CINCINNATI, OHIO - When we at Beacon Orthopedics weighed our options for building a new facility, we ultimately decided that purchasing land and owning the improvements was better than signing a long-term lease with a developer or partnering with a hospital. This was the best means of building the facility we needed and controlling the group's future. As the business administrator, I can tell you that from this process, we learned that doing your homework early and taking your time in the planning phases makes it infinitely easier to handle the execution of the plan later. Here's how we put the deal together.

Draw strength in unity
Formed in 1996, Beacon Orthopedics consists of 11 physicians, 8 of whom are shareholders. The practice is best known for sports medicine (our group includes the team physicians for the Cincinnati Reds and Xavier University) and has a very strong general orthopedic reputation as well. Beacon currently has 10 locations and sees about 61,000 patients each year.

	FACILITY: Beacon Orthopedics, Cincinnnati, Ohio WEB: writeOutLink("www.beaconortho.com","1","sb") IN SHORT: This physician-owned partnership patiently took its time to find the right expansion opportunity and used a methodical approach to locating and acquiring the right location. They have also successfully lined up tenants in related practices - a chiropractor, a prosthetics group and a hospital's physical therapy department - for the new center.

Like any successful business, though, we needed to critically look at our business and decide how to react to local market dynamics. The reimbursement environment in Cincinnati is very poor, especially when compared to other communities only 90 miles away. The community has seen a significant migration of orthopedic surgeons. We are busier than ever but income continues to decline.

We held a strategic planning retreat and determined that we needed to look for ways to make our practice more efficient, explore clinic consolidation, recruit new sub specialists and create new revenue streams.

The process got a jump-start a few years ago when a local hospital system approached some of the shareholders individually with a proposal for a multi-specialty ASC venture. The hospital did all the analysis and told the physicians that the only way to make the ASC viable was to make it multi-specialty and license it as a HOPD. The hospital would control 51%.

In addition, we sought non-Beacon tenants to provide rehab, orthotics and chiropractic care. We also added an operator of an indoor baseball training facility. Finally, the group decided to run the ASC itself and not hire an outside management company. By this point, we were feeling confident that we could make a go of it ourselves.

Be patient in the planning phase
Sometimes it's easy to plunge into a project without first determining whether your goals are realistic and, if they are, how and where you should focus your energies. In the outpatient surgical realm, there is a tug-and-pull effect between wanting to have a great looking facility with the latest in technology yet wanting the facility to be financially viable. We agreed to build a facility that matched our needs, we didn't want to overbuild as so many area ASCs have done.

After rejecting the hospital proposal, we took five months to examine whether we could make a go of developing our own musculoskeletal center. We hired Price WaterhouseCoopers to conduct a feasibility study and assist with site analysis. We ran multiple projections and felt that if we could at least break even at Medicare rates for the ASC, we should do the project because of the added efficiency of a consolidated practice with on-site surgery. We also engaged other experts to help us with all the Stark issues, and used an architect and builder that specializes in group practices and ASCs.

Beacon has 8 surgeons and one physiatrist. The other two MDs are non-proceduralists (a semi-retired surgeon and a sports medicine trained internist).

Therefore, the crux of the feasibility study centered on this question: with 9 MD proceduralists in the mix, how many cases could each physician bring to a new center each month?

We looked at the prior year's case volumes as an initial indicator. For example, one of our surgeons does about 800 cases a year at an area hospital. We found that about 98% could be performed at an ASC. Other Beacon doctors were just the reverse with few cases being eligible for an ASC setting.

We compiled the likely case volume by MD, got their commitment to move the cases, and ran the reimbursement analysis with our current payer mix and local reimbursement rates to see if we could sustain our own center from a reimbursement perspective. We discovered that the plan could work if we had the right location and a cohesive plan for consolidating our medical services.

Pinpoint the right location
The site selection process took three months and then the land deal took four months to close. Our criteria for the perfect location were as follows:

• Is the site located in a growth area? Although there are many multi-specialty freestanding ASCs in Cincinnati, none offers a one stop, comprehensive ortho-focused ASC, with integrated clinics and diagnostics. All site options were in areas experiencing tremendous population growth and attractive access and infrastructures.
• Could the MDs get their patients to travel to the new location for treatment and surgery? Our surgeons committed to each other that they could indeed move cases. Each MD knows the number of cases each is committed to bringing to the new site.
• Is the site convenient to major transportation routes and is there space for ample parking? This factor disqualified some of the other sites. The chosen site overlooks an Interstate exit ramp and provides excellent highway visibility. The lot provides for expansion and the potential additional parking spaces were well within our projected needs.
• Could we purchase the land? Many attractive sites could not be purchased outright. Given the recent downturn in office building development, one developer had some land he was willing to part with. In addition, the local municipality was willing to give us multi-year property tax abatement on all capital improvements. None of our current clinics are located in that municipality and they wanted a "prestige" tenant to be the office park overlooking the Interstate beltway. We ultimately purchased 6.4 acres for $1.6 million. Factoring in the impact of the tax abatement reduced the net purchase price considerably, making the project viable.

Be sure that you're sure
Our purchase offer gave us 120 days to back out of the land deal if we found something flawed with the land or if we couldn't get financing. During that time, we continually asked one question: Are there any issues we did not consider that would make us want to cancel the arrangement?

Also during this time, we hired a Denver firm, Marasco & Associates, as our architects and Irmscher Construction out of Fort Wayne, Indiana, to provide construction estimates. We took a hands-on approach in reviewing the design and construction cost estimates before we were ready to proceed with building the 65,000 square-foot facility.

From tenant to landlord
In order to pay for the project, we secured two separate loans, $1.6 million for the land and $7.4 million for the design and construction. We also went with a lender who has a lot of experience with medical practices, CIB Bank in Indianapolis. Local lenders were not interested in the project or wanted personal guarantees, excess equity or required joint and several liability. CIB's model allowed us to tap into our accounts receivable as collateral and not come out of pocket with a lot of cash. This allowed the group to own 100% of the project and negated the need for outside investors or a hospital partnership.

As part of our financing deal, we executed long-term leases with all of our tenants, which in effect reduce the risk to the physician owners considerably. The tenants' leases pay for more than 50% of the project's space. This created a new challenge that Beacon had never faced before. We were no longer just tenants on someone else's property. Now we were landlords. Fortunately, we found that our careful planning in the previous phases of development helped make it relatively easy to lure tenants. We showed them the same data that brought us to the site-a good patient base, a good payer mix and the opportunity to be part of an orthopedic center of excellence.

We started building in May of 2002. We will be open for business in the spring of 2003.