There's one thing that's all successful and profitable ASCs have in common — effective financing strategies. Every ASC business differs in terms of specific capital requirements and local market conditions, but financing strategies should always be based on transparency in sharing projections and numbers with partners and lenders, a firm commitment to financial discipline, rigorous negotiation with financing sources and creativity in structuring contracts. These same principles are also an excellent guide to day-to-day management and overall culture because they foster trust among partners, which is another hallmark of successful ASCs.
This article will highlight best practices, proven techniques and lessons learned from ASC businesses that achieve profitability quickly and sustain it over the long term.
The basics
Joint-venture ASC partnerships are best structured as limited liability corporations, largely owned by local physicians. A business partner, like my company, Blue Chip Surgical Center Partners, and, in some cases, hospitals or health systems, take on minority stakes. Ideally, all partners should invest startup and working capital, which typically amounts to 20 percent of the total capitalization required. Hence, 80 percent of capital will be financed, usually over 5-10 years.
Some surgeons attempt to start ASCs without investing their own money, but having "skin in the game" is a strong motivator for individual partners, as it fosters physician leadership and promotes clinical excellence. In other words, it's a financing model that directly correlates to long-term success.
Understanding the options
There are many options when it comes to financing — including banks and other financial institutions, and lenders specializing in healthcare. It's important to understand the pros and cons of working with each type — their requirements for collateral and personal guarantees, for example. To find the best deal for the unique needs and goals of each partnership, investor groups must seek out competitive proposals from multiple financing sources, including both local and national lenders.
Further, partners should recommend potential sources of financing; often, the ideal source of capital is local. In some cases, physician-partners may have friends or acquaintances in the local banking community. In such instances, the strength of the local relationships may lead to attractive terms and lower interest rates. In other instances, national healthcare lenders will be most competitive. In either case, a business partner with a successful track record of successful projects can help secure favorable terms and attractive interest rates.
Wherever possible, financing sources should be evaluated in terms of their ability and willingness to provide the maximum amount of non-recourse financing. If recourse financing is required, the recourse requirement should be limited to the shortest amount of time.
There is no "silver bullet" or perfect "one-size-fits-all" financing plan. Many variables — including local market conditions, regional differences in real estate costs, varying regulations, the number of surgeon-partners, projected volume and mix of cases — must all be factored into the equation. The risk tolerance of investors should also be clearly understood; that's especially important for establishing an optimal risk-reward profile for the project.
Defining the plan
Because effective financing is essential to the overall health of ASC businesses, financing issues should be a central consideration during the business planning process. The formal business plan should very carefully specify and assess all viable financing options, opportunities and risks. It's also important to recognize that a sound business plan is a valuable tool for securing capital. Desirable lenders want to see realistic financial projections, clear-eyed competitive assessments and accurate estimates of required working capital. Demonstrated experience in the ASC industry is a plus, too, of course.
During the business planning process, a detailed matrix clearly illustrating the various costs, key terms and requirements may be useful to compare each lender's proposal. To minimize unpleasant surprises down the road — the kind which sink far too many ASCs — it's important to match the financing models to the overall business plan, especially in terms of estimated case volume. All assumptions, implications and dependencies should be quantified in scenario models and the financial obligations of all partners clearly spelled out. Again, such transparency leads to trust, better decision making and a strong foundation on which to build the business.
Making decisions
Once sufficient information has been gathered and all viable options evaluated, partnerships reach the "go/no-go" point. The partners will collectively make the final decision as to financing, though business partners can and should provide recommendations based on their experience and insights. Arranging financing quickly is a top priority. Therefore, once operating and management agreements are signed, financing should be obtained as quickly as possible.
Equipment financing
Equipment financing is an important consideration when launching new surgical centers. Financing for the facility "build-out" or "tenant improvements" can be bundled with the financing of equipment. In some instances, construction financing will be handled as recourse and the equipment as non-recourse. While surgeons select the equipment they want, business partners should take the lead in negotiating the best possible acquisition price to reduce the overall financial burden.
Once the ASC opens it doors, new equipment should be purchased with cash from operating income. In some cases, this approach will necessitate a delay in monthly distribution checks for the partners. If equipment financing is absolutely necessary and justifiable, all financing sources should once again be evaluated, not just financing or leasing offered by manufacturers or sales brokers.
The evaluation and procurement of capital equipment or technology (e.g., new instrumentation) is a governing board-level decision, supported by thorough cost-benefit analysis that seeks to quantify the number of new or additional cases the new equipment will bring and the impact on reimbursement rates, quality of care and patient satisfaction. After analysis and evaluation documents have been reviewed, the board renders final determination on capital equipment purchases. We believe this level of discipline and rigor is critical to the long-term success of the ASC business.
Once financing is secured and the business is up and running, operations and cash flow should be monitored in line with the projected financial model. Keeping a close eye on case volume, quality measures, cash flow, processed claims and accounts receivable and payable are effective tactics to avoid cash calls. By staying on top of these operational matters and promoting financial discipline from day one, the risk of re-financing is virtually eliminated.
Big picture: reducing risk, increasing rewards
A holistic, best practices-based business model views financing issues and strategies as closely linked with other essential disciplines and processes, like case costing, contracting, billing and claims management. Collectively, these activities add up to comprehensive financial and operational management. Put another way, they are important steps on the journey to profitability, and are, therefore, best managed in an integrated way.
For individual physicians, the initial investments required to develop ASCs are substantial — $30,000-$100,000 depending on the exact nature, structure and scope of the project. Business partners will also invest significant money (up to $250,000) for a minority ownership stake. While required investments are large, so is the opportunity and the likelihood of enjoying strong future ROI, provided strong business plans and financing models are in place from the start.
Jay Rom (jay@bluechipsurgical.com) is president of Blue Chip Surgical Center Partners.
This article will highlight best practices, proven techniques and lessons learned from ASC businesses that achieve profitability quickly and sustain it over the long term.
The basics
Joint-venture ASC partnerships are best structured as limited liability corporations, largely owned by local physicians. A business partner, like my company, Blue Chip Surgical Center Partners, and, in some cases, hospitals or health systems, take on minority stakes. Ideally, all partners should invest startup and working capital, which typically amounts to 20 percent of the total capitalization required. Hence, 80 percent of capital will be financed, usually over 5-10 years.
Some surgeons attempt to start ASCs without investing their own money, but having "skin in the game" is a strong motivator for individual partners, as it fosters physician leadership and promotes clinical excellence. In other words, it's a financing model that directly correlates to long-term success.
Understanding the options
There are many options when it comes to financing — including banks and other financial institutions, and lenders specializing in healthcare. It's important to understand the pros and cons of working with each type — their requirements for collateral and personal guarantees, for example. To find the best deal for the unique needs and goals of each partnership, investor groups must seek out competitive proposals from multiple financing sources, including both local and national lenders.
Further, partners should recommend potential sources of financing; often, the ideal source of capital is local. In some cases, physician-partners may have friends or acquaintances in the local banking community. In such instances, the strength of the local relationships may lead to attractive terms and lower interest rates. In other instances, national healthcare lenders will be most competitive. In either case, a business partner with a successful track record of successful projects can help secure favorable terms and attractive interest rates.
Wherever possible, financing sources should be evaluated in terms of their ability and willingness to provide the maximum amount of non-recourse financing. If recourse financing is required, the recourse requirement should be limited to the shortest amount of time.
There is no "silver bullet" or perfect "one-size-fits-all" financing plan. Many variables — including local market conditions, regional differences in real estate costs, varying regulations, the number of surgeon-partners, projected volume and mix of cases — must all be factored into the equation. The risk tolerance of investors should also be clearly understood; that's especially important for establishing an optimal risk-reward profile for the project.
Defining the plan
Because effective financing is essential to the overall health of ASC businesses, financing issues should be a central consideration during the business planning process. The formal business plan should very carefully specify and assess all viable financing options, opportunities and risks. It's also important to recognize that a sound business plan is a valuable tool for securing capital. Desirable lenders want to see realistic financial projections, clear-eyed competitive assessments and accurate estimates of required working capital. Demonstrated experience in the ASC industry is a plus, too, of course.
During the business planning process, a detailed matrix clearly illustrating the various costs, key terms and requirements may be useful to compare each lender's proposal. To minimize unpleasant surprises down the road — the kind which sink far too many ASCs — it's important to match the financing models to the overall business plan, especially in terms of estimated case volume. All assumptions, implications and dependencies should be quantified in scenario models and the financial obligations of all partners clearly spelled out. Again, such transparency leads to trust, better decision making and a strong foundation on which to build the business.
Making decisions
Once sufficient information has been gathered and all viable options evaluated, partnerships reach the "go/no-go" point. The partners will collectively make the final decision as to financing, though business partners can and should provide recommendations based on their experience and insights. Arranging financing quickly is a top priority. Therefore, once operating and management agreements are signed, financing should be obtained as quickly as possible.
Equipment financing
Equipment financing is an important consideration when launching new surgical centers. Financing for the facility "build-out" or "tenant improvements" can be bundled with the financing of equipment. In some instances, construction financing will be handled as recourse and the equipment as non-recourse. While surgeons select the equipment they want, business partners should take the lead in negotiating the best possible acquisition price to reduce the overall financial burden.
Once the ASC opens it doors, new equipment should be purchased with cash from operating income. In some cases, this approach will necessitate a delay in monthly distribution checks for the partners. If equipment financing is absolutely necessary and justifiable, all financing sources should once again be evaluated, not just financing or leasing offered by manufacturers or sales brokers.
The evaluation and procurement of capital equipment or technology (e.g., new instrumentation) is a governing board-level decision, supported by thorough cost-benefit analysis that seeks to quantify the number of new or additional cases the new equipment will bring and the impact on reimbursement rates, quality of care and patient satisfaction. After analysis and evaluation documents have been reviewed, the board renders final determination on capital equipment purchases. We believe this level of discipline and rigor is critical to the long-term success of the ASC business.
Once financing is secured and the business is up and running, operations and cash flow should be monitored in line with the projected financial model. Keeping a close eye on case volume, quality measures, cash flow, processed claims and accounts receivable and payable are effective tactics to avoid cash calls. By staying on top of these operational matters and promoting financial discipline from day one, the risk of re-financing is virtually eliminated.
Big picture: reducing risk, increasing rewards
A holistic, best practices-based business model views financing issues and strategies as closely linked with other essential disciplines and processes, like case costing, contracting, billing and claims management. Collectively, these activities add up to comprehensive financial and operational management. Put another way, they are important steps on the journey to profitability, and are, therefore, best managed in an integrated way.
For individual physicians, the initial investments required to develop ASCs are substantial — $30,000-$100,000 depending on the exact nature, structure and scope of the project. Business partners will also invest significant money (up to $250,000) for a minority ownership stake. While required investments are large, so is the opportunity and the likelihood of enjoying strong future ROI, provided strong business plans and financing models are in place from the start.
Jay Rom (jay@bluechipsurgical.com) is president of Blue Chip Surgical Center Partners.