More than 54 million outpatient procedures are done each year in the US, a three-fold increase in the last 30 years. An increasing number are done in freestanding centers, many of which are owned by physicians. It seems clear that many more surgeries that have historically been done in hospitals will move to ambulatory surgery centers (ASCs).
Many ASC owners and administrators are finding that their ASC capacity is already being stretched to the limit and scheduling is becoming more difficult. Turning business away or scheduling into the future is not good for business or for the reputation of the ASC. Many ASCs need more ORs to handle current and projected business. Some centers need larger operating rooms to allow for added specialties and the new procedures being performed at their centers. Others may need a major renovation, or additional locations.
According to VMG, the average gross cost of adding an OR to an existing ASC, including plant, infrastructure, tenant improvements and equipment is $1.4 million, so to add 2 ORs and a PR could cost $3 million or more.
There is an alternative to paying cash or taking out a loan to pay for the expansion or renovation of your ASC: a sale-leaseback of the ASC real estate to a buyer who will fund the expansion and/or renovation. These real estate buyers can also fund the construction and development of additional facilities.
Assumptions:
- Sellers would have full control to negotiate a beneficial long term prior to closing.
- The real estate owners would sell the ASC real estate for a competitive market rate selling price plus receive the capital for expansion.
The benefits to the ASC and to the physician-owners:
- ASC obtains expansion ORs without taking on more debt or providing personal guarantees for a new loan
- ASC capacity increases to facilitate more procedures, revenues and profits
- Sellers receive cash upon the close to invest in better yielding investments and stop paying ordinary income tax on rent received
- Sellers can pay down existing debt and remove loan guarantees
- The physicians maintain full operating control of the property and pay rent to a new landlord who has provided the capital for expansion.
- Rent is deductible against the ASC’s taxable income
- Makes it easier to add new partners to the ASC
Option of Co-ownership of the real estate.
- Most healthcare real estate buyers that pay for expansion also allow for minority co-investment.
- This allows the physician real estate owners to stay on as minority partners in the real estate.
- Members of a larger group who do not want to sell can remain as owners while others seeking to sell and take assets off the table can do so.
- Other physicians in the group who do not already have ownership in the real estate are also given the option to co-invest.
Adding ORs will prepare your ASC for the future, but it takes time and money. If your ASC is nearing capacity, now is the time to plan for expansion or renovation to take advantage of the projected increase in outpatient procedures. Smart ASC operators will take advantage of this opportunity sooner rather than later.
Moving procedures out of hospitals and into outpatient settings has generally been a positive development in health care — one that reflects advances in science, technology, and consumer preferences. Outpatient surgery is more convenient than inpatient surgery, and it is much more cost-effective. The Affordable Care Act promotes this sort of delivery system transformation because its goals are to make health care more accessible and convenient, while reducing costs and promoting quality and safety. Outpatient volume in ASCs in going to grow.
ASC physician-owners and administrators can obtain more information about sale-leasebacks of ASC real estate and capital for expansion by contacting Jon Vick at 760-291-7745 or JH Winokur Inc. at 914-216-3574.
Since 1998 we have advised ASC physician-owners on development, merger, and strategic acquisition transactions for over 300 physician-owned ASCs, endoscopy centers (ECs) and surgical hospitals. ASC/MOB real estate expert and broker JH Winokur, Inc. specializes in ASC, MOB and Surgical Hospital real estate sales and sale-leasebacks, sources of expansion capital, property valuations and 1031 exchanges.
