Ambulatory Surgery Center: From Concept to Reality

In our continued expansion throughout the State of Texas, we are regularly posed questions pertaining to financial feasibility and cultivation of an ambulatory surgery center. We would like to respond by providing a few feasibility studies, to include financial summaries, in a later post. This post will be dedicated towards setting up the ASC entity, determining consultants, bidding to preparation for construction.

1.  Once you have determined that it is feasible to build an ASC, you must first consider its legal structure. Will you consider owning the ASC with partners outside of your medical practice? Many physicians adopt others when building an ASC. But, prior to making this decision, it is important to determine the legal risks associated with joint ownership of an ASC. Many are familiar that Stark Law has limited scope for operations within a surgery center, yet several other legal issues such as non-compliant physicians, indirect referrals, and billing matters may arise and should be considered and should be explained to avoid contagion within an ASC.

If the ASC is going to be built on existing land investment, it is important to determine how the land should be owned. Should it be in its own legal entity or part of the ASC entity? Will all of the owners of the ASC own the real estate? Owning the real estate in a separate entity may make the cost of the ASC more affordable for others. Separate ownership of the real estate may also provide an income stream for years to come. If your ASC is owned in a separate entity, you should consider the tax implications with receiving income from more than one employer.

Your legal counsel should review with you the issues surrounding the building of an ASC. They include, at a minimum, HIPAA, Anti-Kickback Statute issues, fraud and abuse issues, and antitrust considerations.

Once you have evaluated the legal considerations and determined the structure of the organization, your legal counsel should prepare a number of organizational documents. Within this packet, you should have an Operating Agreement which details how the business of the ASC will be run. The Operating Agreement will clearly define the initial and supplemental capital contributions of each member of the ASC as well as how contributions will be required. The Operating Agreement may also contain a non-compete provision prohibiting investors in the ASC from owning an investment interest in a competing ASC within a specific geographic area. You should consult with your attorney regarding the enforceability of non-competition covenants. The Operating Agreement will also determine how new partners are admitted, and the buy-out of existing partners. A valuation formula for the Member’s ownership interest should be included in the Operating Agreement. The Operating Agreement should also contain a conflicts of interest provision which requires members of the ASC to disclose potential conflicts or business opportunities to the ASC.

2.  Moving forward, now that a viable project exists, it is time to turn the attention towards the next step, which is to contact the state where the facility will be constructed to determine the steps necessary to complete the project and comply with the necessary state and federal requirements. Texas will send you a packet of information detailing this process and advising you of the significant building requirements.

In conjunction with this, it would be advisable to interview architects. In the process of interviewing candidates, be sure to qualify each one based on their experience designing ASCs within Texas. ASCs can be complex structures with significant engineering involved. Do not proceed without a qualified architect and engineer who commit to providing you with a fully engineered plan. As a caveat, if the architect advises you to proceed on a “design build basis” where the contractor and his subcontractors provide the engineering, you may be inviting delays in getting the center built.

The basic decision of what is to be built is largely based on what procedures will be performed at the ASC. If a constructing a single specialty ASC, it is common for physician to assist in direction for the layout of the ASC. Certain spaces are required inside the ASC to support the surgical procedures you intend to provide. The list of all of this space is called the program. Once a program has been developed, the floor plan layout can be done.

For purposes of certification, Texas requires floor plan review prior to proceeding with formal construction planning. Once the floor plan has been approved, your architect can proceed with the construction drawings. A significant period of time for this should be alotted, as most projects sit in idle during this phase.

Most owners want control of bidding for their projects. However, because the industry is seeing a greater number of projects moving forward, some are being performed within a construction management agreement. The advantage to construction management is that if you have advisory through experienced general contractor, or knowledgeable advisory, the process can ultimately save money within in the design process. The contractor can provide a valuable engineering function by recommending less expensive ways to construct the building or less expensive materials for the project.

3.  If you decide to bid out the ASC project, we recommend you get bids from multiple contractors. Your architect and consultants should make a recommendation as to which bidder wins the contract. Ultimately, it should be the owner’s decision, although the architect and consultant’s recommendations will remain of serious consideration.

Once the contract is awarded, be sure to sign a contract for the construction of the project. Also be sure to set out expectations for payment to the contractor at the start of the project so everyone knows what is expected of them. You should expect multiple requests for payment during the project based on a percentage of the project that is completed.

The architect and consultants should provide regular onsite visits. A report should be available on a bi-weekly basis to keep the owner apprised of the progress being made. Construction meetings with the subcontractors, general contractor and the owner’s representative should be held along these same scheduled intervals.

Please look forward to subsequent posts regarding feasibility studies, equipment, or licensing of an ambulatory surgery center.  Contact Robert S. “Bob” Lowery of MREA for any questions during any part of the planning or implementation process of your Texas ASC.

Medical Lease Checklist

As commercial real estate practitioners are aware, most leases contain provisions that require a tenant to be in compliance with all applicable laws, but medical leases must specifically address and require compliance with Healthcare Referral Laws. While there are many similarities between standard commercial office leases and medical office leases, many considerations pertaining to and regulations contained in the Stark Law and the Anti-kickback Statute are unique to medical office leases.  This is especially true in leases where both the landlord and the tenant are physicians or other healthcare providers. These rules are designed specifically to prevent physicians and other healthcare providers from receiving payments based on the volume and value of the referral of patients.

In a standard commercial lease, the ownership by the landlord and the relationship with the tenant rarely have an effect on the structure of the lease or the determination of the rental rate. In the medical leasing context, however, the ownership structure of a landlord and the relationship of the tenant will impact whether a valid relationship may occur.

As for the lease itself, we have provided several items that we suggest you have handy when preparing to enter into a binding relationship with a landlord, tenant or third party.  Each bullet point has a detailed explanation to which we suggest contacting an attorney that is privy with Healthcare Referral Laws.

Medical Lease Checklist

  • Standard office lease review
  • Stark Issues
  • In writing, signed by parties, identify rental space
  • Term for at least one (1) year
  • Rent at fair market value
  • Set in advance (four (4) elements for amended rent)
  • Tenant improvement allowances
  • Landlord concessions
  • Holdover rent must be consistent with market
  • Amount of space is reasonable and necessary for proposed use
  • Lease is commercially reasonable even if no referrals
  • Holdover no longer than six (6) months
  • Subleasing and Timesharing Arrangements
  • Subleases must independently qualify
  • Sharing of common space/staff issues
  • General prohibition on per-click arrangements
  • Durable medical equipment issues
  • Protect against issues created by change in tenant/landlord ownership
  • Allow amendments for compliance with regulations
  • Medical qualification provisions – hospital staff obligations
  • Hospital-imposed use restrictions
  • HIPAA privacy and security concerns
  • ADA compliance issues
  • Excluded individuals
  • Use restrictions to limit practice area
  • Medical wastes – clearly document responsibilities
  • Utility services – ensuring continued service
  • Signage issues