Ambulatory surgery centers (ASCs) structured as three-way joint ventures between hospitals, physicians and management companies are becoming more prevalent as health care systems seek to expand outpatient surgical capacity.
Yet according to a new white paper from Merritt Healthcare, these ventures only thrive when all stakeholders align around capitalization from the start.
“When capitalization isn’t thoughtfully planned, it could definitely lead to incentives that are misaligned,” Danilo D’Aprile, VP of Business Development at Merritt, told ASC News. “Particularly when one stakeholder over- or under-contributes relative to their ownership percentage. That’s an issue that’ll create tension around decision-making, authority and profit distribution.”
To prevent that kind of friction, Merritt in its white paper recommended a balanced investment strategy where each partner’s contribution is proportional to their ownership share. This approach can also ease compliance with federal regulations like the Stark Law and the Anti-Kickback Statute, D’Aprile said.
“I think it’s really important to also make sure that you have a strong legal team analyzing all that,” he said. “Especially when there’s a hospital involved, they have a lot more regulation as far as ownership and equity in a surgery center that they need to worry about, especially around physician ownership.”
Early lender engagement is key
Another critical factor is securing relationships with lenders early in the process. Delaying lender involvement can derail development timelines and result in less favorable loan terms, D’Aprile said.
“Without engaging early lender alignment and financial modeling, that would probably lead to some delays in project timelines [and] financing terms,” he said. “Relationships are key.”
Merritt’s paper also suggests combining multiple financing streams to reduce upfront equity requirements. That typically includes third-party bank loans, vendor financing and tenant improvement allowances..
According to D’Aprile, this blended strategy helps mitigate financial risk and keep projects on track.
“Those reduce that upfront equity, like in the sources and use examples that we give,” he said. “It helps mitigate the financial risk across the stakeholders.”
In the white paper, Merritt’s sample structure shows third-party lenders contributing roughly $12 million of a $15.5 million total ASC capitalization package, with the remaining equity split among partners. Equipment costs are often financed separately through vendor leases, which rarely require personal guarantees, D’Aprile said.
Interest rates not a dealbreaker
While rising interest rates have sparked concerns in other real estate and health care sectors, D’Aprile said they haven’t significantly slowed ASC development – yet.
“Interest rates have risen in recent years, but they’re still historically low,” he said. “It hasn’t really significantly slowed any ASC development that we’ve seen. The stronger, more important challenges … stem back to entering the JV without a clear capitalization plan.”
And hospitals have an evolving role in ASC development.
In the past, health systems often shouldered the majority of project costs. Today, that dynamic is changing.
“Traditionally speaking, hospitals and health systems … have been the predominant funding source,” D’Aprile said. “Nowadays, it’s even across the board, proportionate to their ownership. A lot of systems … may not have cash to invest and cover the entire cost of the project. Between third-party lending and shared risk, I think they’ll feel much better about engaging in an ASC strategy.”
