by: Jeff Cohen
The development of ambulatory surgery centers is still going strong. Physicians who want to form or invest in them should be wary, though.
Physicians, squeezed by shrinking reimbursement and rising costs, sometimes see ASCs as a sure thing, financially speaking. They aren’t. Developing and operating them is something of an art; and care must be taken in getting into the ASC business. Developing and operating a successful ASC depends on key factors, like ensuring:
- The future owners are busy surgeons who will bring cases to the ASC;
- The surgeons perform services which are well compensated; and
- Profit distributions will be enough to stimulate interest in the center (especially an issue when a physician owned ASC sells too much to a venture or hospital partner).
Early on, doctors who develop ASCs may have an overly friendly attitude about who to invite as investors. Big mistake! One of the biggest causes of an ASC implosion is owners who bring little or no cases to an ASC. Since profit distribution must be based on ownership (and not on how many cases one brings), the owners will closely watch their relative surgical activity. If one person disappears for a few months, the others (who are sharing their profit distributions with the non performing surgeon) will get upset and may want to leave the center.
Picking surgeons to invest breaks down by specialty too. Orthopedics (especially joint surgery) is normally a sure thing, financially speaking, but not all specialists are either medically appropriate for an ASC (e.g. spine or heart surgery) or particularly lucrative. Physicians need proper guidance when configuring their investor group, which is heavily impacted by payer reimbursement changes.
Once the doctors have identified the busy surgeons in the appropriate specialty area, they must be careful about diluting their interests too much. If, for instance, there are too many investors, the piece of the pie that is available to them may not be enough to interest them in bringing cases. It may be better to have a smaller center with fewer busy surgeons than a large, fancy one with lots of investors, some of whom may have lost interest.
Physicians must also be extremely careful when considering bringing in a non- surgeon owner. For instance, many doctors view the idea of having a hospital or ASC developer as an owner as a positive thing, since the hospital or developer will bring expertise and bear some of the development costs. Doctors may be trying to fix a short term problem by bringing in a non-physician investor. Doctors should be very wary of such proposals, however, since the smaller the “pie,” the less financially viable the center will be. That is, resentment tends to grow each time a non-surgeon owner receives a profit distribution. And the larger the interest that is owned by the non- surgeon, the quicker the situation may deteriorate. Physicians should beware of investors who require an interest in exchange for investment only or operational expertise, since there are many competent operators and favorable capital sources that do not require ownership. Doctors should weigh the value of having a capital or debt sharing partner against the value of having more surgeon partners.
Operational expertise is also a key matter. Since doctors are busy treating patients and usually lack the expertise to start up or operate an ASC, development and operations are usually outsourced. Be sure to interview several; and make the decision based on proven performance. With ASC development, time is of the essence. These are very expensive businesses, with huge fixed costs. Delays caused by inexperience can be extremely expensive.