How to select your ASC investment

Remember those people who died on the Titan submarine while trying to go see the Titanic wreck last year? They obviously made a huge mistake. And paid a lot of money to lose their lives. There was in interesting interview with James Cameron. The legendary film director is a world class expert in the physics and engineering of deep-sea diving. He explained that the implosion of the Tital was not only possible, but it was also inevitable based on the metals used in construction and the depths of the dives. As it turns out the knowledge the Titan passengers needed to be alive today was available... just not to them.

A lot of surgeons choose their Ambulatory Surgery Center investment are in the same boat (pun intended) as the Titan passengers. The most important financial decision a surgeon makes is who they marry. But the second most important one is their ambulatory surgery center investment. And most of us make it without the right information. That's because our medical school professors, attendings in Residency, and even mentors in fellowship probably don't know much about investing in an ambulatory surgery center.

I'm here to tell you that willful ignorance is still ignorance. First as a doctor and now a developer, I've been in the surgical facility business for twenty years. I have the knowledge you need to make the right decision. This blog is my attempt to avoid the financial version of the Titan sub. Here is what to expect and look for in an ASC.

Quality

I know you want to know about the money. And I promise that's coming... but as an owner, your ASC is part of your practice. Your practice establishes your personal brand. And your personal brand is your reputation. So, your ASC can make or break your reputation.

I met a young joint replacement surgeon once who was offered a seven figure opportunity to joint an ASC with a bunch of pain management doctors. The ASC was basically a closet with a C-arm. I advised him that while he may make some money retrofitting the closet for joint replacement, the first complication would be so damaging that his reputation would never recover. So, let's talk first about quality. Because if the ASC is low quality, you need to walk away no matter how good the money is supposed to be.

There are some things you can look for. The lobby should be as comfortable as a first-class flight lounge. The OR (and whole place for that matter) has to be immaculate. And look for accreditation by a legit certifying agency like the AAAHC. I personally hate JCAHO, but they are serious. Having a State license is a necessary minimum but does not guarantee quality. The Titan didn't blow up on its first journey; yet it had inherent flaws that destined it to disaster.

At the end of the day the place has to pass the sniff test. Look around and ask yourself, would I be proud to show my Fellowship Mentor that I work here? IF the answer is no, walk out the door.

Finances

If you are independently wealthy and find investing a nuisance, then a hospital owned ASC will take your $15K for a fraction of a percent ownership and turn it into $60K over the course of a good?year. The 400% return on your investment seems great---and for the risk it is--- but it’s not going to move the needle on your personal finances. And it has nothing to do with what you are worth. You need to take a different approach to evaluating your ASC investment than you have your other types of investments.

There are 2 key numbers spine and joint surgeons should look at when considering an ASC ownership. The first is gross value. That is the number of dollars the facility expects to earn form your cases.

The second important number for potential ASC owners is the profit margin. That is income ($$) / revenue ($$) * 100. You want to be part of an ASC with a profit margin above 20%. A 30% margin is great, and 40 rarely happens and is not likely sustainable.

In an ideal world, once your ASC had paid its debt and had time to ramp up to full speed, you would take in distributions your value added. Your are worth your gross value * profit margin. In this example, $3.24M * (0.2 - 0.3) = $648K - $972K per year.

So, why not just make a deal with an ASC to work things out so you get your real value? It's illegal. The Federal Anti-kickback Statute prohibits ASCs from offering you shares based on your ability to produce. You would not ever do this, but the idea is to prevent you from having an incentive to overutilize surgery.

Compliance is king. It comes right up there with safety. You may not get your actual value, but you do want to look for a legal situation where you get as close as you can. I build ASCs with two operating rooms and target five owners. That way each owner can enjoy the bliss of having the center to themselves for one full day a week. In my experience you will get closest to your value by having significant ownership of a single specialty ortho ASC.

Location

If you have a nasty spouse and annoying kids, then turnover and commute times don’t matter. For everyone else, pick an ASC near your home that whips the room turnover so you can get home for dinner. Since they only come there once, even if your practice has several locations, most patients are not overly concerned with the distance to your surgery center. They need a driver, anyway.

Facility Infrastructure

Focus on the stuff you know and ask the right questions. Are they doing the kind of cases you do at the volume you need for a full day? A new joint replacement robot is a million-dollar commitment --- do they know the cost and are they willing to get what you what you need? Details matter. A spine fusion case can involve twenty trays. Is the sterilizer capacity adequate for the cases you do?

Ask a surgeon who is operating the day of your tour what time they expect to finish for the day. If the center is turning and burning the rooms and everyone is busy, why are they so concerned about their lounge??

Operational Efficiency

This is important, but you really are not qualified to evaluate it. Ideally, one would compare the ASC’s financials to national norms. If you are the kind of person who does their due diligence, get a copy of their annual P&L and contact me; I will help you normalize their data.

Partnership

Show me your partners and I’ll show you your future. Good partners make everything better, and bad partners... well, a note to the wise: when you lie down with dogs you wake up with fleas.

Every partnership has an operating agreement. Look closely at governance to see how key decisions will be made. Ask the management to walk you through what would happen if you wanted to use a new device or manufacturer. Also, make sure there are means of getting rid of bad partners; free riders aren't fair.

By carefully selecting an ASC investment, you can ensure a good experience for your patients and a profitable investment for yourself. I wish you success in your investment ventures and continued excellence in your practice.

Best regards,?