December 1998 Bulletin

Feasibility study key to ASC

Information is essential to determine success

By Bonnie Booth

If you and your partners are contemplating building an ambulatory surgery center of your own, the first step is to figure out if the group generates enough cases to make a surgery center profitable.

"Case volume drives the initial economic analysis," said Michael McCaslin, CPA, managing director in charge of the health care group, at Somerset Financial Services in Indianapolis, Ind. "It tells you if you have reason enough to proceed into the next phase."

The next phase is an in-depth feasibility study that details the center's financial prospects. It also typically contains a market analysis and a political assessment. A solid feasibility study can take several months to complete and cost between $15,000 and $20,000, but experts said the information gleaned from the study is essential to determining if the venture can be successful.

"This (an ambulatory surgery center) is not a small investment, there's a lot of money involved," McCaslin said. "You want to make sure that the risk of investment is economically worthwhile. The items which are under the due diligence part of the study are extremely important. You need to make sure employers, payers, hospitals and other people are going to accept the opening of the center because they have the power to influence the business that is going to make it to the center."

McCaslin said the feasibility study proceeds in a weighted fashion.

"You make the initial investment to do the economic model," he said. "The first model with fine tuning tells you whether you want to engage in more planning. If at the first pass, it looks like it can work, you invest more money in the rest of the study. If the initial economic model does not look good, you can stop at that point."

Neal C. Small, MD, a Plano, Texas orthopaedic surgeon, who founded Office Ambulatory Surgery Centers, Inc. said his company designed its own software to crunch the numbers.

"We look at the number of surgeons within the practice and whether there is adequate volume, payer mix, case mix and surgeon subspecialty mix to make it work, Dr. Small said. "We can do a very rapid feasibility study. The surgeons fill out a questionnaire, we plug the answers into the software and can tell them their likely gross income, likely overhead, likely net income, etc."

David Woodrum, a principal at Ambulatory Systems Development, said his company interviews each surgeon about their surgical volume, the nature of the practice and the types of outpatient surgery he or she performs.

Once the financial model is completed, the second phase is to analyze the market environment and the political and governmental climate.

The market assessment looks at the community and identifies current and potential referral sources, major employers, major third party payers and competitors, including hospitals and other ambulatory surgery centers.

"This is where you figure out who it is that is going to have an impact on the facility, who it is that may actually take steps to prevent it from being successful and whether or not you should be partnering with a hospital, a publicly-traded company or any other entity," McCaslin said.

The political assessment includes an analysis of issues that may come up between your practice and hospitals, third party payers and other physicians and current or potential local, state and federal laws which could have an impact on the center. This portion of the study would also look at the pros and cons of a joint venture with an area hospital.

A solid feasibility study is also key when it comes time to finance the surgery center, either through banks or potential investors.


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