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.

Surgery Centers: From Concept to Completion (1 of 2)

Surgery Centers are once again in the forefront of healthcare real estate investment discussions.  The reason can be viewed simply.  Investments from hospitals and fully leased medical facilities did not come to market as originally thought when the recession and health care reform were making everyday headlines and curtailing growth plans for the entire sector.  So, as shareholder interest began to subside, and as capital burns holes, investment interest is moving back into this unique sector of real estate.

Thus, developers are actively searching for physician-investors to initiate (or complete) their thoughts of participating in a surgery center investment.  This is exciting news for the building industry, most of which have gone unnoticed for a several years.  But issues are still abound, especially with building costs relatively unchanged since 2008. So, the costs of building are still somewhat prohibitive and have been one of several factors that have kept some on the sidelines.  But, with investors willing to pay a greater amount than the structure is worth, some looking for strategic partnerships prior to building, this sector is receiving a great deal of interest from investors.

Cost Breakdown

A surgery center, shell and interior, can be between $150 per square foot to as much as $300 per square foot, let alone land costs.  Any addition or reduction from the initial construction estimate could severely impact physician interest.  For example, if 1,000 square feet was necessary for an additional operating room to assist a few physicians, $150,000 to $300,000 in additional construction costs would be necessary, not to mention additional operating costs. Designs have been going back to the drawing board in many situations and any addition or reduction in square footage could cause a change in the function of the building, especially for a fragile physician base that is concerned about future business profits.

Building New or Existing

There are some advantages and some disadvantages when building on a completely new construction site. For example, if you select a previously constructed building, the architect will have existing structures which may somewhat limit the facility design, but, conversely, all site development work will have been done and paid for, and construction time may be substantially reduced.  In the flip side, retrofitting existing structures can reduce construction costs but prove devastating if due diligence and architectural redesign are not performed properly.

Standards of Construction

Those who have not previously developed Ambulatory Surgery Centers typically will find that ASC construction is the not the same as medical office building construction.  In fact, the two types of structures are fundamentally and structurally different. And, because of the potential life-safety concerns, a single city inspection is becoming replaced by multiple inspections at the city, state, and federal levels.

Federal Regulation

On the federal level, a limited amount of construction data may be found in the Code of Federal Regulations-Ambulatory Surgical Services.  We find that most consider the “Guidelines for Design and Construction of Hospital and Health Care Facilities,” produced by the American Institute of Architects, the standard-bearer for construction of ASCs.

State Regulation

When a layman performs an online research on construction standards for Ambulatory Surgery Centers, unfortunately, they will find little uniformity among the states. Some states have no regulations regarding Ambulatory Surgery Centers, while other states have quite lengthy regulations which include facility standards. Some states have adopted national construction codes and include a virtual itinerary of codes for ambulatory surgery center construction.

Construction Team

Often we tend to think of a construction team simply, beginning with a general contractor, when in fact the surgery center team consists of several more contributing members. The architect, the engineer, and on occasion, structural and civil engineers will play a role in surgery center development. The cost for each of these team members may increase the overall construction costs, but is likely necessary component to a fully functional facility.  An ASC is a complex facility which requires special attention and experience on the part of the entire design team.

General Contractor

When selecting a contractor, always search for one who has performed similar medical projects, preferably Ambulatory Surgery Centers. It is essential to verify the references of your general contractor, AND that of the proposed subcontractors to ensure they meet healthcare requirements. The construction process can be a lengthy process, and at times uncomfortable, so be careful when selecting a relative or acquaintance as your contractor.  The point person on your project should be the construction superintendent and not necessarily a good friend.

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This post is an abbreviated version of an entire article written by Robert S. “Bob” Lowery.  For the complete article, please contact our office or your local Texas MREA representative.

The Different Types of Ambulatory Surgery Centers

As commercial real estate professionals, with a strong, unique focus in the medical arena, we are involved in communication with several types of medical real estate owners and operators in the Greater Houston area on a routine basis.  Through our network of partners, vendors, physicians and hospital systems, we have had the privilege of a thorough comprehension of how the Ambulatory Surgery Center functions, thus creating significant value upon acquisition, disposition, and JV opportunities. We would like to dedicate this post to those that would like to increase their basic understanding of the Ambulatory Surgery Center (ASC).

First, the the ASC Safe Harbor regulations identify four different types of Ambulatory Surgery Center entities that may meet safe harbor protection.  These four types of ASC’s include Surgeon-Owned ASC’s, Single-Specialty ASC’s, Multi-Specialty ASC’s and Hospital-Physician ASC’s.  Each category has separate requirements that must be met in addition to the threshold requirements that are applicable to all ASC’s to meet the safe harbor.

Surgeon-Owned ASC’s

Owners of a surgeon-owned ASC may only include general surgeons or surgeons in the same surgical specialty.  The surgeons must be in a position to make referrals to the ASC and to perform surgical procedures on the patients that they refer.  Each surgeon owner must meet a variety of criteria, one of which is an income test for the previous fiscal year or 12-month period.  Each surgeon must derive at least one-third of their total medical practice income from performing surgical procedures that require an ASC or Hospital surgical setting, not location.  This structure does not require all procedures to be performed in the ASC in which they are an investor.  However, when a surgeon’s annual revenues are calculated, at least one-third of the physicians medical practice revenues, must come from the surgeon’s performance of procedures that are listed, as Medicare covered services in an ASC.  The surgical services may be performed in an ASC or in a hospital outpatient department and are not limited to the procedures actually performed in the surgeon-owned ASC.

Single-Specialty ASC’s

This safe harbor allows physicians within the same specialty, whether or not they are surgeons, to invest in an ASC to which they refer their patients and perform surgical procedures on patients in the ASC.  Group practices composed of a single-specialty may also own as well as refer to their own ASC.

Multi-Specialty ASC’s

This safe harbor permits physicians, who are in a variety of specialties, to form an ASC and make referrals to the ASC.  Physician investors in multi-specialty ASC must meet the one-third practice revenue test described above in relation to surgeon-owned ASC’s.  However, unlike surgeon-owned ASC’s, physicians in multi-specialty ASCs must actually perform one-third of their ASC procedures in the ASC in which they hold an financial interest.  This is commonly referred to as the “one-third/one-third” test.  The reasoning behind this requirement is that in this category of ASC, the physicians are actually using the ASC as an extension of their medical office and this does not create significant incentives to generate referral revenues for other investors.  Group practices, composed exclusively of physicians who meet the one-third/one-third test, may also invest in multi-specialty ASC’s.

Hospital/Physician ASCs

Under this safe harbor, a hospital, or several hospitals, must be an investor in the Ambulatory Surgery Center.  The remainder of the investors must be physicians, or group practices, who meet the requirements for a surgeon-owned ASC. There are a number of additional requirements that must be met by physician/hospital ASCs.

If you are an investor or owner, operator or interested party, please provide a call to Robert S. “Bob” Lowery for assistance for Greater Houston Ambulatory Surgery Centers.