Interest rates are slowly creeping upward, managed-care reimbursement is declining and the pro forma for that new ambulatory surgery center rests in the file cabinet unchanged, having been filed there immediately after the development of your new surgery center was approved.

Some see the pro forma as a snapshot in time of the financial factors that must be considered when developing a surgery center, with the hope and prayer that the events which led to the financial forecast will recur and bring the financial rewards suggested. The pro forma should not and must not be a snapshot in time, but should be a motion picture, complete with all of the variables one might anticipate in a real thriller.

You should quantify the changes that occur after you produce the initial pro forma and change the document to reflect actual data in lieu of estimates. Test each major decision with the new information. On occasion, you may alter your course if the results of the decision might adversely impact the projected financial outcome of the initial pro-forma. The pro forma then becomes the roadmap to the success of the center. If you hope to achieve the goals established in the pro forma, you must periodically review it to ensure that it accurately portrays the financial and workload facts learned during the pre-opening phase of the new center.

A living, breathing document
The time between the approval of the pro forma and the opening of the new surgery center is unquestionably the most important time in the development of a new surgery center. The reason is quite clear: If you take your pro forma and simply add up the operating costs you'll obligate during the pre-opening phase, you'll soon see that you'll make decisions about 50 to 70 percent of your recurring operating costs.

You'll establish the cost of construction, the interest rate for borrowed capital, the cost of your medical and non-medical equipment, the cost of insurance coverage for the center and various contract costs for maintenance.

You'll decide on staffing the center and will offer positions to your core staff. It may be possible to later reduce the cost of some of these items, but the majority of the costs will be fixed, leaving the center with the ability to control only 30 to 50 percent of recurring costs, and those costs will be primarily for medical supplies and staff.

Cost elements to review
Scrutinize every financial decision you make during the pre-opening phase to ensure that it corresponds with the estimates made in the pro forma. Here are some of the costs you should periodically update as well as advice on avoiding cost over-runs.

• Managed-care contracts. When you developed the pro forma, you likely estimated the reimbursement you might receive from your managed-care contracts. Now that you've actually negotiated some of these contracts, you can update the revenue portion of the pro-forma.
• Architectural costs. Architectural costs for an ambulatory surgery center can range from 6 to 14 percent of total construction costs, and this variation can dramatically change your pro forma.
• Construction costs. Unless a professional cost estimator made your construction estimate, you likely used an estimate somewhere between $150 per square foot to as high as $300 per square foot. Now that the contract has been bid, you can insert the actual construction costs in the pro forma. Don't forget to leave some contingency for change orders however, as change orders can range from 0 to 20 percent of total construction costs.
• Insurance costs. Insurance costs on some centers have actually doubled from early pro forma estimates.
• Cost of capital. The cost of borrowed capital and the resulting interest expense is now edging upward, but likely won't change substantially in the coming election year. Still, see if you can reduce your rates by shopping your loans.
• Medical equipment costs. This is an area that can easily escalate as your providers start selecting the equipment for the center. Keep the pro forma estimates at the forefront and only exceed them after you've calculated the impact on the pro forma.
• Billing service. The costs of outsourcing your billing can range from 4 to 9 percent of collectibles. Negotiating a billing contract that exceeds your pro forma can be quite costly.
• Legal fees. You're looking at hundreds of legal hours' being billed to the center for the development of the legal entity for the surgery center, including the operations agreement, the private placement memorandum, and the drafting of the governing body and medical staff bylaws. The rates for these services can range from a low of $200 per hour to $450 per hour.

How to trim costs
Here's how to save critical financial resources during the pre-opening phase of development

• Construction costs. If your construction-cost estimates exceed your early estimates, the first place to start looking for a reason is the square footage you estimated. To see the impact on your pro forma, try this. Ask the person who developed your pro forma to re-run three to four iterations of your pro forma, with each new version having 1,000 fewer square feet than the previous iteration. Review the bottom line of your pro forma so you can evaluate the consequences of either increasing or reducing the size of your center.
• Construction change orders. Change orders reflect either changes you have requested after the initial facility design or changes necessitated by construction conditions. When you negotiate your architectural and construction contracts, carefully examine the costs for change orders levied by both the architect and the general contractor. On occasion, you may find that the architect charges as much as a 10 percent premium for such services, and the contractor adds an additional 10 to 20 percent to actual costs for overhead and profit. Negotiate the rates in advance and keep them as low as possible, or carefully consider each change order and think about delaying the change until after the facility is open. Making the changes after the facility is open may save you the mark-up if only a superficial change is needed, such as the addition of a shelf.
• Medical equipment and non-medical equipment. A medical-equipment consultant will often have the skills to negotiate with the vendors you select. If you aren't using a consultant, there are firms that will negotiate on your behalf and share the savings with you. Some used medical-equipment vendors and furniture dealers will offer a rebate to the person who places the order with their firm. This rebate can often range from 5 to 10 percent of the total purchase price, which can be a great deal of money. Regardless of the means you select to buy your equipment, demand that your representative prepare and sign a statement that states he won't personally accept any rebates or discounts for items purchased for you, and that any and all such rebates will be directly credited to your account.
• Loans. It's likely that you'll borrow some money for either capital costs or working capital. Some of the major equipment manufacturers will now finance all of your equipment and construction costs, and they offer this financing at market rates. Some will even let you repay your loan on a cost-per-procedure basis, which is ideal in a start up situation where your workload ramps up over a period of time. Even if this isn't of interest to you, shop your loan to at least three financial institutions and you might be surprised at the savings that could result.
• Professional fees. Here we include legal fees, architectural fees and engineering fees. If you can get the firms to agree on a fixed price for their services in lieu of an hourly rate or a rate based on construction costs, you should carefully consider using this basis for the payment of fees.
• Insurance costs. Again, don't hesitate to bid these costs, as the various brokers can be quite competitive. Carefully consider the amount of coverage you are purchasing and the limits of the coverage. Apples-to-apples comparisons are somewhat difficult to make, but are well worth the effort.
• Cost decreases. It's possible that some costs have decreased from the pro forma estimate, or that revenue and case-volume estimates have increased. Certainly, include these revised estimates as well, as you want to ensure that all aspects of the pro forma are up to date.

Continually refine and update
It's critically important during the pre-opening phase of surgery center development to continually refine and update the pro forma to ensure that the financial objectives for the ASC will be realized after opening. You can improve all major decisions that impact the pro forma by testing the decision against the bottom line of the pro forma. If you can establish and maintain this discipline, it's likely that the first order of business for the new board won't be a capital call for additional working capital and capital needs.