WCI #94: Surgery Center Investments

This is the White Coat Investor podcast where we help those who wear the white coat get a fair shake on Wall Street. We've been helping doctors and other high income professionals stop doing dumb things with their money since 2011. Here's your host, Dr. Jim Dahli. Welcome to White Coat Investor podcast. Number 94, Surgery Center Investments.

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Our quote of the day today comes from J.L. collins, who said, yes, it is possible for every middle class wage earner to retire a millionaire, though it's never going to happen. And that's not because the numbers don't work. I like that quote. I think that is entirely possible if you can get yourself to a middle class wage to become a millionaire. Today we've got a pretty special episode. I've got two docs that are going to remain anonymous, but we're going to talk about outpatient surgical centers as an investment and a place to practice. So let's get into the interviews. All right, we have two special guests on the White Coat Investor podcast today. We have Dr. L and Dr. D. Obviously we're trying to preserve a little bit of anonymity on this episode, but the real impetus behind this episode was to try to talk about outpatient surgical centers. This is something I get questions on all the time. And given that I'm not even a surgeon, nor have I been involved in one of these businesses, it's difficult for me to answer those questions. And so I thought I'd at least try to get some people on with some experience to talk about it. The truth is there's very few people who are involved in a lot of these and it's hard to find an expert on the topic out there that can really give some specific recommendations. So I thought the best we could do was to get two docs on, one of whom is looking at an opportunity to buy into a surgical center. That's Dr. D and one doc who has fairly extensive experience with owning a surgery center. And that is Dr. F. And so the question that I had or the offer I had to be a podcast guest originally came from Dr. D, who said, I'm three months out of residency with moderate student loans and have just been offered a small percentage in my ASC. I'm also planning on making partner in one to two years with around a $300,000 buy in. I would like to explore ways to prepare for practice and ASC buy ins and how that fits in with paying off debt and saving for retirement. And so then I put out the question to the email list, you know, 21,000 docs going, hey, who's got experience with ASCs and would like to come on the podcast and talk about them? And Dr. L was gracious enough to agree to come on and I think will make for a great guest for this episode. So welcome to Both of you, Dr.

D and Dr. L. Thanks, Jim, for having us here.

Yeah, thank you, Jim. And thank you, Dr. L. No problem.

Okay, so let's get started in this a little bit. Let's have, let's start with Dr. D. Can you tell us as much as you can? And I know there's always some details that you'll want to keep private, but as much as you can about not only your financial life, where you are right now with it, but also about the details of this opportunity you're having presented to you.

Yeah, no problem. I'm actually very blessed. I have a very small amount student loan. I was probably military before I went to my undergrad, so I was able to do a GI bill near medical school. So after my end of my residency, I had about 90,000 in student loans. And originally me and my wife had planned to aggressively pay that off in one year and continue that high rate of saving and save up for my buy in for my partnership in two years. At that time, it should be a natural increase in my income. And my plan was just to get a small loan for the rest of the buy in and then I would look at any buy in to the surgery center at that time. Traditionally, you had to be a partner in the practice before you can even buy into the asc. But I had a very unique opportunity that I wasn't expecting that just only five months in. Still with my student loans, I had an opportunity to buy a very, very small percentage. And the reason was this is because I got way busier than they originally thought. I would be here only after five months and actually operated two community hospitals. So there's a little incentive for them to offer me some buy into the practice to direct my patients here when it was in their best interest. We do have at this time we have my wife's 401k that we match, that we max out and also max out our Roth one, or excuse me, our Roth four ira, excuse me. And that's kind of where we're at financially right now. The opportunity of the ASC is we're a multi specialty center. We're fairly large. We are not the only ASC in town, but we're by far the largest one, do the most production and have the highest revenue value.

And your specialty.

I am an ophthalmologist and Dr. L.

Can you tell us a little bit about your experience as being an OB GYN and being a part owner of a surgery center?

Sure. So I started out practice a couple decades ago and luckily, and I'm kind of afraid to admit this, but I was able to graduate without any medical school and undergraduate debt, so. So right off the back I was a little bit ahead of the curve, so to speak. Initially, I actually had zero interest in getting involved in a surgery center. There was one that my practice was affiliated with and it was actually a physician run surgery center. And my understanding was they were kind of basically writing checks every month to meet the bills and pay off the loan debts. So it had been in existence for a number of years and for whatever reason, they just weren't as profitable as they potentially could be.

So it was cash flow negative. They were feeding the beast.

It was cash flow negative. It was cash flow negative. In fact, my partners were encouraging me to utilize the center, obviously because it benefited them. But from my perspective, the surgery center was about 30 minutes further from where I lived. And if the hospital was a closer commute, why would I waste my time going out there if it didn't really benefit me in any way? And it wasn't until I started getting busier in my own practice that I started doing multiple cases that I guess I realized some of the inefficiencies that can exist in a hospital type of setting. So if you have like a 15, 20 minute case, but you're having a 30 to 45 minute turnaround time in between cases, eventually it seemed a little bit of an inefficient use of time, so to speak. So luckily, at the time that I started getting busier, there was a management company that became interested in the center that my partners owned and they said, hey, you know what, you guys have a lot of providers affiliated with center. It looks like you're doing some things, but you could be doing a lot of things better, you know, if you let us take the reins, so to speak, we can help get rid of excess baggage and potentially bring in some newer providers who will do different types of cases and potentially higher acuity cases maybe that could kind of turn things around and hopefully turn out a profit. And I guess it was by chance that I happened to be getting busier at that time as well as a couple other providers. And we were approached as new talent, so to speak. They pitched it in the sense that, hey, we can all become a part of this new center, we can work on productivity, we'll make it more efficient for everybody, we'll get busier and hopefully kind of turn things around. So initially I was told about potential buy in and I actually had no money saved up. I'm not afraid to admit I took about two months off before I started my tenting lifestyle and I kind of racked up some credit card debt. Luckily, the specifics of the, the arrangements for the center dragged out long enough where I could save up enough money to buy my pieces of pie, so to speak. And luckily within that first year we were receiving checks, we became profitable and things have been heading that way ever since.

So did the management team buy it from the docs that owned it before or did they just come in, they were hired help or what was the structure there?

So they were a management team and they essentially purchased 30% ownership of the entire center. And the current or the former owners, they were given the option, hey, would you like to become a part of the new entity? If so, you can get X percent for X amount, but if you want to be released from the current debt, then you can say bon voyage and we'll leave it at that. So luckily there were a number of people that said, hey, you know what, I'm kind of at the tail end of my career, I don't need to be taking any more risks. And then there were some younger docs and involved docs who said, hey, you know what, I think we can do something here. Let's keep going forward.

So did those older docs that bailed out end up losing their shirt, given that this had been unprofitable for years and years, or did they make out okay?

They lost a fair amount of money because they were writing checks basically every month for about four or five years, I'd say.

Just several thousand dollars every month, huh?

Yeah, but there were enough of them where, you know, it was, it was kind of spread out and I guess they had Been doing well enough in their main practices that it wasn't too. Too much of a burden, so to speak.

Yeah. Kind of a warning there that those things don't always make money, though, isn't there?

Definitely. I think. I think a lesson that, you know, I learned, you know, just looking at things, is I think you can get as much out of any business, whether it's a surgery center or side business, you'll get as much out of it as you can put in. And if you're managing a center, it does take a fair amount of time to kind of do things right, number one. Number two, there's always a more efficient way to do something. And then number three, you can have many number of providers affiliated with the center, but if no one's bringing cases there, then that surgery center is basically a really expensive closet for a bunch of expensive equipment.

Yeah. Now you say do things right. What do you mean when you. When. When you say that? Are you talking about ethically, which cases get brought and how they get done? By who or what do you mean by that?

I think one thing that the group never really looked at were things like reimbursement and negotiating contracts with payers. I think that's one thing. There's a more efficient way to do that, number one. Number two, being willing to bring cases to the center. Just because a case could be done at a hospital because it's more convenient, doesn't necessarily mean that it's more beneficial for the center that exists. So I think, number one, utilizing the center to its fullest ability was something that people had to learn. Realizing that certain types of cases could be done in an outpatient setting is something that took people time to get used to. And, you know, once people are able to realize that certain types of surgeries can be done in that type of environment, people start to feel more comfortable with doing those things in that particular setting. And when people are bringing those cases to the center, then the center is being utilized and it becomes more productive.

Can you talk about there being any pressure or conflicts of interest to maybe bring cases there that are borderline in a gray area, maybe shouldn't be brought there at all? Maybe they should be done at a hospital?

I think that was one of the things that was initially challenging for some of the partners because the center evolved at a time where things like laparoscopically and minimally invasive surgery were really being developed. So initially, a lot of these cases, things like hysterectomies and myomectomies were done in an open Manner where patients needed to be admitted to the hospital, usually overnight or sometimes two nights. But then with the advent of newer technology and more refined techniques, a lot of these cases were being done essentially at the hospital, laparoscopically or in a minimally invasive way, and patients were basically going home from the hospital. So if you have a skilled group of individuals who are able to do these things in a safe manner, it's just a matter of changing the setting where they're actually performed. So definitely there are probably some cases that can be done at a center that shouldn't be done at a center. But I think when you have a group of talented individuals, not only surgeons, but anesthesiologists and an OR team that can do things safely, it's just a matter of trying to change the environment where these things are being done.

Now, is the physician fee portion for the surgery about the same no matter where you do it? Was there any difference there for you or is that portion of sixes?

The physician fee doesn't really change whether it's done in a hospital or a surgery center.

So it's just a matter of collecting the profits on the facility fee for. Exactly. Then.

Okay, exactly.

And can you talk a little bit as much specifics as you're willing to get into about how much it costs you to buy in and what kind of returns you've seen on that money?

So I guess the buy in is really kind of dependent on what type of center is being run. Our center at the time happened to be a single specialty center, GYN only. And like I said at the time, everyone was writing checks, so they had kind of bare bones equipment because the type of procedures that were being done there weren't necessarily higher acuity cases that are being done now. So the equipment was not all that much. With that said, the area that our center exists, the real estate's a little bit on the higher end of the spectrum. I'd say Our surgery center, I think at the time was about 5,000 square feet and the average square footage is about $35 a square foot. So just for the facility itself, you're talking about up to $200,000 a year just for the rental space. In terms of equipment, some of those things are kind of pricey. Believe it or not, an OR table that's pretty decent can be anywhere upwards of 25 to $30,000. You have to have anesthesia equipment for general anesthetic. That could be anywhere from, you know, 40 to 50K. If you're going to do laparoscopy or hysteroscopy video towers could be another 40, 50,000. And then you have to worry about things like sterilizers, autoclaves, pacu, those little stretchers that people use are actually kind of pricey. They could be anywhere from like two to $3,000 each. And if you have a four bed PACU and a four bed recovery, that kind of adds up.

So yeah, I know the gurneys in our ER cost about six grand. So that equipment can sometimes be ridiculously expensive. So how much value is there in those equipment? In that equipment? I mean, if you turned around and needed to sell it, if you're closing the place down, I mean, do you get pennies on a dollar or what do you get for it?

I think just like a car, once you drive it off the lot, it does depreciate significantly. So I wouldn't say pennies of the dollar, maybe nickels or quarters off the dollar. But we just recently underwent a renovation of our center and it went under a complete facelift. We expanded the ORs, and that by itself was about $2 million for the physical structure. You combine that with the equipment, putting everything together, it could be up to two and a half million if we were to start everything anew. And that's just the startup cost. It doesn't include staffing, daily operating costs, front of house or tax, and, you know, management.

Yeah, there's a lot of capital there for sure. And it sounds like, at least in this case, the real estate and the business are all blended in together.

Correct? Yes.

And do you have any idea what kind of returns you've seen on that? Has it been, you know, in the 20% range or better? Worse? What, what do you, what do you think it's been over the years?

Well, from when I got in, the valuation of the company was significantly less. But within that first year, based on my buy in, I got about a 200% return on my investment. And then for the subsequent eight years, as we became a little bit larger, a little bit busier, and people actually felt comfortable bringing cases to the center, we were seeing upwards of anywhere from like a 400 to 500% return over the investment over that time on your.

Initial investment or over the previous year's.

Value on my initial investment.

Very nice. So it's been very, very good for your finances to be part of this surgery center than it sounds like.

It's, it's been, it's been, it's been good. It's been good.

So, Dr. D, I mean, do you have Any idea if they give you any information on how the business has done in the past and, and what you can kind of expect going forward on this?

Yeah. Yes, sir. Now I will say mine is quite a bit different than Dr. L's. The surgery center is attached to my main building, so it's literally 15 steps from my clinic lanes to the surgery. So I can operate, come back and see a patient and then go back and do another case if I need to. It's all in the same building, but the buy in to the practice does not count. The real estate, that's a totally different LLC and the same for my practice. So the founding partners own the real estate and then of course we pay rent to both of them. So the buy in does not include the actual physical building. And in ophthalmology, almost all surgery are done in outpatient centers. Very few are done in a hospital. Now the reason why I actually operate in a hospital is clearly due convenience to my patients because my satellite clinics are about an hour and a half away and it's just a long drive to bring them all the way back to our main clinic. And like Dr. L said, one of the biggest advantages is just efficiency. I literally operate in one room, go to the next room, operate, come back out, scrub, operate again. We're in the hospital, there's a 20, 30 minute turnaround time and we have much more stronger negotiating power with the equipment. And like their intraocular lenses, we get them for a much cheaper price because we do such a high volume here compared to the surgery center. About a 1% share in the current surgery center I'm in is about $240,000. I've been offered only a fifth of that share. So I'm not going to offer a full share, which is good because there's no way I could afford a $240,000 1% buy in at this point right now. And that's really why I was taken back being offered this soon and didn't know really what to do with the situation. I think in the ophthalmology side, most surgery centers are pretty profitable. Just could we do such a high volume of surgery? And it's been a long track record of having outpatient centers and this particular center has been here for close to 20 years. I want to say the profits per year is just a little under eight figures. So it's been a very profitable center. The idea is that you can, your original investment will be paid back in 4.4 and a quarter years. That's the ideal. So 240,000 should be paid back in four and a quarter years. And after that, anything you make should be just profit on the original investment.

Yeah, I mean, at those sorts of returns, it makes sense to borrow money for your share, you know, as much as they're willing to sell you, you want to buy, you know, just because the returns are spectacular at that sort sort of rates.

And that's how I felt, Jim. I felt like I really did not want to get more in debt with my student loans, but I felt like you're too good of opportunity. If I just got my foot in the door, there'll be more opportunity to buy more later on down the road because partners are required to sell out once they hit a certain age limit. And in the next five year, two partners will be hitting that age and it will be about 10% of the company will be up for sale. So I just want to get my foot in the door so I can have that opportunity in the future to buy in some more.

That's interesting that you actually mentioned that the partners are required to sell out after a certain age point.

What's been your experience with that?

Dr. L. That's actually work in progress. Haven't had any partners that have officially retired as of yet. There are people that are considering it. There are probably some partners we'd like them to consider sooner rather than later, but we.

At age 65, you had to start selling 20% every year. It's about age 70. You're completely sold out.

Wow.

And what was the reasoning behind doing that? Just because you wanted people who were actively practicing and bringing cases to be the owners? Was that the idea behind it?

Absolutely. Most surgeons to slow down and you didn't want people who were not operating getting the largest amount of the profits and stuff.

That's some pretty forward thinking actually, because it actually also avoids some of the, I guess, the ethical and law issues that come up from people who aren't being productive. It kind of forces them to kind of scale down, so to speak. So I was very forward thinking of those partners.

Now, it doesn't sound like your buy in is going to be a huge chunk of money, but tell us a little bit about what you've thought about in your mindset. You know, you're just out of residency, just, you know, don't have that much in debt in your case. Lots of surgeons in your situation might owe three or four hundred thousand dollars in student loans. How did, what was your thought process in deciding, you know, when to pay off student loans, when to Put it in retirement accounts, when to save it up for practice, buy ins and asc. Buy ins, etc.

That's funny you said that, Jim. I do have a very low student debt. When I met my wife, her mouth pretty much hit the floor her jaw day when I told her how much debt I have. So it's still a lot of debt but for the medical world it is a very small amount. And since I sent you that email, I'm actually a partner now. I did go ahead and buy in to the practice.

Congratulations.

Yeah, thank you. I just thought too good opportunity to mess up. And how I did that was we wanted to pay off our loans aggressively and as soon as we as we could. That's already been our plan when we came together. I ended up having to get a small personal business loan with a local bank here that had worked with the surgery center for multiple years and had financed many, many of the partners in the past. So I had no difficulty on that end. They were pretty willing to give me the loan and what we had done, we turned our attention to just paying off that loan as quickly as possible. I'm just paying the minimum on my student loans now and I'm paying 50% of my base salary goes towards paying off debt and any BONUS I get 75% of that is to go towards paying off the extra loans. Also I plan on being this particular loan should be paid off by June. At that point I'll redirect all my finances back into paying off my student loans. The big issue can come up to me again is I won't have anything set up for the partnership when that time comes in another year. So I have to look at financing probably that 300,000 for the buy in for that which I was hoping to have a good chunk of that saved up and I won't have that now that I bought into the surgery center.

Still, when 50% plus of your income is going toward retiring debt, I mean you're on the fast track to wealth there. The debts will go away very quickly at that rate. And if you keep saving like that and putting it toward investments, you know, I mean you'll be financially independent very, very quickly. So congratulations on being that disciplined. I think most docs are not and.

I will say I look at the surgery center as, as a investment. That's how I approached it. This I may not put into the 401k. My thought buying into it is the same. I will get returns on it and it's buying stock in a company is what I'M doing. So that's how I looked at it for the investment and paying off debt section.

Yeah, it's obviously not particularly diversified, but you know, there's kind of two schools of thought when it comes to investing. The first is diversify broadly to protect yourself from what you don't know. You know, don't put all your eggs in one basket. And the second one is put all your eggs in one basket and watch it very, very closely. And I think the, you know, a surgery center or a freestanding ER or these sorts of imaging centers that radiologists might buy or dialysis centers for nephrologists are kind of in that second category. It's a business that you buy into that you expect better returns and you're going to get out of stocks or real estate because there's more risk. There's. But it's also your day to day life and it's something you're keeping very close tabs on. I think it's nice to have a mix in that respect of those two investing philosophies.

I will say one thing, Dr. L, maybe you can comment on this. The one thing I was worried about is there's a lot of non partners who operate here and my concern was we ended up be leaving in the next couple years and there was at least one high volume surgeon who will be leaving and there's no way I could predict how that was going to affect the future returns. I did talk to the surgery center essentially about that and plans we have to actually expand and try to bring in new procedures. I think this year you can start doing diagnostic caths in ASCs and that's something we're trying to bring in to may make up from that revenue loss. We're going to lose some of the high volume surgeons who are moving to a different town.

I think that's.

Go ahead.

I was going to say in terms of answering the question, I think that's another thing that I was kind of alluding to when I said referring to doing things right. I think part of a surgery center to be continue to be productive is to look for continued growth and to potentially look for individuals who at a certain time might decide to kind of wind down, so to speak. Because very easily a surgery center's success and productivity could easily hinge on one or even two different surgeons who are, you know, really high producers. And if for some reason they retire, they leave or you know, God forbid something happens, then you know, that could definitely have an impact on the overall success of the facility.

So what advice would each of you have for somebody that's, you know, been presented this opportunity? I mean, what should they do to decide whether this is worthwhile? What kind of vetting should take place? What should their due diligence involve? Let's start with you, Dr. D. And then Dr. Link.

One thing I did not do that I most people probably should do is hire a health care lawyer to look at the contract and review everything. I did not do that. I reviewed everything myself. I had a lot of trust in the partnership. I talked to previous people who have been offered partner who recently bought in, got their take on field stuff. So I felt comfortable going ahead and doing that without having a contract lawyer. I really recommend most people. Probably we need to get a contract lawyer to look at the buy in into the asc. There is actually a company out there who is willing to evaluate the company for, for you to look at the numbers for you and give you feedback on that. I did not feel like I needed it in this particular case. In ophthalmology, ASCs are pretty much a part of a private practice and you don't really get taught this in residency. But I think that's something you should be planning from, from day one. And our specialty is being a part of ASE and then planning your finances ahead of how you want to approach that when that time comes.

All right, Dr. L. I think anyone that's looking at investing in an existing center, I think their concerns might be different than someone who's potentially building one up for the first time. So if you're looking at a center that's already been in existence for X number of years, I think definitely questions you might want to ask about if they don't present it in their original pitch is things like complication rates. Do they seem like they're above national averages or within acceptable ranges? Do they have access to their transfer rates? For example, if there's a complication, how many patients are transferred to a hospital from that surgery center? And also do they look at things like patient satisfaction scores and even provider satisfaction scores? How often do they address those things and how do they collect that information from a point efficiency perspective? And I don't know if everyone keeps this information, but I think it'd be good to have the percentage of on time starts. I think is important the average turnover in between cases, how long the OR staff has been there, and you know, what is their experience with the type of cases being done. And I think another thing that's pretty important is, you know, who provides Anesthesia. Are the anesthesiologists there, you know, locum tendons, and, you know, potentially you have a different provider there, you know, every week. Is it a set number of anesthesiologists that rotate in and out on a daily basis? How long have these providers been, you know, practicing in the surgery center setting? Because I'd say the level of anesthesia and the type of anesthesia is sometimes different when you're in a hospital and, you know, you have a lot of, you know, the backup ancillary services readily available than when you're, you know, practicing in a surgery center. Our anesthesiologists actually have a lot of say in terms of what types of cases we're allowed to bring to the center. And if they feel, for whatever reason, a particular patient or a particular case isn't appropriate, we value their opinion. We're not here to put anyone in a position they don't feel comfortable with and vice versa, because in the end, we all got to try to do what's best for the patient.

So do you find there's a lot of conflict there, that the anesthesiologists are saying, no way? And does that change if they're also owners of the surgical center?

We all have the patient's best interests in mind. We've come up with protocols that we all feel comfortable with, at least initially. For example, we have a top BMI that we're willing to even consider bringing into the surgery center. And if it's somewhat borderline, we have patients literally meet with anesthesiologists. And a BMI is just one factor. Part of it depends on where that body mass is focused. If it happens to be all in the neck, then, you know, that's an anesthetic risk and, you know, medical comorbidities, level of hemoglobin and hematocrit. As much as we want to try to do as much as possible at the center, we also want to do what's safest for the patients. So we have sets of checks and balances. And I think also having a. A medical executive committee that does random case reviews, I think that's important because, you know, sometimes people will try to push the envelope as to what type of case was would be appropriate for that type of setting. And if you have individuals who are essentially policing that, it kind of helps prevent issues that could come about, you know, that could lead to poor patient outcomes.

Now, in both of your cases, are your anesthesiologists or CRNAs, owners of the center or are they employed staff?

And there's no. They're only employees that are ASC. We have one full time entheologist and four or five full time CNRAs. And we have two locums who come in on a regular basis to fill in any gaps. And I will say for ophthalmology, 95% of what we do is elective. So anytime the anthologist has any question or any concern about something, we. We usually just cancel the case. But we do a lot of local or topical anesthesiolog anesthesia for our case. It's a little bit different environment that we have at our surgery center. Of course we do do GI and urology, but I'd say pre med. For the most part, we listen to the anesthesiologists and any concerns they have when they voice them.

Same question to you, Dr. L. Your anesthesiologist.

The anesthesiologists we have at our center are contracted anesthesiologists. Our situation is unique in that they also are the same anesthesiologists that work at our hospital. So we've already kind of established a level of trust, I'll say, and mutual respect. If they have any questions about things that we're thinking about, they will freely voice their opinions. And whenever there's a question, it's easy to say, hey, you know what, let's just do this one at the hospital. And no one's going to say no. So it does. I think there is a benefit in having anesthesiologists that aren't vested in the center because I think when there's a little bit too much of that, sometimes it can lead to riskier situations.

All right, let's get into some of these questions I've picked up from the White Coat Investor Facebook group. They've got lots of questions for you guys for this podcast. Let's start with the beginning of someone coming in and buying in. Would you recommend using a consulting firm? And I think maybe they're even talking about starting one on their own rather than just buying into an existing one. Would you use a consulting firm to help navigate through the regulations?

I think if, if it was a surgery center that was being built up from the ground up for the first time, I think definitely having some guidance would be beneficial because a lot of the times people's eyes are bigger than, you know, they should be. And, you know, there's actually a lot involved, a lot of things that you might not want to consider or that you don't always consider initially, and there's different factors that you gotta kind of take into account that you might not realize. I think one thing that's, you know, important is sometimes the most important thing to know is what you don't know.

Right.

And sometimes you need someone to tell you that.

Yeah, that's a good point. Another question was, what is their why? What? Why did you want to get involved in an outpatient surgical center? You want to start Dr. D. And then Dr. L on that one.

Yeah.

So like I said, pretty much all ophthalmologists operate in an outpatient surgery center. The why is just financial benefit to being a part of it and also having a say in the type of equipment that you buy and the type of lens that you use. So just, you're already going to operate there, you're making somebody else some money. Why not make it for yourself? And then having a say in what's going on in the surgery center that you're going to be operating in.

Dr. L. I think for me, the why was more initially had to do with the productivity and the better use of my time. Initially, I was an employed provider, and if I'm spending, you know, two, three, four hours in the hospital waiting to do two small cases, and that's time that I'm not in the office seeing patients. So rather than being an asset to the group who's being someone who's being productive, I'm more of a liability. So as I became busier as a surgeon and I started getting referrals, I had to have a place where I could do things efficiently or I could do a high number of cases and I could prove myself as an asset to the group that I was a part of. And if I can benefit from that financially, that was icing on the cake, so to speak. And I think being involved in the leadership of the center, I didn't realize how much I would, number one, enjoy that. But then, number two, I didn't realize how much of a better impact I can have on my patient outcomes. If, you know, I'm really looking at things from both sides of the spectrum, so to speak.

Yeah, I think that's the one reason why a lot of emergency docs get involved in, you know, these outpatient emergency departments, basically, these freestanding ERs, is because then the employees, the staff, the nurses, the X ray techs, etcetera, become their employees rather than the hospital employees. So they decide how much they get paid, they decide what their benefits packages are, they decide which one stay and go. And as A result, the employees are much more responsive to them. And so they just enjoy having a lot more control over their practice and how their patients are treated that they just can't get at the hospital emergency department. Have you, either of you experienced that and enjoyed that aspect of it?

I think that's a really dramatic and very profound comment. Like our patients, I've had patients that have had procedures done at the hospital and I've had patients that have had procedures done at the surgery center. And when the patients can tell the difference in the staff because of their disposition and their outlook on things, I think that that speaks volumes. At our surgery center, for example, everyone from the check in to the post op nurses, they tend to have a sunny disposition. I'll say part of it's because a patient satisfaction scores are very important to us. And I think another aspect of it is at the surgery center, at least the last employee leaves when the last patient walks out the door, people aren't staring at the clock waiting for the change of shift. They're not looking at the clock waiting for lunch so that someone else can come in and relieve them. Everyone's there, everyone works together. It's a small center. So everyone is essentially forced to work efficiently and work together. And I think creates a more positive environment. Safer experience for the patients.

Yeah, definitely a better experience for the patient. Just the time from the door to the enter to the exit, it's probably half in the outpatient center compared to the hospital. And like I said, the whole experience from the time they're there, we try to make an environment that's comfortable for them. They don't feel like they're waiting in a hospital, the waiting room, nothing like that. Feel like they're more in like a luxury spa. So we just try to make the whole environment for them just better experience overall. And the door that the Internet exit is probably the biggest thing that is more better for the patients, their time, they're waiting and stuff.

I had a couple of questions related to capital. For example, Alex Sadaskas on the Facebook group asks how much capital is generally necessary to get involved in such an investment. And Mark Sanger asks how to secure funding for such endeavors and ballpark costs, setting it up and running it. Can you give us some idea of, you know, if you're going to build and buy this thing and you know, start at the ground up and build an outpatient surgical center, how much money are we talking about and where does that money come from?

Well, for I'm aware of some individuals in the Area that have tried to set up their, you know, smaller surgery centers as well. And I think one variable that's regional is the real estate. I think the more fixed costs are the equipment because those are more national types of costs. And depending on the specialty of the center, that also impacts the type of equipment that you're going to use. I think if you have a lot of orthopedists and neurosurgeons, I know a lot of their equipment and hardware is a little bit more pricier than a suction DNC set of instruments that the GYNs are going to use. We initially were a single specialty gyn and our startup costs just for the equipment, upwards of 2 to $300,000. Our real estate, the physical shell, upwards of $200,000. And depending on how much you want to make your surgery center look as much like a spa, the facelift costs could be significant. For ours, it was approximately $2 million renovation. So adding that all together, that's two and a half, 2.6 million for a single specialty. Since we've been practice, we've introduced other specialties, General surgery and urogyn and urology. And luckily, a lot of the instruments that they use are similar to what we already had, so it was a little bit of an easier integration. But I think as other specialties are introduced and their equipment needs change, then costs are generally going to go up.

And that money is just usually borrowed for the most part, or contributed by partners, part of it, and borrowed from a small business loan from a bank or where does the capital typically come from?

We did have a small business loan that we applied for, and the rates might be different than what they were 10 years ago. I believe at the time when we first did the original renovation, I believe our rate was anywhere from like 5 to 6%. But it was a variable rate, so that did change with time.

And did all the partners have to sign for the loan personally?

All the partners individually had to sign for the loan to guarantee it? Yes, that's correct.

Yeah, but that felt like a big step doing that.

My heart rate went up a little bit when I signed that map.

Yeah, I bet. Question from Olufunsho Adam Molakun. I hope I pronounced that right. He's asking, are you going in network with insurance companies, staying out of network, or a mixture of both?

Dr. D, you got some insight in that?

I'll be honest. I'm pretty ignorant over it. We set pretty much every insurance around here, but I'm really ignorant on the details of what we do.

Actually, so initially when our surgery center was re established, I'll say back 10 years ago, the management company that took over things, so to speak, their model was to stay out of network as long as possible. The reimbursements tended to be significantly higher. The challenge was that although the facility was technically out of network, many of the providers were in network. So at some point insurance companies, they don't like that, so to speak.

Their patients definitely don't like it.

Yeah, patients, the out of pocket costs were significant. And you know, if you have an out of network facility with an in network provider, eventually the insurance company is going to recoup that money some way form or another. So at some point there's a, I guess a law of diminishing returns where you know, if you lose enough of those small cases because those patients are now going to in network providers and facilities, then the gain of doing the higher acuity cases that are out of network, you know, don't really make up for things. So staying out of network to the point, to a point where it makes sense, but then eventually going in network is kind of a necessity for most facilities and practices, but it does give you a little bit of leverage in terms of renegotiating whatever in network rates you agree upon.

Let's switch to another question, three good questions actually from Venkata Boduvula from the Facebook group Group, who asks how do you calculate the buy in for younger physicians and is there room to negotiate?

I'll say from my experience there was no room to negotiate. It's a set formula they have used for all the partners since it's been open. And it's basically they take up what the profit would be after all your debt, after all your depreciation and it's 4.2 times five that amount. So like I said, the idea was my original investment should pay for itself in 4.25 years. But there is no negotiation on that. That's something that's been done for every partner since they came in and it was set in stone.

And how do you negotiate that, Dr. L. Or how do you calculate the buy in?

I have to agree with the same thing. I mean it's kind of straightforward. The profitability of the center is the profitability of the center. It's just a matter of what the administration felt would be a fair buy in for whoever wanted to come in. And ours happens to be about a two and a half, two and a half multiple. Wow.

So what, what? He also asked what happens if you don't meet the 1/3 law. I don't know what the 1/3 law is. Do either of you know what the 1/3 law?

Yeah. @ least one third of your cases has to be done at that center, which is not an issue for me because I probably about 80% of my cases there.

I think although that law exists, I think it's not really easily enforceable, so to speak. For example, If I do 10 cases, for example, in a week, if I don't feel comfortable bringing a particular patient to the center, then you can't force an individual to do something they don't feel comfortable doing, even if they feel, or even if the administration feels it could be done. So that's it's written down. I think something like that exists for us. I believe our number is actually eight. It's expected that 80% of your eligible cases should be done at the center. But you know, it's not something that's enforceable, so to speak.

I see.

I think that's part of the stock stock law, I believe, and it's to protect you from your investment that somebody won't buy in but not do any surgery and not contribute to the surgery center. I believe that's the reason behind that law.

What will be the process for getting rid of non performing partners?

That's another slippery slope as well. And like Dr. D was mentioning, that kind of relates to the Stark law as well. So for those not familiar, the Stark law is basically a health care fraud and abuse law that prohibits providers from referring patients for certain designated health services to an entity in which they have a financial relationship. So on the one side, you know, as a producer, I can't and I shouldn't be paid more for bringing more cases compared to an equal share partner who isn't bring as many cases. On the opposite side of the spectrum, we can't necessarily dismiss a provider who isn't as productive as some of their peers, so to speak. So it's a little bit of a slippery slope. Unfortunately, non producers, they're there and unless they want to leave under good terms, you can't really do much to get them out.

So another question from Dusty Schuett in the Facebook group. What are the legal ramifications of operating at a surgery center you own and what disclosures required to patients? And maybe more importantly, how do you bring up that you own the place where you, you will be operating on them to patients? Is that tricky conversation or is that just kind of an expected thing or have you run into any issues with that?

Again, that kind of has to deal with the Stark laws as well. At our center, for example, we actually have a list of all the physician owners on a, it's essentially a billboard as they're signing in. And when patients are doing their pre registration paperwork again, there's a form that's, you know, they sign that, that's being acknowledged. Initially. When I first started going to the center, you know, I would, you know, I would tell patients, hey, I love going to this place. You know, things run efficiently. We have a dedicated or team. All they do is gyn. You know, they're not doing a knee case in one room and then two hours later doing craniotomy in another room. So that provided them with a level of comfort, I would say. But you know, definitely it does need to be disclosed. Again, that's part of the Stark laws as well.

Yeah, we too, we have a list of all the partners name when it first came in. But in ophthalmology, like I said, we don't do much operating in the hospital so it's not an issue. And since our surgery center is connected to our building, most people just assume that we're the owners also. So it's never really been an issue for us.

So a question from Nitin Sastry who asks, any experience with turning an office based surgery suite into a one bed Medicare credentialed asc? Sounds like kind of a play to try to get more money for, for doing a procedure in an ASC rather than the office. You have any insight into that?

Negative. I know there's a movement to do office based cataract surgery, but I think it's died down the last couple years.

Is that just because you can't get paid the same for doing it there? Is that the issue?

I honestly don't know. I'm ignorant on the.

Yeah, I don't have any experience converting an in office suite to a Medicaid suite per se or one that provides that type of service. But you know, there are many gyns that do have in office suites but they're not necessarily designated as an asc. So as such they, you know, they can perform the procedures there but you know, can't necessarily collect the facility fee.

Okay, here's a question from Mark. What do they do with their complications? Are they required to have admitting privileges to an inpatient patient facility?

So I'm not sure with ophthalmologists how many emergent cases need to be transferred, but definitely with gyn, you know, that can happen, that can be an issue. So all of our Providers that provide surgical services at our center need to have admitting privileges at one of the hospitals that's within a 20 or 30 minute radius of the center. There has been occasions where patients have need to be transferred for observation, fluid management issues, even issues with blood loss. So luckily it's rare. But I'm not going to say it doesn't happen.

How about this question from Daniel Farrugia who asked about certificates of need. Are you in states where a certificate of need is required to open an outpatient certificate surgical center? Is that an issue or not really?

So in Maryland it is one of those states that does require a certificate of need, particularly if you're going to open up a two or suite. I believe if it's only one main or then a certificate of need is not required. But if you were to open up a double or so to speak, then a certificate of need is needed.

And Dr. D, we are, we are a com.

But I really don't know how that plays into the logistics or administration of it.

Yeah, I don't. I don't know either. Nor do I know whether outpatient surgical center is more profitable when there are certificate of need states or versus other states. I have no idea. Good question. None of us know the answer. Doesn't sound. Here's another one from Kapil Saigal. Are there non compete terms and duration and is there relative likelihood there will be a capital call for the partners if the center loses surgeons or money?

That's a good question. That's one of the fears I have because I've only been here five months and most physicians don't or a good number of students don't stay in their original location. So you know, my original thought I'd be here two years, I would know for sure if I wanted to stay here in this area. But for me, if I decide to leave on good terms, the practice will buy back my initial investment at the same multiplier as when I bought in.

I think part of that fear is if you have a group of individuals at a particular center that happen to be the producers of that center, it's to protect the main entity from having those individuals leave and set up another center across the street. Our center in particular does have both a non compete. It's not two years and 25 miles. That's what we kind of put into place at our particular facility. And in regards to the second part of that question, yes, capital calls can happen and unfortunately, you know the history of the center that I'm with, it was sounds like it happened on a regular basis.

Yeah, sounds like it happened every month at that center. Okay, let's go over the last question here. We're starting to run out of time, but this question is interesting. What are your thoughts on forming the surgery center as a non program profit? Asks Andrew Takamori from the Facebook group. With the idea being the owners still get high salaries rather than ownership distributions, I suppose. Profit distributions. Have you heard of any senators that do that? And is that a reasonable option or not really?

I think. I think if I brought that up to some of my partners or our legal counsel, I think they might suggest that that proposal might not pass the Maryland sniff test. That's just my opinion.

I don't know what the financial advantage to doing it would be anyway.

I think. I think the idea here is I have no idea if this is possible or not. I think the idea is to get a better tax situation for the business and yet pay a whole bunch out in salaries. And so the doctor owner still makes a lot, you know, even though. And also enjoys the benefits of being a nonprofit. I think that's where they're going with it. Again, I have no idea if anybody's done that or how that works.

I think the challenge. I think the challenge might be also is, you know, if you're gonna provide a salary, it's got to be market rate. So if you're just simply an owner, I mean, you have to have a role or a title, and there's a way to figure out the market rate for that. If you're just an owner and you're, you know, giving yourself a salary of quarter million dollars for no particular reason, and that's an arbitrary number. Then again, I think that might be a little bit of a challenge and a stretch.

Yeah, I think you're probably right. All right, let's just do one last question and give it to both of you in turn. We'll start with Dr. D. What else would you want people to know before they got involved in an outpatient surgical center that we haven't yet covered?

I think the most important thing would be, and we kind of covered it. It just. If somebody's not open with you to looking at the books and being very front with you, then that would be a very big red flag to me. They should be willing to open up all the books, give you all the numbers, the past history, the profits, their expenses. If they won't do that, I think that would be a huge red flag. And I would be very weary of buying into a practice like That I.

Definitely agree with that. And I think another thing to definitely ask and know about is how many partners are there and what percentage of cases are being done by what percentage of providers and I guess how close to retirement are some of those higher producers? Because that will have an impact on the numbers that you're looking at in front of you. But more importantly, it's going to impact the numbers that you're going to be, you know, dealing with 1, 2, 3, 4, 5 years down the line. Because like I said earlier, it's very easily that one or two providers can bring in a great majority of Center's productivity.

Dr. D and Dr. L, thank you so much for coming onto the White Coat Investor podcast today. I think this will be really helpful for people who listen to it. It's not a subject I've ever covered on the blog in eight years and so I think this is going to be a great resource for him. And thank you very much for volunteering your expertise and your time and your experiences.

Jim. Dr. D, that was an awesome experience. Thanks for having me here. I appreciate it.

Yeah, thank you gentlemen.

That was great. I really appreciate those docs coming on. That is a topic I've wanted to hit on the blog or the podcast for a long, long time and I'm constantly asked about it and just, just don't seem to have the expertise personally to talk about it. And so it was great to get some personal experiences.

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