Robert Carrera is president of PINNACLE III, based in Lakewood, Colo.
Q: Why should physicians planning an ambulatory surgery center get a feasibility study done?
Robert Carrera: The feasibility study provides planners with objective information about the project they are envisioning. It helps them determine whether to move ahead with spending additional money and resources or let it go. Essentially, the study can provide a red light or green light. And if there is a green light, the findings will serve as the basis for an initial operational plan.
Q: Is a feasibility study always necessary when planning an ASC?
RC: Sometimes partners looking to develop a new ASC think they don't need a feasibility study. They assume the project will work without it, or they don't want to incur expenses associated with this due diligence phase. This might have been possible when ASCs were in their growth phase — when you could practically build it and they would come. Now that the ASC market has matured, just assuming an ASC is going to be successful can be a costly error with longstanding financial implications. A feasibility study is an invaluable way to determine whether the project makes sense and whether you are on the right track in developing a successful business strategy.
Q: What are the essential areas a feasibility study should cover?
RC: Projected volume, case mix, revenue and expenses. The projected volume and case mix determine the space and equipment needed and provide a snapshot of anticipated revenue and expenses. It is important to note, however, that there are other aspects of the project to review that have little to do with straight numbers. Some problems are fairly nuanced and cannot be detected by mere data analysis.
Q: What aspects of the review do not involve numbers?
RC: One example would be philosophical differences among physicians, which could impede the center's overall success. For example, you may be planning to have pediatrics and then it emerges that some of the specialists do not want pediatrics. Physician-investors may be facing a struggle for control of the center with each other or the potential hospital partner. These issues can be identified in the feasibility study. They may be so problematic that participants might reconsider the structure of the partnership or drop the project altogether. Or it could turn out that one of the physicians is involved in multiple ASCs.
Q: Can a physician be involved in multiple ASCs?
RC: It is not all that unusual in larger metropolitan areas for this to happen. About five years ago, multiple-ownership was in full swing. Physicians wanted to cover all their bases by joining several different centers, not realizing this would dilute their volume and reduce chances that any single center would be successful. Although the phenomenon still exists in some markets, it has pretty much dissipated. Now physicians tend to have very specific reasons for participating in several centers. For example, they may want one surgery center in each of two geographical areas. The geographical separation makes it fairly easy to determine what part of the physician's volume would feed into the new ASC.
Q: What can payors tell you in this planning stage about potential reimbursement?
RC: A lot of the responses you get from payors are going to be pretty nebulous — something along the lines of, "Sure, if you want to build an ASC, go ahead." It is important not to skip this part of the process, though, because sometimes you get some valuable information that affects your decision to proceed. For example, you may find out that a key PPO for your surgeons is held by a health care system that operates competing surgery centers. The PPO might never agree to contract with you, and the lack of that expected volume could kill the whole project.
On the other hand, in an area saturated with ASCs, the payor might welcome you but at rates 15-20 percent below what currently contracted ASCs are receiving. In this case, you would need to consider your reimbursement options before moving ahead with the project. One possibility would be to partner with a hospital or health system that could leverage a reasonable contract with the payor.
Q: What happens if the feasibility study does not provide a decisive red or green light?
RC: Sometimes a feasibility study can only give you a yellow light. For example, the projected volume may only be enough to generate marginal net revenue, or the projected costs might be so high that the ASC would have to operate several years before realizing any return on investment.
In these cases, it's advisable to postpone the project until the planners can figure out how they can to create a more optimal situation. Perhaps more physicians can be brought on board to boost volume, or the real estate parameters might be structured differently to make it less expensive and thereby save the project. On the other hand, the physicians might decide they would be better off dropping the project altogether and turn their focus to buying into an existing center. These are important decisions that might never have come up without a feasibility study.
Learn more about PINNACLE III.
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