Financing: The Building Blocks of Your ASC

Until today’s credit crisis is fully resolved and the economy returns to stable terrain, determining which industries are suitable for investment will remain a daunting challenge for most banks and financial services companies. Yet in one industry — healthcare — the benefit-to-risk ratio is fairly stable, as the need is measurable, the elements involved are definable and the outcome is predictable.

Meeting a measurable need is the key. Over the past 20 years, there has been a shift of hospital services from an inpatient to an outpatient setting. Because an ambulatory surgery center (ASC) is a healthcare facility providing services and procedures that do not require a hospital stay, but are more complex than those generally provided in a doctor’s office, it fills a significant niche in today’s healthcare environment. We’ve all heard reference to such current hospital practices as 23-hour admission and drive-through surgery, which underscores the role of the ACS in meeting a broad range of patient needs. In fact, it is estimated that more than 20 million surgeries a year are performed in more than 5,000 ASCs in all 50 states. Patient satisfaction is the result of convenient scheduling, a high level of professionalism, and safety and costs that are generally less than those same procedures performed on hospital patients.

While there is no formula that guarantees success in today’s economic environment, the old axiom that proper prior planning prevents poor performance still carries weight. In the ASC marketplace, this means considering key factors such as the focus of the facility. Will it be multi-specialty or single-specialty? It is also critical to know how many other centers exist in your locale and what needs (general or specific) do they meet. A little research goes a long way.

Where Do You Start?

Selecting the appropriate partners to serve local communities is the logical starting point. You might consider an experienced ASC developer and/or a hospital with physician joint venture experience. These are the groups that invest in market analysis and physician-oriented research resulting in a “packaged” approach to service delivery. Basic financial projections can begin with a simple equation: ASC revenue = number of procedures performed x anticipated reimbursement. Case volume and reimbursement rate data are the key drivers of a financial pro-forma.

Physicians who perform surgeries in the center often will own a part of the facility. Physician ownership in the 10 to 49 percent range is typical, but percentages do vary. Occasionally, an ASC is entirely physician-owned, but more often a group of physicians will partner with a management company, hospital or healthcare company.

Physician partners should have significant case volume. But should they direct their practice to a single- or multi-specialty center? Some pros and cons to consider:

• Single-specialty centers can be efficiently built and staffed
• There are fewer concerns about profit and revenue-sharing with other specialties, however, changes in reimbursement can have a negative impact on revenue/financial health
• Multi-specialty centers help reduce reimbursement reduction risk through diversification of sources and physician mix
• Greater staff and facility diversification, based on volume
• Lower operating margins

According to the ASC Association, 42 percent of ASCs focus on a single specialty while 58 percent provide services in multiple specialties. It is also of interest to look at the specialties served by ASCs. Based on the percentage of cases, ophthalmology accounts for the greatest number closely followed by gastroenterology, pain management, neurology, orthopedics, urology, dermatology, ENT and general (minor) surgery.

Financing the ASC market requires a lender with experience and an understanding of the healthcare industry. The needs are complex, demanding a range of programs which may include equipment loans and leases; real estate and construction loans; leasehold improvement loans; refinance loans; working capital loans; and revolving lines of credit.

What’s Next?

A detailed business plan is a “must have” for prospective lenders. And an essential first step, after identifying physician partners, is determining financial feasibility.

Physician input must include an income statement in addition to data regarding projected case volume, case mix, scheduling preferences and expected reimbursement rates. Physician involvement helps inform potential partners about expectations, risks and profits, as well as each physician’s commitment to establishing the ASC. Case volume and rate data provide the foundation upon which the ASC is built.

Other sources of financing are an integral part of the process. For example, a hospital partner may offer the ability to jointly negotiate reimbursement rates, or include the center on the hospital’s own payor agreements. The limitations to this may be legal restrictions to which the hospital may have to conform. Hiring a third-party consultant with experience in the ASC arena may prove beneficial for advice on planning and negotiating reimbursement contracts.

Costs and expense management require careful scrutiny. There are some general costs that will help estimate the approximate investment to establish and/or build a facility. Exclusive of construction considerations, if they apply, operating expenses can be projected. According to Becker’s ASC Review, “fixed costs...generally require $3 to $5 million in revenue to become significantly profitable and still cover the necessary expenses.” Figure into the equation the three biggest costs: about 20 to 30 percent of revenue for staffing, 20 percent of revenue for supplies, and about 10 percent of revenue to cover facility expenses.

Once the composition of the ASC has been determined, monthly financial projections for the first two years can, and should, be detailed. This will form the foundation for soliciting essential financing. And proposals, from both banks and finance companies, must be carefully compared. Rates and terms will undoubtedly differ, and agreement from all participants at this crucial juncture will help pave the way for success.

Negotiation is the Key

Shopping around for lenders, while exploring all options, is vital. It is essential to work with a lender that understands the ASC business and offers well-structured financing terms. While adequate capitalization has always been important to both lenders and owners, lenders are now requiring increased equity investment by physicians and other partners in order to reduce project risk. Despite rate cuts by the Federal Reserve, higher interest rates can be anticipated.

However, an effective beginning is a loan structured to reflect the start up of the business, recognizing that the ASC won’t generate income in the first months of operation. Funds are needed to pay for expenses incurred from the beginning of the project until revenue is received. And full operation of the ASC must wait until it is state licensed, Medicare certified and, in some situations, accredited. Therefore, an understanding of the working capital requirements must be reflected, and included in, the initial project budget.

Fixed rate term loans, with a three- to seven-year maturity, are still typical in the ASC market. But loan guarantees vary by type of lender, and may affect both the interest and maximum loan amount. Multiple options should be considered. For example, pro-rata guarantees divide the total guarantee amount up between the individual owners; and joint and several guarantees are enforceable against any one or all of the owners for the entire loan amount. Pro-rata guarantees are more common than joint and several guarantees. Pre-payment penalties should also be investigated. While it’s not unusual for some penalty to exist, the facility will want a level of flexibility — the ability to pay off or refinance a loan at its convenience — to take advantage of changing market rates as well as greater than anticipated profitability that could lead to early loan payoff.

The End Justifies the Means

After the myriad of considerations have been examined and dissected, there seems to be little question about the valuable role of the ASC in today’s healthcare industry: to provide timely, convenient and comfortable surgical services to patients in their community, while avoiding the more impersonal atmosphere of hospitals.

Standards of performance are exceptional. ASCs are some of the most highly regulated healthcare providers in the country. Medicare has certified 85 percent of the ASCs, and 43 states require ASCs to be licensed. Surveys are conducted regularly to verify compliance.

In addition to state and federal inspections, many centers choose to go through a voluntary accreditation process conducted by their peers to demonstrate their commitment to the highest standards of quality care.

Therefore, in spite of the challenge of financing an ASC today, many patients and healthcare providers are likely to agree that the investment is not only worthwhile, but also welcome.

Michael Wendling is senior vice president at CIT Healthcare. He can be reached at Michael.Wendling@cit.com.