One of the benefits of being a partner in a private practice is the ability to share in the various revenue streams of the practice. Often, this can involve practice real estate, revenue share from profits generated by employed physicians and clinicians, and other ancillary income streams such as product sales. The ability to buy into an ambulatory surgery center (ASC) can be exciting, and it’s one often asked about by members of our physician communities.
However, some of our members are quick to point out that not all ambulatory surgery centers generate a profit. As with buying into a private practice partnership, it is necessary to look at all the data before making this decision, which can be a substantial investment. We’ll go into pros and cons of buying into an ASC here.
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Doc2Doc Lending: Doc2Doc Lending has partnered with Physician Side Gigs to provide physicians with fast access to personal loans. It's a novel lending platform created by doctors, for doctors. Doc2Doc loans can be used for a number of reasons: relocation expenses, refinancing of credit card debt, unexpected medical expenses, practice buy-in — you name it. Rather than evaluating potential borrowers based purely on one’s FICO score, Doc2Doc’s algorithm considers doctor-specific factors to gauge one’s creditworthiness, and ultimately, to generate more favorable rates than are typically available at traditional banks. Use our affiliate link at www.doc2doclending.com/psg if you want to apply, as it will provide you with a $100 cash rebate with any newly funded loan, a 0.25% discount if you use auto payment1, and your first payment due date held for 30-45 days. They can also help with commercial loans for larger amounts of money - use the same link and click on the option for commercial loans.
Doc2Doc Lending products are made available by DR Bank, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply. DR Bank may sell, assign, or transfer ownership of your loan to another party after the loan funds. The borrower will receive notification if and when any such sale, assignment, or transfer occurs.
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Bank of America: When you need financing for your medical practice, you want to work with someone who understands your industry. For over twenty years, Bank of America Practice Solutions has helped doctors across the nation reach their goals through smart financial solutions1 and expert guidance. Whether you own a practice or are just getting started, we can provide customized financial help for your short-term needs and long-term aspirations.
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What is An Ambulatory Surgery Center (ASC)?
Ambulatory surgery centers are outpatient surgical centers that are predominantly used for outpatient same-day procedures that are typically lower risk and thus unlikely to require a hospital stay. Ownership these days can vary, but traditionally these have been owned mostly by physicians in surgical fields who do their procedures at these facilities.
How Is Ownership of an ASC Structured, and Is There a Conflict of Interest?
Surgical centers can be quite expensive to construct based on the degree of specialization needed and the amount of space required, as well as the local real estate market. As such, these tend to be owned by multiple owners rather than a single physician.
Ownership structures vary quite a bit depending on the facility. These efforts are often spearheaded by physician groups, but given the rise of investment in the healthcare space, increasingly, there are also companies and management groups that may be involved. Regardless of the ownership, there is almost always some level of physician involvement, as facilities want to incentivize surgeons to bring their procedures to the center.
We hear a lot about self-referral fees and Stark laws, and they do apply here. It’s important to note that not everyone can buy into surgical centers - most ownership structures dictate that you do a certain number of cases at the facility every year and that you give up your ownership once you retire or choose to stop operating.
There are also CON (Certificate of Need) laws present in many states, which require that the need for a facility is proven. Ostensibly, these laws exist to prevent there from being surgery centers on every corner and resulting in excessive expenditure on underutilized spaces, but the laws are controversial as they can sometimes prevent independent groups from having a fair chance at establishing ambulatory surgical centers. As you might guess, existing facilities such as hospital systems may not be excited about creating competition for themselves, and may use their political connections to prevent these from getting approved. If you are planning on creating a new ASC from scratch, expect to encounter some challenges in justifying the need for your center in most states (and some states may preclude you from building one outright).
Often times, you will not be offered a share in an ASC until you are partner in the practice or even until an existing owner in the ASC retires. If an ASC is trying to raise money, they may open up opportunities to buy in at other times, or opportunities to increase your investment. Others require that you hit a certain utilization before you’re offered shares.
What are the Benefits of Owning an ASC?
There are many reasons why procedurally oriented physicians may consider constructing or buying into an ASC.
As with any investment, you should be looking at what your return on investment will be. In the case of an ASC, there are several avenues for ROI in terms of both cashflow and property appreciation. Additionally able to benefit not just from the professional fees related to the procedure, but also from the facility fees billed. It’s more than that, though.
In addition to the monetary reasons, many physicians prefer the control of the flow of operations they have at their own facility over that they might have at a hospital. For example, they are less likely to get bumped, more likely to get the preferred OR block times, turnaround times are generally better than at a hospital and surgeons can run multiple rooms at once if available, and they can invest in equipment and facilities specific to the procedures they tend to perform. Overall, efficiency is better, and this leads to the ability to do more cases and generate more profits, as well as the ability to meet patient demands in a timely fashion.
Patient satisfaction also tends to be better at ASCs. The facilities can be constructed to give a better experience for their patients, and many patients prefer the convenience in location and ease of getting in and out of a facility without the hassles involved with hospital registration. Generally, fees are also lower for patients as hospital facility fees are far higher.
Things to Consider when Invited to Buy In To An ASC
While it’s easy to assume that an ASC is a great investment opportunity, that’s not always the case. Many ASCs can turn into horrible investments or money pits. For an ASC to be profitable, it’s got to be utilized regularly, have good payor contracts and reimbursement, and run efficiently. These are the questions you want to be asking:
What is the payer mix, and what has ownership done to ensure that contracts are negotiated and renegotiated regularly to ensure the best possible reimbursement for procedures done at the facility? Is the billing in network or out of network?
What is the current utilization of the facility? If it is not fully utilized, what is being done to ensure that it will be in the future?
What is the competition in the area?
What are staffing costs and how have they been rising? How experienced are the staff and how is staff retention?
What is the net operating income of the property? What is the trend here?
What major expenses are anticipated in the future (major maintenance issues, new equipment, etc.)?
How are ongoing expenses split amongst the investors?
How are large one time expenses handled and financed? Is there a personal guarantee required if outside financing is required?
What is the potential for a capital call (asking for more money)?
What has the return on investment been for existing partners? Ask for multiple years of returns.
What are voting rights like in regards to major decisions? Who comes up with policies and procedures?
Have there been any major issues at the facility, such as lawsuits, audits, abnormally high complication rates, etc.?
What is the reputation of the facility in the community? Do patients like the facility? What do the online reviews say?
Who provides the anesthesia? What is their experience level? Would you want to operate alongside them?
What is the pipeline to retirement of existing shareholders? Are you going to have to take on more ownership in the future and are you comfortable with the risks associated with that?
What is the legal landscape and current CON situation in the geographic area and what does it mean for future competition?
Ultimately, you’re going to have to decide if the ROI of the investment opportunity is worthwhile. In cases where the ASC is wildly profitable, it’s hard to pass up the opportunity and many of our physician members would argue you should participate at all costs, keeping the long game in mind. In certain fields where ASCs are very profitable due to highly compensated cases and relatively low overhead due to less expensive equipment and less staffing needs, it can be a no brainer. A lot of physicians also love the idea of diversifying their income streams with a known asset rather than the unpredictability of investing in something where you don’t have control over the profits.
You should get your own individual valuations and have your own attorney review the buy-in agreement. Remember, though you may trust your partners, they have someone on their side advocating for their interests and you should too.
Existing ASCs versus New Construction of An ASC
In many ways, buying into an existing ASC is a lot more straightforward. Hopefully you have a lot of data to look into as to the profitability and trends of how the ASC is performing. You should of course look at the potential for major expenses related to maintenance and failing equipment, etc, but it’s likely overall easier to project what kinds of returns you can expect on your investment.
A new ASC is a lot different. Things you want to consider include:
What is the need for this facility? How many other ASCs exist in the area and what is their usage? How many physicians in the area are looking for places to operate out of that don’t already have a place they are happy with?
If your ASC is going to be very specialized to a specific procedure, does the patient population in the area and surrounding areas have a demand for that procedure? What is the payor mix and profitability of each case?
How long can you go before getting a return on your investment? A new property is unlikely to be cashflow positive right from the beginning. Staffing is expensive and may not offset the utilization, and you’ll be more likely to be paying off equipment and other startup costs at the beginning.
ASC Buy-In Structure and How Much It Should Cost
Again, this can be different depending on the facility.
Part of the buy in is going to depend on the value of the real estate, which will of course vary based on the geographic area. There will also be the cost of the equipment within the facilities, which are depreciating assets. All of these numbers should be shown to you in a recent valuation.
Most ASCs have a set formula used to determine the valuation depending on the factors above as well as usually a component related to the profits of the ASC. Many times there is a multiple applied to historical profits. These books should be open to you and your accountant/lawyer for verification purposes.
If this is an established ambulatory surgery center with many partners, there is not usually much room for negotiation, as terms are generally intended to be fair to all owners. Be sure to ask if there are special terms for senior partners, which may be monetary or in the form of voting rights/decision making.
Getting the Money for A Buy-In
Many people are offered buy-ins at early stages of their career, at a time when most physicians are still dealing with a lot of debt. You may still have student loans, a substantial mortgage, a private practice buy-in, and other expenses, and may not have the cash on hand to buy in when offered shares. This can make the decision to buy in more complicated, as taking on further debt can be prohibitively expensive.
Assuming that you have decided that this is a good opportunity where the investment will pay itself off relatively quickly and then lead to passive income, you then have a few choices for financing. One, you could use money that you’ve saved up. Two, you could see if there are financing options through the practice or for a gradual buy-in. Three, you could secure outside financing through a personal loan or bank. We have some options listed in the resources section above if you need this.
Conclusion
Buying into an ASC can be a great opportunity, but also potentially a bad investment. It’s important not to approach the decision from an emotional or gut reaction standpoint, but actually in a calculated way as you would consider any investment opportunity. Make sure that the investment opportunity is profitable, that you are comfortable with the current and future risks, and that you understand the opportunity cost of not investing the money elsewhere. Don’t be afraid to ask lots of questions. If anything rubs you the wrong way, dig deeper. And don’t be afraid to ask for second opinions on our physician communities, as many of our members have taken part in these ventures and have lots to say!