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Invest in a surgicenter?


You can make a solid profit, but be careful about anti-kickback and self-referral rules.


Invest in a surgicenter?

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Choose article section... How to determine profit potential Don't ignore referral rules Buy stock in surgery centers?

You can make a solid profit, but be careful about antikickback and self-referral rules.

By Stan Luxenberg

Investors in ambulatory surgery centers have reason to crow. Plenty of the centers are delivering double-digit returns, and prospects for the field remain healthy. With more than 3,500 centers operating nationwide, the number of facilities is increasing at an annual rate of about 10 percent, according to the Federated Ambulatory Surgery Association.

The success can be traced to a simple economic reality: Costs are generally lower at surgery centers than at hospitals. That's why many insurers favor the independent centers. Medicare and other third parties realize that patients can receive quality care at a fraction of the cost of inpatient—or sometimes even outpatient—care at a hospital. Plus, the smaller facilities make it easier for doctors to work efficiently.

All that may sound appealing, but before you invest in a surgery center, you should understand what you'd be getting into. First consider that, like any other investment category, this one has its lemons. The most successful centers boast profit margins of more than 20 percent, and a middle tier produces margins of up to 12 percent, based on the experience of Brent Lambert, an ophthalmologist in Norwell, MA, who's a veteran investor in more than 20 centers. But a bottom group barely breaks even. Many lose money or go out of business, and investors lose their stakes.

Many surgeons don't necessarily consider a money-losing center a failure. The typical increase in efficiency means they can do substantially more procedures. With their practice incomes rising, the doctors don't focus on cutting the center's costs to boost profits.

How to determine profit potential

While surgeons may be content with a center that breaks even or even loses a bit, primary care doctors who invest in the facility need more. So if you're invited to join a partnership that's planning to build a surgery center, how do you make sure it will be profitable, not simply a convenience? You and your partners should start by evaluating whether your area really needs the facility. Ask colleagues if they would patronize the center. "There's no point in building something when there are already three surgery centers within walking distance," says Clay Caroland, managing director of Corporate Development & Capital, an investment banking firm in Nashville.

For expert advice, consider using a development company. These start by conducting community surveys, checking the amount of surgery that's already done, and determining whether demand is sufficient to support a new facility. Another major question is whether insurance plans will pay for procedures done in surgery centers. Most will, but isolated pockets of resistance exist. In Michigan, for example, some centers have faced hard going because they must meet certain requirements before the state's Blue Cross Blue Shield plan will reimburse them.

If the project looks promising, the developer may provide a turnkey service, overseeing construction and then running the new center. Even if you don't end up hiring a professional developer, chatting with several can be worthwhile. Some are willing to do a preliminary market analysis at no cost. That research could steer you away from a project that may be doomed from the start.

Once the initial research has been done, the next consideration is raising money. Building a center can cost $3 or $4 million, says Brent Lambert. Investors often put up 20 percent and borrow the rest. The amount doctors invest varies widely, anywhere from a few thousand to half a million each. While some facilities are doctor-owned, others are joint ventures of doctors and hospitals. Commonly the hospital holds a 50 percent interest and doctors take the rest. Or a development company can own all or part of a facility.

If you'd rather not get involved in a small, local partnership or you don't have the opportunity to, another option is to buy stock in one of the large publicly traded companies that have entered the field, such as AmSurg, HCA, NovaMed Eyecare, and United Surgical Partners International. But before you go this route, have a financial adviser evaluate whether the company's finances are sound. In March, HealthSouth, which owns stakes in hospitals and more than 200 surgery centers, came under investigation for accounting problems. The company is currently negotiating to restructure its debt, in an effort to avoid bankruptcy.

Don't ignore referral rules

One more hurdle to consider before investing is how you'll avoid running afoul of federal and state antikickback rules that bar doctors from accepting remuneration for referrals. In addition, Stark I and II, the federal self-referral laws, can come into play under certain circumstances, as can state self-referral rules. To find your way safely through the maze of all these restrictions, you'll need to hire a knowledgeable healthcare attorney.

The surest way to avoid trouble with the anti-kickback laws is to qualify for a safe harbor, a circumstance in which regulators will consider you protected from prosecution. One airtight approach is to use the center as an extension of your practice. Surgeons commonly meet the standard by using the centers to perform procedures on their own patients. "If the physician does the work personally, then the regulators say there's really no referral, and no problem," says Neil B. Caesar, president of The Health Law Center in Greenville, SC.

Trouble is, to take advantage of the safe harbor you must derive at least one-third of your income from the kind of procedures done in surgery centers. That leaves out most primary care doctors. Only those who do a significant number of surgical procedures can enjoy the protection. That's why most investors in surgery centers are surgeons.

It's tricky for primary care doctors to make their way around the obstacles. Perhaps the safest bet is to make no referrals to physicians at the surgery center. That way, regulators can't accuse you of enriching yourself with referrals. But while this tactic offers legal protection, it may not endear you to any surgeon partners, who'll likely prefer that all investors support the center's business.

What if you refer patients to surgeons who sometimes use the center? Such referrals aren't strictly illegal. The rules prohibit agreements requiring surgeons to handle referrals at the center; the doctors must be free to decide whether to perform procedures there or elsewhere. Still, the safe harbor doesn't apply; if you make such referrals and regulators believe the return from your investment is a reward for sending patients to the center, you could face prosecution.

A less-risky way to profit may be investing in the real estate housing the center, rather than the facility itself. Sometimes surgeons planning to build a facility will invite primary care doctors to act as landlords. "This is a legal way for the surgery center's owners to cement good relations with primary care doctors," says Geoffrey T. Anders, president of The Health Care Group in Plymouth Meeting, PA.

As a landlord, you must charge fair-market rent. But you can also offer the center additional services, including security, waste disposal, and computer systems. You must charge fair-market prices for those extras, too, but providing them can help you enjoy higher annual returns than you'd receive from an ordinary real estate project.

Better yet, if the center succeeds and the property appreciates, someday you might even reap the top returns that investors have come to expect from strong surgery centers.


Buy stock in surgery centers?

52-week range
Recent price
NovaMed Eyecare
United Surgical Partners Intl.



The author is a freelance writer in New York and a former Senior Editor of this magazine.

Stan Luxenberg. Invest in a surgicenter?

Medical Economics

Dec. 5, 2003;80:60.

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