Buying Healthcare Real Estate That Includes an ASC? Do Your Homework....

The early 2000s brought with it substantial growth in the ambulatory surgery center (ASC) model.  Physicians and private ASC companies jumped in to the market to compete head-to-head with the acute care hospital outpatient surgery model for the all important reimburse dollar.  From 2003 to

2009, the ratio of hospitals to ASCs went from 1:9 to 1:1.3, with the number of ASC based  companies growing from 93 in 2000 to 381 in 2009.   Touting the decision to enter this arena on the platform of higher patient satisfaction due to the ease of access, physicians and the ASC firms also enjoyed the benefits of less overhead, less management costs, physician comfort and an opportunity to dictate the patient mix that they want to see in the ASC setting versus the traditional hospital outpatient surgery center.  Traditionally, the specialties that have the highest utilization of ASCs are Ophthalmology, Pain Management, Orthopedics, Urology, and Gastroenterology. 

While the construction costs of new ASCs can be as high at $300/SF just for the build-out depending on how specialized the facility is, favorable lending rates to physicians during this growth period gave the physician community the opportunity to not just be owners in their practice, but in their real estate as well.  But now, the continued uncertainty of the overall healthcare model being influenced by healthcare reform has many physicians transitioning to be hospital employed physicians versus that of the independent group.

The trickle down to the healthcare real estate sector is fascinating as now we are seeing an influx of physician owned properties coming to market, with a leading reason being health systems want to make sure they are Stark Law compliant and not inducing their newly employed physicians via real estate returns.  The selling point from the physicians (owners) are that the new investor can take solace in that the credit on the lease will go from physician personal guarantees in many cases to that of hospital/health system.  However, the investor needs to not only take into consideration the price/SF being asked, which will be significantly higher than a traditional MOB, but also must do its homework on the physician’s specialty and what the long-term plans will be for the health system in keeping the ASC open at the all important renewal/extension option time.

Health systems are looking to mitigate their risk.  In 8-10 years when an initial lease term is up, will the hospital want to renew the ASC lease that performs GI work off campus?  Maybe they will, but they also could say that our preference is to bring that surgery back “in-house” or at least on campus in an effort to protect the patient, and themselves in the event something doesn’t go as planned in a given procedure.  In the latter, the chance of renewing the ASC lease drops significantly and the cost to re-tenant a specialized facility can’t be dismissed as trivial, let alone the risk of long-term, expensive, vacant space.

Health system leaders will suggest that specialties such as Ophthalmology, which represents the largest outpatient ASC setting will continue to be a safe bet for the real estate investor.  They have carved out their own niche and hospitals aren’t looking to compete in that environment.  It is important that the investor look at the details and understand the long-term strategy for all parties prior to jumping at these specialized facilities. To learn more about navigating the changes in the healthcare development industry as an investor, see our Block Healthcare Development Division and get in contact with us to get the expert insight. 

Contributing Author:

Stephen Bessenbacher
Vice President, 
Block Healthcare Development
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