Physicians Capital is a Nashville-based lending organization for ambulatory surgery centers, offering loans to physicians seeking buy-in financing. Unlike banks, which typically collateralize physician assets before granting loans, Physicians Capital analyzes the ASC cash flow to determine whether the distributions are sufficient to repay the loan and then, if the loan is accepted, Physicians Capital is repaid from those ownership distribution payments. After the note is repaid, the physician becomes a full owner in the surgery center.
Shannon LeRoy, CEO and managing director, and Douglas Lewis, managing director, of Physicians Capital discuss the company's model and how industry trends are influencing the types of transactions they are completing.
Q: Why is there a need for the services your company provides?
Douglas Lewis: We were told about a need in the ASC industry about physicians who wanted to buy into a surgery center but they didn't have the cash to buy in. Surgery centers are a wonderful opportunity for physicians to build equity but they just didn't have the financial wherewithal to invest. We came up with the idea that this was a niche healthcare financing type of situation, started investigating it and found out there was a definite need for this type of financing.
There is a need to focus on how to help the [physician] figure out how he can get the funds necessary to buy in and that's what nobody talks about. You can have the greatest center in the world — top quality care and all of the bells and whistles — and yet it's easy to forget that these guys need help, direction and exposure to obtain money other than going to the local bank. They can go to the local bank but they're so young and they haven't built up any equity yet so they don't really have any personal assets to collateralize a loan. They begin to dodge the ASC's questions about when they are going to buy in and do they want to buy in, and eventually people think they're not interested.
We collateralize the loan with the stock they receive from the center. That opens up a whole new area of financing for them. Everybody is concerned about Stark issues and fraud issues, but those do not affect the transaction we have with the doctors because we are independent of the ASC.
Q: Who are the typical physicians you serve?
Shannon LeRoy: Our general physician client is 2-3 years into practice, making good income but has a lot of debt. They want to buy in to the ASC for equity purposes. They have a couple hundred thousand dollars in medical school debts, maybe have a couple of children, a new house, couple of cars and they just don't have any discretionary income to invest in [a surgery center] but they know they should. The last thing they want to admit to any of these ASC development companies is that they really don't have any money to buy into the center. We think there's a way to bridge the gap.
We've been able to create a model that really allows us to look at the strength of the center they're buying into and base our decisions on that business and its prospects, certainly aware as time goes in, this doctor, if he's at all successful, will have good fortunes. Banks don't look at it that way.
Q: How do you determine if a physician receives a loan from Physicians Capital?
DL: We evaluate the ASC and determine if it's a reasonable risk based on its financial profile. We look at how long has it been around, how many doctors do cases there, what's the specialty mix, payors, etc. All we're trying to do is underwrite it from the standpoint of will it be a good business.
If that's the case, and that's a very quick analysis — less than two hours — if it's a go from that perspective, it's more than likely a go from the perspective of whatever doctor they tee up, we can finance.
Q: How has the economy impacted your business and the services you provide?
DL: We've recently had a lot of interest from companies and individual ASCs to look at doing more traditional commercial loans to the center as opposed to just a doctor buying into the center. The reason for that is the credit markets over the last couple of years have tightened up dramatically. It's just more difficult to access debt, particularly if it's an amount in the hundreds of thousands to a few million dollars because there just aren't that many banks interested in making that kind of loan today as there once were. This is an opportunity for us. There's a good chance we're already doing business with that ASC through a physician there.
Calls are also beginning to come in from physicians who have been owners for maybe five years and want to borrow on those shares under the same condition as the surgeons borrowing to buy in new.
SL: It's kind of like a home equity line. Now that they own an interest, they want to monetize the equity because maybe they have kids going to college.
DL: Typically they call around tax or tuition time and ask if they can do that kind of transaction. We haven't done too many but we look at them when they call in. I'm seeing a lot more of the people taking interest in this type of loan. The other thing we're constantly getting calls about is the need for working capital and equipment because of the economy.
Learn more about Physicians Capital at www.physicianscap.com.