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How to Choose a Development Team
Hundreds of advisors want to help you get going. Choose the right ones for you.
Stan Herrin
Publish Date: October 10, 2007   |  Tags:   Facility Construction and Design

Once you've decided to build an ASC, among the next and most important decisions you face is "who is going to help me build this thing?" Do not try to go it alone; advises Larry Patterson, a Tennessee ophthalmologist who is currently building his second surgery center. "This is not like opening an office. There are so many state and federal regulations. You might be able to do it yourself, but it's much cheaper to keep seeing patients and hire someone else to do this." Here's some advice on picking:

The project leader
This first and possibly most important entity will be your "quarterback" as you build, equip and even open your ASC. According to Gayle Evans, RN, MBA, a principal with Continuum Healthcare, a project leader may offer the following services:

  • Doing a feasibility study. This is the very first thing you need after deciding to go ahead with the project. It is a rough projection of how well your center will do based on the volume of cases you and your partners will bring to it, the local reimbursement picture, and so on. Expect to invest no less than $10,000 and as much as $50,000 in this part of the consulting, no matter the results. Some consultants include this in their overall fee.
  • If your state requires it, helping out with the certificate of need process;
  • Depending on the results of the feasibility study, developing a full-blown business plan to take to your lender. This typically is a very involved document that is several inches thick;
  • Coordinating the development of the schematic plan with the architect. This is the first drawing of what the building will look like;
  • Design development coordination. This includes meshing the architect's efforts with those of the physicians and the equipment planners through two more stages of drawings;
  • Developing written policies and procedures. You must have these for accreditation;
  • Helping to set up supply channels;
  • Hiring and training the facility manager. This is a critical step that needs to take place early on;
  • Coordinating accreditation, and Medicare and state licensure;
  • Overseeing the certificate of occupancy and state fire marshal inspection.

In addition to all these start up functions, some project leaders will also offer to run (or insist on running, in the case of equity partners) your center for you.

Payment for project leaders comes in all flavors. Some work on an ' la carte fee for service basis; you take as many or as few services as you need. One consultant quoted us $35,000 to $65,000. Some work on an hourly basis; you also reimburse them for expenses. Some will charge a percentage of the project costs. Some do the work for a percentage of the center. Some "equity" partners do the development work for free. One tip: Julie Hammersley, RN, MBA, with V4 Consulting, suggests insisting on withholding at least $25,000 of the fee pending Medicare certification of the center.

With some firms, you also have the option of keeping them on after you've built the center to manage it. The cost is typically 5 to 7 percent of net collected revenues, says Luke Lambert, CEO of ASCOA.

There are a number of project leaders in the market. To find the best one for you, consider taking these steps:

A Few Thoughts on Site Selection

The axiom "location, location location" is as applicable in ASCs as any other business. In fact, a poor location can actually sink your ASC. Here's some advice from the experts on site selection:

  • If possible, choose a freestanding building. Our experts almost universally prefer them to multi-tenant office buildings, for several reasons. Texas ASC architect Jay Boynton says support columns in such buildings nearly always demand compromises that can force you to lease more space than you planned. He adds that freestanding ASCs have more "identity" with consumers than office-building ones do. And he adds that having your own parking lot can be a big plus for a surgery center. "Ever try to discharge a patient into a busy medical office parking lot?" he asks. Luke Lambert of ASCOA, who in an earlier career was a site selector, says buildouts in office buildings where there are other existing tenants can literally cost hundreds of thousands of additional dollars due to the challenges of transporting material, doing the wiring and plumbing and ducting without disturbing other tenants. It requires crews to work odd shifts and to sometimes take extraordinary measures. He prefers freestanding space, or barring that, space that provides excellent access on at least three sides, such as strip mall space. He adds that if you must go into an office building, insist on the first floor.
  • Make the location convenient for surgeons. Caryl Serbin of Surgery Consultants of America recounts the story of a center that stands empty because it was built too far away from the surgeons' practices. Be careful, though, about building an ASC adjacent to one practice, Mr. Lambert warns; competitive concerns may discourage other physicians from using it.
  • Make sure the site you select has the right structural elements, says Physician Endoscopy's John Poisson. He lists several items his company uses to rate location:
    ' Steel beams construction rather than wood;
    ' A sprinkler system;
    ' A first floor location. If the ASC will not be located on floor1, Medicare certified elevators;
    ' A covered egress;
    ' A square or rectangular configuration, which is ideal for patient flow;
    ' Natural light in the recovery area (it's thought to speed recovery, he says)
    ' The ability to discharge to a separate exit rather than through the building's entrance.
  • Pay attention to parking. Mr. Lambert says an efficient, high-volume two-OR center requires 27 to 28 spaces and preferably 30.

In addition, you can find project leaders in the flesh in the exhibit halls of your own specialty meetings. Another place to find them is one of the ambulatory surgery meetings. One is the American Association of Ambulatory Surgery Centers, starting Feb. 13 in San Diego. Call (800) 237-3768 or visit www.aaasc.org. Another is the Federated Ambulatory Surgery Association meeting, starting on April 18 in San Antonio. Call (703) 836-8808 or visit www.fasa.org. Both meetings boast several sessions on starting up an ambulatory surgery center.

Also ask colleagues who have ASCs for the names of their project leaders. Ask about their experience while you are at it.

When trying to narrow your choices, consider looking for the following:

  • Experience. The firm should understand clinical issues, surgery center operations, and general business issues, says Ms. Hammersley. Preferably the firm should have managed surgery centers before.
  • A personality mesh. "The owner has to have the 'warm and fuzzy' with the development team," says Ms. Evans. "The consultant should be able to talk in a way that you can understand, without a bunch of technical terms."
  • Willingness to individualize the advice. "Do not get put into a cookie cutter mode," says Ms. Evans. "The consultant should listen to what you really want and need. For example, if you will only do ENT at your center, you don't need a 600-square foot OR."
  • Good references from centers that are as close to the one you want to develop as possible. For example, if you are developing a single-specialty endoscopy center, ask to talk with other like centers. Ask for a case study, suggests Dennis Martin of the Johnson & Johnson Development Group.

    When inquiring about earlier projects, ask about the cost per square foot of building the center, suggests Ms. Hammersley. She also suggests inquiring about on-time performance. The center should be finished within a month of the original projection (unless the surgeons asked for change orders, in which case the projection revisions are reasonable) and certified by Medicare within a similar timeframe. If the firm does equipment planning (more on which later), ask how close to budget the equipment purchasing was. She believes equipment should always be on or under budget.
  • Knowledge of your local regulatory and insurance environment.
  • A favorable exit strategy. Firms vary in how long they will hold your hand after your center is up and running. Make sure the schedule of the firm you use works for you.

Once you have narrowed down your list to three or so, send out a request for proposal, suggests Johnson & Johnson's Mr. Martin. In addition to cost, he suggests, "Ask about qualifications, access, timing, and the timetable." Also ask about what resources the firm has in house and which they will outsource.

The CON Lawyer
If yours is one of the states that still requires a certificate of need, you will most likely need an attorney to shepherd the application through. Remember, unless you are allied with a local hospital, that entity may vigorously oppose you.

To find the attorney, ask around, and also attend a CON hearing in your state and observe, recommends Mr. Lambert. "You will see who is doing the most CON applications and how well they present them, live and in action." He also recommends asking the state agency for their opinion on "who does a nice job with these applications. They are not supposed to tell you, but then again they may," he says. A warning: CON attorneys are expensive. They work on fixed fees or charge a percentage of the project, says Ms. Hammersley.

Says Dr. Patterson, who is in a CON state, the CON lawyer "really needs experience in this process. It's much better to spend an extra $5,000 to $10,000 and get the person who can get it done."

The Architect
Once you know your center is financially feasible, it's time to select an architect. This professional should help you with the site selection, site planning, determining how much space you will need, doing three stages of documents for the floor plan, refining your budget, and supervising construction, says Mr. Martin. Architectural services typically take up 8 to 11 percent of the project cost, says Ms. Evans.

Your "quarterback" should help you here, says Mr. Martin, preparing requests for proposal and coordinating the interview process. However you will be expected to participate heavily in the final selection. Here are a few questions to ask:

  • What specific experience have you had in designing ASCs? All the experts with whom we spoke emphatically advise choosing an architect with ASC-specific experience. Hospital experience may only lead to "overdesign," inefficiency and extra cost, they say. Architect Michael Gordon says ASC-specific experience is particularly important when specifying the air flow systems and the medical gas systems. He says architects who've only had experience with hospitals could very easily spend $150,000 too much on overdesign of these two items. By the same token, experience in designing medical clinics only is not nearly enough, since ASCs must comply with much more stringent regulations. Medicare requires special ceilings, floors, air conditioning, gas systems, wiring and even paint in operating rooms. States often impose additional requirements, and have their own quirks. The State of Tennessee required Dr. Patterson to make every bathroom handicapped accessible. He also was obliged to have an emergency generator rather than a backup battery system and a compressor for his medical gas system rather than tanks, he says. It can be helpful if your architect has at least done a project in your state.
  • What have the architect's centers cost on a per square foot basis? One caveat here: John Marasco, of Marasco & Associates, recommends taking this number with a grain of salt. "Construction costs can fluctuate over the years, and location also has a significant impact. The surgery center we designed in Manhattan, N. Y., will be different than the one we designed in Manhattan, Kans."
  • Do you have engineering services in the firm? The construction of an ASC requires civil engineering services, including topography, drainage and soil analysis, electrical engineering (lights, dedicated circuits for some equipment and possibly an emergency generator) and mechanical engineering, including plumbing, heating and air conditioning. Mr. Martin believes the process works more smoothly when the architecture firm has at least some engineering services in house.
  • What are your references? Mr. Marasco recommends asking for five to 10 projects of similar scope and size. Ask about satisfaction with the center, and also ask specific questions. For example, how is the sound attenuation in the walls? Is the heating and air conditioning satisfactory? How is the accessibility to phones? Mr. Gordon advises asking what the physician would do differently if it were necessary to do it over, and whether he or she would hire the same architect again.
  • Can the architect talk your language? Beware of architects "who talk purely about space and light and flow and don't talk about the kinds of cases you are going to be doing," says Mr. Marasco. "If you are doing an ophthalmic center, your architect needs to know what a YAG laser is. If you are doing a gastroenterology center, he had better be able to pronounce 'endoscopy' correctly."Texas ASC architect Jay W. Boynton, AIA, agrees, and adds that the architect should listen carefully to your ideas. "You don't want a prima donna," he says. "The architect should throw out ideas but not be fixated on them."
  • With whom precisely will you be working? Some firms turn their principals into salespeople, warns Mr. Boynton, and delegate the work down in the organization. Insist on meeting with the people who would be handling your project.

Should You Choose an Equity Partner?

As many as 30 different U.S. corporations may be interested in becoming a minority partner in your ASC, says Jon Vick, an attorney who helps set up such deals. Would one of them be a match for you?

Proponents of this arrangement say it can offer many advantages.

  • Financial risk reduction. Most equity partners will supply some of the start up cash, and also may be willing to guarantee the loan more strongly so that you don't have to. Frequently, corporate partners take on "joint and several" liability for the loan, whereas the physicians take on "pro-rata" liability. "So the company is at risk for maybe a million dollars, while the doctors are at risk for maybe $25,000," says Mr. Vick.
  • Operational risk reduction. Mr. Vick, who has been involved in the industry for nearly 20 years, says centers with corporate partners just generally do better. "Doctors are great at taking care of patients, but they don't have time to negotiate insurance contracts and supply deals," he says. "They pay 10-20 percent more for everything. Their range of strategies is limited also. It's hard for a doctor to go out and sell an interest in his center to another physician. Doctors don't have experience in preparing a good story."

    He points out that an SMG study shows that while independent ASCs average $1,062 in facility fees for each case, corporate-owned ones average $1,342, a direct result, he says, of contracting expertise. He says volume buying arrangements enjoyed by corporate partners generally save centers enough to pay for the management fee (5 to 7 percent of collected revenues). He says he's seen a number of independent centers be unsuccessful, whereas "very few corporately managed centers are unsuccessful."
  • A profit focus. Equity partners work hard to achieve good economies because their own money is at stake, says Luke Lambert of ASCOA. "If we put in $200,000 into a center, we don't want to lose that," he says, adding that consultants who work just to get the center up and running don't necessarily have the same incentive. "Consultants generally get paid whether center does well or not," he says.
  • Experience. Mr. Lambert says organizations like his have a history of experience that provides a basis for better judgment than a physician could have doing it for the first time themselves. He says his organization has helped physicians understand how to economize on equipment purchases without sacrificing quality. They also have cost per case benchmarks to help improve operational efficiencies.
  • National representation. "If Aetna decides to drop reimbursement for a procedure by 8 percent, a consultant can't do much about it," says Physician Endoscopy's John Poisson. "To us, that's not acceptable. We will go and meet with them in Hartford."
  • Expansion capital. A corporate partner may be able to fund expansion projects, such as turning your ASC into a surgical hospital, a project that can cost $2.5 to $5 million, Mr. Vick says.
  • Liquidity. Corporate partners can help buy out physicians who want out. Mr. Poisson says his company's prearranged valuation is three to four times EBITDA, or Earnings Before Income Taxes, Debt and Amortization.

    That said, equity partners are not right for every ASC or even most ASCs. Mr. Poisson says that about one in 12 meetings with physician groups actually leads to a partnership. Among the stumbling blocks:
  • Potential loss of profits. You may be able to hire a "non-equity" management firm and achieve many of the same benefits without giving up any equity, says Tom Yerden, CEO of Aspen Healthcare. "In 99 percent of the cases, we can get financing, so there's no need for an equity partner" as long as the physicians are willing to guarantee loans.

    He says firms like his will provide all of the operational benefits of an equity management company for 5 to 6 percent of net revenues, which an equity partner would charge anyway. He says his firm achieves 15 to 20 percent group discounts on everything from equipment to software to employee benefits. The firm provides accounting, legal and strategic consulting. It hires and trains employees. The difference, he says, is that his firm endeavors to exit within three to five years "after we've downloaded all our intellectual capital." He says centers can also dismiss his firm at any time, whereas "it's a lot harder to fire a partner."
  • Potential loss of control. Mr. Lambert says physicians who have had difficulty in the past with partnering generally may also find it challenging to partner with a corporation. "If your group is adverse to outsourcing things, it won't work," adds Mr. Poisson. "Everyone has to want to do this."
  • A non-profit focus. Some physicians want their own ASC more for convenience or control than profit. For-profit corporations have little interest in centers like these. Most prefer larger, multi-specialty centers with multiple physicians, says Mr. Vick. "Our philosophy is that each physician should be able to take out $40,000 to $50,000 a year or it's not worth doing," says Mr. Poisson.

The Builder
Another entity you will need to select will be the builder, the person who will execute the architect's plans.

The architecture firm almost always has a major hand in the selection process, but once again you will have the final say-so. Our experts say this is an extremely important decision. Picking the wrong builder can be extremely expensive. Here are a few pieces of advice:

  • Lean toward local builders. This is often a matter of necessity, since, as Mr. Martin puts it, "building is resource intensive." But it's also a good idea for other reasons. Your area may have unique building codes or traditions that outsiders don't know about. Local builders will be more responsive if something goes wrong with the building later; they have a local reputation to protect.
  • Pick someone with experience. As with the architect, you need a contractor with background in this type of facility. Best is a builder with OR experience. "All contractors can build per drawings," says Mr. Gordon, "but contractors will also constantly suggest changes that could save money, the 'value engineering' process." He says that if the contractor doesn't understand operating rooms, a $20,000 savings may turn into a $100,000 cost a year later. Everyone has to start somewhere, but, says Brian Shearer, AIA, a project director with Marasco & Associates: "You don't want to educate them on your project."
  • Check references. All builders are not ethical paragons, Mr. Boynton warns. He says some builders deliberately underbid projects to get the business, then pick apart the plans to get leverage for costly change orders so that they can make a profit. He says it's also important to make sure the builder is financially stable; they can and do go bankrupt in the middle of projects. If you have any doubt, "bond" or insure the project.

In the end, a surgery center is only as strong as the people who designed it, built it and helped you get it going. Do your best to pick the right people and you won't go wrong.