August 1998 Bulletin

Building future takes capital

Financing is available if physicians 'stand behind' the loan

Orthopaedic surgeons who traditionally operated their practices as a zero sum game-revenue in, expenses out, zero retained earnings at the end of the year-are learning the ropes of high finance these days.

Faced with the need for additional sources of revenue to offset declining reimbursements and to protect their future with beefed-up infrastructures, many physicians are planning ancillary developments. A "hot" development today is the ambulatory surgical center and that takes capital, says Robert Bennett, vice president, Health Care Finance Services Group, Summit Bank Princeton, N.J.

First developed in Phoenix, Ariz. in 1970, the development of ambulatory surgical centers got a boost in 1982 when Medicare began to pay the cost of surgery in the centers. Arthroscopic, endoscopic and laser surgical advances contributed to the growth. About 1,200 free-standing surgery centers have been built in the 1990s, bringing the total to more than 2,400 in the United States.

Depending on the size of the center it can cost $800,000 to $1.5 million for construction and operating expenses. "Few doctors are willing to finance surgical centers out of their own income," Bennett says. When physicians need capital for developments like surgical centers, Bennett says "they want to borrow as much as possible for as little as possible for as long as possible."

He understands the attraction of these developments. "Physicians want to own surgical centers so they can keep their professional fee and the facility fee that now goes to the hospital," Bennett says. "Ten years ago, physicians may have looked at ambulatory surgical centers as a headache; it didn't make sense to own one. Now, as reimbursements decline, they are working harder and developing these centers to maintain their incomes."

In today's favorable economic environment, physicians are finding that capital is available for these developments. However, physicians will find that banks want the doctors to "stand behind" the loan with personal guarantees. Patricia Costante, executive vice president and COO, MIIX Health Care Group, says many of the ambulatory surgical centers are developed by four or five physicians putting their personal assets behind the financing. An exception, says Costante, are "doctors on the west coast whose incomes have been declining. They seem less willing to backup loans with personal assets and guarantees."

As development groups get large, and physicians learn about the "joint and several" concept in finance, which entitles the lender of a financially troubled development to seek full reimbursement from any one in the group, another trend is taking hold. "When there are 20 physicians guaranteeing the loan, the senior physicians (with the most personal assets) suddenly realizes they (each) own 5 percent of the development, but may be liable for 100 percent of the debt," Bennett says. The senior physicians will want to limit their liability by tying the guaranty to their respective percentage of ownership. Bennett says "it is in their (the senior physicians') best interest to negotiate a limited guaranty, wherein each investor's liability is limited to a multiple of, or in some cases, their shareholder/ownership percentage."

Physicians also are looking for capital from private investors and joint ventures, but they have to learn how to give up control," says Costante. "The physicians want the investors to finance 51 percent of the project and then wonder why they are not the majority partner."

However, some physicians are learning the rules of the game, even retaining earnings to show their creditworthiness when they need to borrow money, says Bennett.

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