and at times confrontational, so be careful when selecting a friend as your contractor. It can be a good way to lose a friend.

If there is a very important person (VIP) on your project, it is the construction superintendent. This person truly is a VIP, as he or she runs and manages all of the day-to-day aspects of the project. Interview the person who will be the superintendent on the project, and check his/her references for finishing projects on time, with a high degree of quality, at the projected cost, and their ability to get along with the owner and sub-contractors.

The Construction Contract

Once your construction contract has been either bid or negotiated, the general contractor will ask you to sign a construction contract. More often than not, this will be one of the standard contracts published by the American Institute of Architects (AIA). There is no law anywhere that says you must sign this form as submitted to you. Read the form carefully and don’t hesitate to change it if necessary. Look for changes to the standard form which were made by your contractor, and don’t hesitate to have your attorney review the contract. The same holds true for the architectural contract. Look at the mark-up the contractor might have on change orders, and then carefully look at the contract exclusions, as these are items you will have to pay for in addition to the contract price. You can and should negotiate all of these items to ensure you have a contract that protects you as well as the contractor.

You should always specify a time of completion for the project, and in some states you can even include special penalty clauses to charge the contractor, in the event the work is not finished on time. Before you include such a provision, contact your attorney, as some states require a balanced provision, rewarding the contractor for early completion or penalizing them for late completion. Also, understand that the contractor is usually going to increase the price of the contract to insure himself against such a contingency and penalty.

If this is a contractor you don’t know, you may want the contractor to get a performance bond for the contract. The bond will insure you in the event of adverse situations such as poor performance or bankruptcy. This will cost you, as the contractor will ask you to pay for the bond, but in the case of an adverse situation, it could save you and your organization a substantial amount of money.

The Process

Once the construction contract has been signed, a representative of the ASC gives the contractor a notice to proceed, and the contractor will obtain building permits from the local building authority. The contractor may require a short staging period to get his equipment and staff onsite, but should begin work shortly after the building permit is obtained. Thereafter, monthly progress meetings should be held with the contractor, architect and ASC representative (consultant) to resolve outstanding issues, ensure that the facility is being constructed based on the architect’s plans, and ensure that the timeline for construction is being met. The timeline is a vital document, and should show all key stages of construction in sequence, and their planned completion dates. You can then use the document to monitor the status of your project.

Change Orders

If the contractor finds a problem with the architectural drawings or if a change is requested by the ASC, then a change order may be requested by the general contractor. This will often require additional funding and the general contractor should not begin to work on the change order until the architect has validated the need for the change order, and the ASC representative has approved the work. Change orders can increase contract costs significantly and must be closely monitored. It is quite common to experience change orders that increase building costs as much as 10 to 20 percent of the total construction cost.

Inspections

During the construction process, the construction will be monitored on a daily basis by the superintendent, and the city or county having jurisdiction will make numerous inspections to ensure all city codes are being met. In addition, some states will make periodic inspections, as well as full inspections at the completion of the project. At the conclusion of the project the city will issue a certificate of occupancy (CO) to indicate the facility is acceptable for occupancy. This is the formal local approval by the city and is required before the state inspectors will begin their final inspections. Prior to asking for your state final inspections, you should ensure that you have all of the following certifications and that you have a copy of each of them for the various surveyors to review. Among the required certifications are:

• Boiler inspection if you have boilers on your sterilizers
• Fire and smoke alarms
• Emergency power system
• Nurse call system
• Medical gas system
• Fire sprinkler system
• Flame-spread information on all combustible building material, fixtures, and furnishings

Once the CO has been received and you have all the required certifications, a number of state inspectors may perform final inspections of your facility. Depending on the state, the following inspectors may be sent to evaluate the ASC: fire marshal, sanitarian, boiler inspector, construction department, pharmacy board, and licensure office. After the state inspections are successfully completed, the ASC is licensed, you will have to see anywhere from one to 10 patients, and then you will be inspected by CMS, although the state will likely complete the inspection under a contract with CMS.

For the inspection process to flow smoothly and without untoward delays, your ASC representative should identify all agencies that will inspect your facility, find out the names of the persons who schedule the inspections, the order of the inspections, and what the inspection requirements will be. In this way, the full opening of the ASC can be expedited.

Construction of an ASC is a complex and heavily regulated process, which requires knowledgeable and experienced participants at every step in the process. The facility, if not properly planned, can cost millions of dollars more than necessary, and can thwart the financial success of an ASC before the doors are ever opened. The financial success of the center therefore begins with the construction program, and those involved in such ventures should develop a knowledgeable and experienced development/construction team that can guide them through this process.

Fred Ortmann is an ASC consultant, and president of Ortmann Healthcare Consultants, LLC based in Columbia, S.C. He is a former hospital administrator and an executive with a major national ASC corporation.

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