What to know before investing in a surgery center

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The decision to buy into a surgery center can be daunting at any stage of your career as a physician. It is critical to understand whether this decision is something you can realistically take on, given your current financial state.

What is a surgery center?

While you likely already know what a surgery center is if you are looking into buying one, it always helps to have more information, especially where investments are concerned. Surgery centers, also known as ambulatory surgery centers (ASCs), are licensed outpatient facilities that are predominantly physician-owned. They are licensed, freestanding entities generally smaller than a hospital and often specialize in a particular procedure. Due to the outpatient categorization for the procedures provided at these facilities, patients are in and out in a single day. There is generally no need for an overnight stay.

Surgery centers are typically offered to physicians entering practice in the first 2-3 years. Physicians who buy into these facilities receive a share of the value and, depending on the facility will be required to invest some of their own surgical expertise there.

What are some of the benefits of buying into a surgery center?

Income potential and profit

As long as you own the facility, there will always be profit potential. However, this does rely on multiple factors including community need, facility efficiency, inclusivity (accepting more types of insurance), and more.

With profit potential in mind, another benefit to note is that once you pay off your loan/note on the business, you will continue to receive an income from it. While the initial investment may be a hefty financial lift, think of the longevity of the business and the profit you will see over time. Just make sure you are prepared to hold out for a couple of years before the profit from the business really starts coming in. With all investments, there are risks, but in this case, if you play your cards right, you may be in for a huge financial benefit.

Flexibility

A huge benefit to owning your own surgery center is the flexibility that it allows you to have. Think about it: you could invest in a surgery center close to your home or the hospital/clinic where you spend most of your time (if the opportunity is available). As a result, there comes an ease of location, and your commute may decrease when you have to spend a percentage of your time there.

Moreover, buying into your own facility means you can specify your hours of operation. You can create designated or preferred times to see your patients and/or perform surgeries, whereas hospitals are typically unable to offer that benefit.

Now that we've looked at some of the most common benefits of buying into a surgery center, it's time to consider the potential cons.

What are some of the cons of buying into a surgery center?

Upfront financing

The first big con is financing the upfront cost. Though this is to be expected with any investment, it can be a big deal, especially if you are just starting out as a physician and are taking on the brunt of massive student loan debt and other early costs. Having a sound investment strategy can make all the difference in this situation.

The potential for loss

To reap the benefits of investing in a surgery center, you have to really embrace the management side of owning a business. Poor management of your surgery center can hurt its overall profitability. Someone has to manage and run it as well as set up agreements with medical providers and insurance companies. Is that going to be you? Is there existing staff from a previous owner? Will you have to hire new employees? Having the proper management and administrative staff in place is absolutely worth it.

A few additional common instances of poor management that can affect your surgery center's profitability are below:

• The lack of insurance inclusivity - A big perk for patients is the lower cost of the surgery center. From a management side, you need to be willing to negotiate with a wide array of insurance companies to ensure that patients who come in can get the care they need at your facility.
• Inefficient Scheduling - How efficient is the scheduling at your facility? Are there gaps in the day that could be filled with surgeries? Are you getting to patients fast enough? Efficient scheduling is essential to your profit strategy.

Money restraints

This is a big one and can be an issue, particularly if you are buying a new facility vs. an older, more established one. If the pro forma is not what you anticipated and you are not receiving the payout you initially thought you would, this could slow your facility growth (you can't add another surgery room without money). You commonly see this with new facilities where there is no historical pro forma information. Consider making projections based on what you perceive as the worst-case scenario in your first couple of years until you can generate some established data to draw from.

Also, consider the potential for your facility to decrease in value. For instance, if it is run poorly and improperly maintained (e.g., out-of-date technology, basic structural issues), the value of your investment may decrease, causing you to see a smaller return on investment.

Selling complications

Prepare yourself for the possibility that your facility may not be easy to sell. Remember, someone has to be in a position to buy you out, or the surgery center has to buy it back from you. The person needs to be able to finance it and must be qualified to buy it.

Ownership

Another factor to consider is that ownership of the facility may not be as straightforward as you would hope. If physicians all bought in at the same time, they could have equal shares. If older physicians invested earlier, they could have more shares than others.

Also, consider that you may not be buying into everything. (Ex. If the surgery center owns the building, you want to be able to buy into that as well). Ideally, you want to have the practice and facility. The surgery center would typically own the building, not lease it, but you need to consider that as a potential setback.

While upon first glance, it would seem like the 'cons' of buying into a surgery center far outweigh the 'pros,' remember that much of your surgery center's success depends on how it is run, the preliminary steps you take for inclusivity (insurance), and your own financial planning. Working with a financial professional experienced in physician's affairs can help you maximize your investment.

Questions doctors should ask before investing in a surgery center

Investing in a surgery center can be an intriguing opportunity for a physician, but it's crucial to ask some essential questions first.

1. Who owns the surgery center and who makes decisions?

First, determine who owns the surgery center and who calls the shots. Is it run by doctors, hospitals, or outside investors?

Knowing if doctors have a say in how things are run is vital. However, this doesn't mean the physician ownership group always needs to be in the majority, but it's imperative to know who the other business partners are and whose vote counts the most.

2. What's the money situation?

Before diving in, take a good look at the finances. How much money will you need to invest? What's the expected return on investment?

Make sure you understand the financial side of things, including costs and potential earnings. Often, you'll be given a "pro forma," an official-looking record of financial projections. Understand that a pro forma is just a guess of what might happen and includes a lot of assumptions.

Ask what assumptions were used and think critically about what risks could threaten those assumptions.

3. How do they ensure good care at the surgery center?

Quality care is crucial. Ask about the center's track record for patient safety and satisfaction. Are they following all the rules and regulations?

Also, find out what they're doing to improve care over time. You want to invest in a center committed to giving patients the best care possible.

4. What Is the plan for the profits?

Lastly, make sure you understand the plan for the profits. Do the majority of owners want to accelerate debt repayment? Do they plan to distribute the profits to all the owners?

Understanding the plan for the profits is crucial if you expect to finance the buy-in through a loan. There can also be confusing tax implications if the profits are used to pay off surgery center debt instead of shared with owners.

Bonus questions for yourself

• How would this fit with your current financial priorities?
• Do you have a good plan for your student loan debt?
• Do you have enough cash and liquidity built up for emergencies?
• If you need to borrow money for the buy-in, how will the timing and amount of the loan payments fit within your cash flow?

Planning your investment strategy for surgery centers

The biggest thing to keep in mind when buying into a surgery center is that you must be financially prepared if you don't see a payout for a few years. These opportunities are called investments for a reason. If you are patient and diligent about the needs of your facility, then over time, you should see some sound returns.

Shane Tenny, CFP®, is the managing partner and a financial planner at Spaugh Dameron Tenny, LLC.

Securities, investment advisory and financial planning services offered through qualified Registered Representatives of MML Investors Services, LLC. Member SIPC. Supervisory office: 4350 Congress Street, Suite 300, Charlotte, NC 28209, (704) 557-9600. Spaugh Dameron Tenny is not a subsidiary or affiliate of MML Investors Services, LLC or its affiliated companies. CRN202705-6513994