James H. Cobb, a consultant and president and CEO of Orion Medical Services, identifies 10 ways to reduce risk to physician-investors in a start-up ambulatory surgery center.
1. Don't go solo. Banks usually prefer 3-4 surgeons in a new facility before they will lend money for it. A center with just a solo physician-investor can still get a Small Business Administration loan, but the facility would still be stuck with the same risk the bank identified, namely: What happens to the center if that single surgeon dies or is incapacitated? "Doctors are attracted to the idea of developing their own center, but my advice is not to do it on your own," Mr. Cobb says.
2. All investors should have capital. A new physician just out of residency training, with high medical school loans and few savings, should not become an investor in an ASC. Investors may be required to put up substantial capital. In most states, each physician-partner must attest that he or she is a "qualified investor," which usually means having at least $1 million dollars in net worth or earning at least $200,000 a year.
3. Provide for extra funding. Have access to extra funds to cover unforeseen problems. "Some start-up pro formas assume the best outcomes," Mr. Cobb says. "That is a mistake. Trust Murphy's Law: Something unexpected is going to happen." For example, licensing may be delayed or the accreditation organization may take six months to get the center Medicare-certified and accredited. This will require extra funding that wasn't identified in an overly optimistic pro forma. When expenses exceed their line of credit, physician-investors have to put up the funds out of their own pockets. Lines of credit typically must be paid back within two years, but if they are not, ASCs often have the opportunity to convert the balance on the owed amount to a term loan, Mr. Cobb says.
4. Check each surgeon's payor mix. To estimate the ASC's income, project planners need to check each physician's payor mix and the new center's ability to contract with each of those payors. "Physicians invariably overestimate the number of cases they can bring to the center," Mr. Cobb says. "Generally, the real number is about 70 percent of the physician's estimate." It can take up to two years to negotiate a contract with a payor. Contracted reimbursements should be at least 150 to 200 percent of Medicare. The contract should cover the cost of implants, which, in the case of orthopedic or neurosurgery implants, can be significant.
5. Get to know each surgeon. Since a physician's personality and work habits can substantially affect the ASC's success, it is useful to have some familiarity with each physician. In one project, "we had a surgeon that looked good on paper but he failed to meet expectations," Mr. Cobb recalls. He would try to bring in high-risk patients who should have gone to the hospital. "Unless you had worked with him, you would not have known that about him," he says.
6. Use experienced professionals. Use a development company with experience in ASCs to draft the initial pro forma and estimate costs of the project. This document has to be accurate because physician-investors will be using it to obtain bank loans. "The initial pro forma is only as good as the analysis of the cases being promised," Mr. Cobb says. Also, hire an experienced healthcare attorney to draft legal documents outlining the risks to each physician. To find candidates for these tasks, consult with companies that have experience in the process and check their references.
7. Start with skeleton staff. The new center will have only a trickle of cases from the time it opens until it obtains its Medicare facility number. "You can begin doing out-of-network cases once your facility is licensed by the state, in most cases," Mr. Cobb says. "But, in any event, it makes no sense to have the full staff working."
8. Do not overbuild. Unlike overstaffing, overbuilding cannot be corrected. The ASC will continue to pay for unused space. It is rare to hear a surgeon say, "Let’s build it real small," Mr. Cobb says. Physician-partners may want to build a center that is 7,000 to 12,000 square feet when they only need 5,000. As a general rule of thumb, an ASC with three to six surgeons may need only two ORs to be successful.
9. Use some refurbished equipment. A typical ASC equipment budget should not exceed $1 million, but that amount can vary depending on the mix of surgeons. The center can stay within that target by contracting with a reliable equipment vendor and by buying refurbished equipment. "While the ASC will need state-of-the-art surgical instruments, many of the larger pieces of equipment can be purchased refurbished, such as autoclaves and blanket warmers," Mr. Cobb says. There are many creative ways to obtain refurbished or used equipment, such as working with a hospital that is downsizing or going out of business.
10. Don't overpay staff. "Physicians often insist on hiring clinical staff they enjoyed working with at the hospital," Mr. Cobb says. The physician may promise a generous salary to lure them over to the new center. This is where many surgery centers get into financial trouble. Physicians should avoid making promises to hospital staff and saying they cannot operate without them. "Competing with the hospital for high quality clinical staff can be expensive," Mr. Cobb says. He has seen struggling ASCs where the nurses were making over $100,000 per year. To avoid this pitfall, physicians should offer clinical jobs through management companies. Due to attractions like no weekend or shift work, an ASC can offer lower pay than the hospital.
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