Now more than a year into a recession, consumers and companies aren't spending, patients are canceling elective procedures and loans for startup capital are getting harder to find. How can you launch a surgery center in a situation like this? It's difficult, but new centers keep sprouting up just not as many as in years past.
In addition to the struggling economy pumping the brakes on new surgical construction, there's the question of the supply of existing facilities catching up to demand. Outpatient surgery remains a runaway growth market, but how many more new surgical facilities do we need? It's estimated that 5,787 ASCs are up and running today, outnumbering acute care hospitals doing surgery by more than a thousand. As a result, renovations and surgery center turnarounds (group A buys out group B and resyndicates the facility to new surgeons) are becoming more common.
However, there are some bright spots for those groups that do decide to launch a surgery center in the next couple of years. "For investors with good credit, strong financial statements and profitable business, there may be opportunities to take advantage of the downturn in construction and capital purchases," says Gayle Evans, RN, MBA, president of Continuum Healthcare Consultants, based in Kennesaw, Ga. "Deep discounting of services and equipment may be available to develop the center at a lower cost."
With many healthcare systems and investor groups putting off new projects, those groups that do launch a surgery center will have the advantage of being up and running by the time the others decide to jump back in the race. In the meantime, there are many hurdles in front of any group looking to finance a surgery center startup. Here's how to meet five of the major challenges to financing a startup without stumbling.
1. Economic slowdown
When the economy slows down, banks become conservative. They'd rather hold on to their money and wait for things to pick up again than loan money to unknowns and first-timers.
Success in business is all about whom you know. "Banking is still based on relationships," says Ms. Evans. When you begin planning, sit down with all your partners and put together a list of possible contacts. "Don't lock yourself into one lender," she says. Besides lenders specialized in the outpatient surgery market, consider community banks, which may have a better feel for a local community and its needs. As you meet with more lenders, even if they don't offer to fund your project, you'll be able to refine your pitch.
2. Tight credit
Lenders are not very generous today. Banks are holding on to their money because they fear that they may need it later. Large financial institutions are tightening up on funding because they're trying to stay afloat after losing money in other sectors. This doesn't bode well for a group of investors looking for a loan to start a new business.
Your solution is to put together a great pro forma analysis. This is how you show that you've done your homework and that you have a well-thought-out plan based on the economic realities of today and years to come. The pro forma is the first thing the lender sees. "Thoughtful, rational projects will get funded," says M.J. Klimas, senior vice president and national sales manager for healthcare equipment finance at Bank of America, based in Pittsburgh, Pa.
The pro forma is your calling card and should include at least the following items:
- physician commitments in writing;
- physician scheduling preferences that show maximum OR usage;
- five-year case volume projections;
- five-year reimbursement projections;
- staffing needs reflecting volume; and
- assessments of your market and competition.
If you're working with a partner or development company, they will help you put together the pro forma. Otherwise, it's best to hire a consultant that has done pro formas before. Since the success of a surgery center is based on physicians scheduling cases at the center, it helps to show that the physician-investors are involved, financially and emotionally. At least one physician should be involved in creating the pro forma, which should show that the physicians will be active participants in the venture.
3. Banks want to see more skin
For many years, the surgery center business was considered a safe market for lenders. "Historically, lenders were more lenient," says Ms. Klimas. Often physician-investors could borrow money for a startup with little or none of their own money in the project. They could also get non-recourse loans that were not tied to their personal assets.
Today, a lender doesn't want to be the only one taking a risk when it loans money to a new business. "Non-recourse loans are harder to find now," says Rick DeHart, chief executive of Pinnacle III, a surgery center development and management firm based in Fort Collins, Colo. The bank wants to see that the investors have their own money in the project as well. If the investors have cash at stake, the lender figures the business has a better chance of success because the investors have some of their own "skin" on the line. But many physicians, like many of us, have a lot of personal debt, which means they have less cash on hand for investing.
Don't overbuild at the start. Plan for big things but don't build more than you need. "Take baby steps," says Scott Shapiro, senior vice president at Warren Capital Corp., based in Novato, Calif. This will allow you to ask for less money from a lender. In the current lending climate you're more likely to find money for a smaller loan. However, it's good to have phases planned because it shows that you've thought through future plans and have an idea of where you'd like the project to go as it succeeds.
4. More hospitals are building outpatient facilities
With more than 77 percent of surgeries performed in an outpatient setting, hospitals realize that outpatient surgery is the here, now and future. Many regional hospitals have even started to like ASCs, especially when they're partners. About one in four new ASCs is a hospital-physician joint venture. A local hospital chain's embrace of the ASC concept can be good or bad, depending on whether you're in on the venture.
Teaming up with a hospital can head off a lot of problems. Many hospitals still see ASCs as a threat to their case volume. "A hospital can make it very difficult for a surgery center to get up and running," says Mr. Shapiro.
Lenders like hospitals because the hospital already has a track record, which helps predict procedure mix, volume and case migration from the hospital to the surgery center. "A hospital partner makes my job a lot easier," says Ms. Klimas. "There's value to the brand."
5. Some specialties are more profitable than others
Not all specialties and procedures are equal in the eyes of Medicare, insurance companies or banks. While orthopedics is expected to do well in the coming years, reimbursements for GI and ophthalmology procedures are scheduled to drop. Elective procedures, especially cosmetic surgery, fall off when the economy sours. Lenders know this and make their funding decisions based in part on the types of services the center will offer.
The key is to have a healthy procedure mix. Don't place your bet on one specialty. "The more variety, the better," says Ms. Klimas. Don't discount entire specialties because they've fallen out of favor with CMS. There are gynecological, GI and ear-nose-throat procedures that can be very profitable in the right situation. Make sure that they're worked into your mix.
This year might prove to be a tough one for gathering startup capital, but it can be done, say the experts. If you define your niche and communicate it effectively to the lenders, you'll find the money.