Credit Crunch Impacts Physician/ASC Investor Loan Firm But Demand Remains

With an economy in shambles and banks refusing to make loans, physicians seeking to invest in or recapitalize ASCs face continuing financial challenges.

"With the banking crisis there is greater need for us than ever before," says Douglas Lewis, managing director of Physicians Capital, a Nashville-based lending organization that functions like a bank loan organization for ASCs. Physicians Capital, which was founded only one year ago, offers loans of $50,000-$5 million to physicians seeking start up capital for a new ASC, buy-in financing or recapitalizing when physician partners seek to sell their equity shares.

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.

"We've grown light years since we started," points out Mr. Lewis, a Mississippi attorney and former hospital industry executive. He says a federal law opened a window of opportunity for companies like Physicians Capital. He says the physician self-referral law, better known as the Stark Law, imposed prohibitions over who and how physicians could obtain financing to buy into joint-venture arrangements. ASC development companies and hospitals are prohibited from loaning doctors money to buy into ASCs, Mr. Lewis says.

"Stark has a lot to do with what we do," he says. "We do not take an ownership interest in the physicians' business. We loan the doctors money and have a unique understanding with the managers of the ASC businesses that allows us to do certain things that banks don't normally do."

He says physicians must either go to the bank and pledge personal assets like homes or property, or come to companies like his.

"The physician goes to work everyday while the distributions pay off the note to us," Mr. Lewis says. "After the note is repaid, the physician becomes a full owner."

ASC outlook strong
Mr. Lewis says in spite of the current economic malaise, he's optimistic about the ASC sector of the healthcare industry. "I think Congress has separated physician-owned hospitals from ASCs in its mind and has gotten over its anxiety," he says. "Congress recognizes that ASCs are performing a benefit. CMS appreciates the quality and cost savings and ASCs are serving patients, insurers and doctors very well. Even hospitals are beginning to understand that ASCs are a viable part of the industry they can no longer overlook."

He says recent developments at the federal level further encourage his optimism, including CMS's expansion of DRGs and CMS payment increases for 2010 and 2011.

"We're predicting 7-10 percent revenue increases going forward for ASCs," Mr. Lewis says.

Shannon LeRoy, the company's CEO and managing director, says the economy has tempered the company's growth. Mr. LeRoy says the biggest loan to date has been $300,000 and the smallest $50,000, but most average in the $100,000-$200,000 range.

"The reason we haven't made bigger loans is the economic turndown's constraint on capital; It's a different world than the one we started in," he says. "But the reason we have a business to begin with is because for the past 17 or 18 years, banks have shied away from making loans to anybody secured only by partnership interests, whether those were in real estate or ASCs. Today it's even tougher to access credit from banks and today's economy only exacerbates the problem, which has existed for a while."

Mr. LeRoy says his company has isolated the loan to the asset it's purchasing.

"We don't ask a physician to obtain a second mortgage on his house," he says. "Those assets should be available for something else, giving the doctor more flexibility. We underwrite the individual ASC the doctor is buying into and make our decision based on the financial merits of that center."

He explains that his company's typical client is a young physician 38-40 years old who has not yet accumulated wealth and still carries a heavy debt load.

"Some are only a few years out of school and just beginning their practices," he says. "Banks don't want to loan money to people heavily in debt."

Mr. LeRoy says to date Physicians Capital has only offered loans to doctors investing in ASCs, though at some point the firm hopes to branch out into other healthcare market areas.

"We want to remain focused on that industry segment and build a platform in that ASC space before we branch out to other things," he says.

He says the terms and interest rates are higher than banks typically offer. "But we're not securing a loan the same way a bank would; we don't require doctors to pledge personal assets, so the risk is higher and we have to charge a higher rate to cover our borrowing costs," he says. "We haven't seen any resistance because of the loan costs. Most of the doctors appreciate that we're looking at their investment assets only."

Success rooted in industry experience
Mr. LeRoy says the principles behind Physicians Capital, Mr. Lewis, himself and veteran healthcare banker Walker Choppin, are steeped in the healthcare industry and have loaned money to many types of healthcare entities over last 25 years. "We can speak their language and understand the issues and challenges they face," he says.

He says Physicians Capital has helped physicians to buy into hospital-physician joint ventures, partnering with ASC management and development firms like Symbion, NovaMed and USPI.

"We market directly to these ASC companies," Mr. LeRoy says. "While they can't provide financing, they can suggest sources."

He says physicians Capital has also collaborated on ASC projects with ASC companies and physicians with systems like Memorial Hermann Healthcare System in Houston and Baylor Health Care System in Dallas.

Physicians Capital has made dozens of loans to date and would have made more if not for the economy, Mr. LeRoy says.

Learn more about Physicians Capital.