How a Corporate Partner Saved Our ASC - Surgical Construction

Don't overestimate yourself. That's my advice to any physicians planning to build their own surgical facility. When my two urologist partners and I decided to build a small ASC to meet our needs, we figured the dividend checks would start rolling in soon after we secured our certificate of need. The truth is, we were overconfident and underinformed, and it was only in hindsight that we realized how much trouble we could have saved if we'd partnered with an ASC development company from the start.

What went wrong?
In the beginning, my physician-partners and I had no doubt that we knew what we were doing. We expected to have three other physician groups — ophthalmology, GI and orthopedics — on board, so we designed and built the surgery center with all four specialties in mind. Unfortunately, we underestimated the power and determination of our community hospital, which began construction on a competing facility and was able to pick off our would-be partners before we even opened.

Meanwhile, we thought we could learn all we needed to know about managing a facility by attending a weekend conference. Such overconfidence led us to commit a number of costly rookie errors, such as overstocking the facility in a big way, ordering enough quantities of some supplies to last us for years.

All of a sudden there we were, three urologists in a six-room surgery center. What began as a conservative project designed for success quickly turned into an overbuilt, overstocked and underutilized failure. We were able to bring some other physician groups in to work with us to a limited extent, but during the first couple years, our ASC was bleeding money. We were constantly writing checks just to keep the venture afloat.

Rescue plan
About two years after we performed the first procedure in our ASC, we began in earnest to seek out a corporate partner that could help dig us out of the hole. Finding a partner that was willing to take a chance on us wasn't easy — several prospective partners took one look at our facility and walked away. Eventually we found a match with a partner that was impressed with the quality of our facility and staff, but saw that there was much work to be done on the business end of things. Our new partner quickly brought several valuable assets to the table.

Contract renegotiations. The company brought in a managed care consulting team to help renegotiate our insurance contracts and secure higher reimbursement levels and better terms, such as carveouts for expensive orthopedic procedures.
Surgeon recruitment. Through aggressive marketing with local physicians, our partner was able to recruit orthopedic, GI and some ENT surgeons to our center, bringing in higher revenue cases and diversifying our case mix.
Oversight and management. Our administrator works with our corporate partner to keep business operations running smoothly and efficiently. They've consolidated our schedule so we're only open on days when we have a full OR, and we only open a second OR when the first one's full. Our staff now tracks case costs on every procedure and is much more aggressive with cash collections and following up on accounts.
Working capital. By purchasing one-third of the surgery center, our partner provided us with the working capital we needed to retire some of the debt that we'd incurred.

We signed the agreement with our partner in May 2007, three years after opening the ASC. That was the last month we had to write personal checks to keep the facility open. The center became cash-flow positive within four months. Our net revenue per case has grown from about $800 when our partner first signed on to about $1,200 today.

Which Corporate Partner Is Right for You?

Today, there are so many different types of corporate entities in the ambulatory surgery industry that you need a playbook to keep track of who's doing what, or why one corporate partner is better than another for a particular ASC. Here's an overview of the three main partnering strategies.

1. The Big Boys. These large companies, usually national in geographic scope, have the necessary access to capital to acquire a majority interest in an ASC. They tend to target the most successful facilities (defined by amount of EBITDA or cash flow) and pay high multiples (6 or 7+ still being the market range). The big boys typically obtain their acquisition capital in one of two ways: self-funding or bank financing. Those that self-fund their acquisitions have no technical cost of capital and can theoretically pay the higher multiples, while those that borrow may be limited in the prices or multiples they can pay.

The big boys present you with an opportunity to take some chips off the table and put some money in your pocket. You'll get the best of both worlds if you can combine the economic windfall of a liquidity event with a marriage to a corporate partner capable of engineering future growth for your ASC.

2. The Heavy Lifters. Most corporate entities rely more on their "sweat equity" — human resources such as management and development expertise — to add value to your ASC. These companies seek to acquire a much smaller equity interest in your ASC in return for helping you take it to the next level.

The most important question to ask when considering one of the heavy lifters is, "What exactly does my ASC need?" For example, if you've got a single-specialty GI center with a large amount of Medicare business, and you've been watching your profitability fall along with Medicare's declining reimbursements, start by taking a critical look at your local market to ascertain the best path forward. Need to add a new specialty or two? Target a heavy lifter that's well suited to bringing in that new specialty. Knowing exactly what you need from a corporate partner is the key to making sure you get it at the least cost. Included in that cost is the equity you must give up to entice the partner aboard, so make sure you have sufficient need for their heavy lifting expertise before you give up equity.

3. The Hospitals. Believe it or not, hospitals are the newest entrant to the corporate partnering model. Depending on the circumstances of your market and the unique characteristics of your ASC, it's possible for a locally dominant hospital to have enough managed care contracting clout to provide increased reimbursement levels for your surgery center. It's important to note that your ASC won't get paid hospital rates; rather, the hospital or hospital system puts your ASC on its roster of existing surgery centers or uses its market dominance to negotiate higher ASC reimbursement levels. In this scenario, you could yield an overall 30 percent increase in reimbursements, leading to immediate revenue and profitability growth for your center without adding a single new case.

A word of caution: Since these hospital partnerships require much more sophisticated structuring and more complex legal and business negotiations, they can be difficult to accomplish without the assistance of professionals with firsthand experience. Don't underestimate the value of top legal and consultative resources before you enter into any corporate partnership (see "Partner With a Hospital?" on page 66). — Robert Goettling, JD

Mr. Goettling ([email protected]) is a partner at the ASC consulting firm The Bloom Organization, which specializes in helping physician-owners with corporate partnerships.

Don't wait till you need a turnaround
The best corporate partners aren't necessarily the ones who wine and dine you and your physicians. They need to tell it to you straight and come to the table with a wealth of facility startup experience. In my opinion, building a center is a project you shouldn't tackle alone. You don't know all that you should (even when you think you do), and you don't have the time to learn it. Corporate partners help bridge that knowledge gap. That's something we didn't realize at first. We were na??ve and full of ourselves, thinking we couldn't fail. Don't make the same mistake.

DID YOU SEE THIS?