Spine and Orthopedic ASC Development

Transcription

1 Performance, Efficiency, Achievement, Knowledge Spine and Orthopedic ASC Development October 22, nd Annual Meeting The Business and Operations of ASCs Kenny Hancock, President and Chief Development Officer Meridian Surgical Partners

2 Market Drivers for Spine & Orthopedics

3 Market Drivers Spine & Ortho ASCs Minimally Invasive Mindset Physicians Patients internet search Minimally Invasive Industry less invasive technology Technology Surgical - implants, instruments and techniques Anesthesia Ability to eliminate nausea Pain control Insurance Company Acceptance Safe to perform in an ASC setting Superior environment & less expensive than the hospital alternative High quality patient outcomes 3

4 Migration of Spine to ASC Spine Surgery Shift to Outpatient 2015 Shift of Spine to ASCs 45% Driven by Technology, Anesthesia, Physician Mindset and Insurance Acceptance Insight from Spine Investments MSP Estimated Migration of Spine Surgery from Inpatient to Outpatient 600,000 Inpatient Outpatient Spine Surgery CAGR Inpatient 523, , , % 400,000 Outpatient 27, , , % Total 551, , , % 200,000 % Outpatient 5.0% 30.0% 45.0% Source: NeuroSource Inc

5 Migration of TJR to ASC Total Joint Replacement Surgery Shift to Outpatient Trends TJR currently performed in hospitals Same clinical considerations as spine Appears to be moving faster than spine Significant market opportunity» 600,000 knees in 2012» 350,000 hips in 2012» TJR projected to 2 million cases in US by 2015 (Source Arthritis Care & Research)» CMS fee schedule for uni-knees CMS may include fee schedule in 2015 for TJR» Fee schedule for uni-knees now 5

6 The Essentials for Success

7 Develop a Detailed Business Plan Detailed Business Analysis Project Scope Surgical Case Volume & Mix Financial Analysis and Plan Partnership Structure Reimbursement - Managed Care Strategy Equipment Plan Operations Plan 7

8 Project Scope

9 Project Scope Determine the Scope of the Project The Scope Determines the Cost The Cost Determines the Investment Number of Physicians Case Volume Specialty Mix Scope Number of Square Footage ORs/Pre-Post Square Footage Working Capital Pre-Opening Expenses Construction Cost Equipment Costs Cost Equity Debt Investment

10 Surgical Case Volume and Mix

11 Case Build Analysis by Physician Surgical Case Analysis Determine Volume Complete case data worksheets Discount case volumes Determine Reimbursement per case Market Specific Determine Revenue Volume times Reimbursement Use historical cost to build financial model 11 Spine Worksheet Cases Cases Cases Cases CPT Description YTD 2015 Annl Cervical Disc Foraminotomy Post Cervical Laminectomy Thoracic Kyphoplasty Lumbar Kyphoplasty Lumbar Laminectomy / Micro Discectomy Decompressive Lumbar Laminectomy ALIF 1 Level PLIF - 1 Level Lumbar Spine Fusion Combined PLIF - 2 Level Lumbar Spine Fusion Combined ACDF - 1 Level Spine Fusion ACDF - 2 Level Spine Fusion Laminotomy Single Lumbar Totals avg per month Pain Worksheet Cases Cases Cases Cases CPT Description YTD 2015 Annl Injection Sacroiliac Joint Lumbar Discography Injection Cervical Discography Injection Epidural Injection Cervival/Thoracic Epidural Injection Lumbar/Sacral Facet Injection Cervical/Thoracic Facet Injection Cervical/Thoracic 2nd joint or 3rd block Facet Injection Lumbar/Sacral Facet Injection Lumbar 2nd joint or 3rd block Injection Foramen Epidural Cervical / Thoracic Injection foramen Epidural Cervical/Thoracic 2nd level Injection Foramen Epidural Lumbar/Sacral Injection Foramen Epidural Lumbar 2nd level Destruction Facet Joint Nerve Lumbar/Sacral Destruction Facet Joint Nerve Lumbar/Sacral add on Destruction Facet Joint Nerve Cervical/Thoracic Destruction Facet Joint Nerve Cervical/Thoracic add on Totals avg per month

12 Case Build Analysis Physician Build Name Spec Cases Discount Base Thomas ORT % 216 Smith ORT % 180 Jones ORT % 240 Tulloch ORT % 240 Wilson-Hand HAND % 240 Uden-TJR HAND % 240 Smith TJR % 90 Gupta TJR % 90 Morris PAIN % 480 Guion PAIN % 720 Kowalski PAIN % 720 Samuelson-SP SPINE % 90 Bruce SPINE % % - 12 Specialty Build Spec Count Cases Discount Base Ramp Year 1 Year 2 Year 3 Year 4 Year 5 Case Mix ENT % GI % GEN % GYN % OPT % Hand % 480 (160) % ORT % 876 (292) % PAIN 3 1, % 1,920 (640) 1,280 1,411 1,729 1,920 1,951 56% POD % URO (60) (60) % Spine % 180 (60) % T otal 11 2, % 3,456 (1,212) 2,244 2,722 3,292 3,636 3, %

13 Financial Analysis and Plan

14 Net Revenue by CPT Net Revenue Determination By Sub-Specialty - (Spine) (Pain) (Ortho) NeuroSpine - Surgeon 1 CPT Description Rev/Case Cases Net Revenue Cervical Disc Foraminotomy Post $3,996 0 $ Cervical Laminectomy 5, , Thoracic Kyphoplasty 3, Lumbar Kyphoplasty 3, , Lumbar Laminectomy / Micro Discectomy 4, , Decompressive Lumbar Laminectomy 5, , ALIF/XLIF 19, ,413, PLIF 18, , Laminotomy 4, , Transpedicluar approach with decompression of spinal 5, , ACDF , ,759, level hardware removal 4, , or more levels hardware removal 4, Artificial Disc replacement 6, ,183 Totals 337 $4,396,054 Net revenue per case - surgeon 1 $13,056 NeuroSpine - Surgeon 2 CPT Description Rev/Case Cases Net Revenue Net revenue per case - surgeon 2 $8,963 Total blended net revenue per case $12,083 14

15 Revenue Assumptions by Sub-Specialty Revenue Assumptions Case Volume Year 1 Year 2 Year 3 Year 4 Year 5 Orthopedic Pain Management 1,280 1,411 1,729 1,920 1,951 Hand Total Joint Spine Total 2,424 2,722 3,292 3,636 3,692 Reimbursement Year 1 Year 2 Year 3 Year 4 Year 5 Orthopedic 2,601 2,640 2,680 2,720 2,761 Pain Management ,008 Hand 1,592 1,616 1,640 1,665 1,690 Total Joint 11,000 11,000 11,000 11,000 11,000 Spine 9,245 9,384 9,524 9,667 9,812 Total 25,388 25,604 25,823 26,045 26,271 Net Revenue Year 1 Year 2 Year 3 Year 4 Year 5 Orthopedic 1,519 1,704 2,114 2,383 2,457 Pain Management 1,216 1,361 1,692 1,907 1,967 Hand Total Joint 1,320 1,980 1,980 1,980 1,980 Spine 1,109 1,241 1,544 1,740 1,795 Total 5,674 6,857 8,039 8,809 9,023 Net revenue in thousands 15

16 ASC Scope Global Project Assumptions ASC Construction 8,500 sq. ft. facility 2 operating rooms 1 procedure room Lease rate $24.00 per foot Equity raise $15,000 per 1% - Units 100 Design and construction $1.360 million Capital expenditures $1.975 million 16

17 Project Assumptions Project Assumptions Facility Size Debt Financing Uses of Capital Square Feet 8,500 Capital Expenditures 1,975,000 Capital Expenditures 1,975,000 Operating Rooms 2 Construction Costs 1,360,000 Working Capital 1,259,685 Procedure Rooms 1 Other Fees and Expenses 160,000 Pre-Opening Expenses 240,315 Total Debt Financing 3,495,000 Design and Construction 1,520,000 Construction Costs Total Uses 4,995,000 Build-Out Costs per SqFt 200 TI Allowance 40 Debt and Lease Terms Sources of Capital Build-Cost to Partnership 160 Debt 5.00% 7 Years Physicians 70% 1,050,000 Construction Costs 1,360,000 Building Rent Rate (per SF) $24.00 Corporate 30% 450,000 Total Equity Financing 1,500,000 Capital Expenditures Investment Terms Debt Financing 3,495,000 Medical Equipment 1,750,000 Price pre Unit $ 15,000 Total Sources 4,995,000 Computers & Software 100,000 Available Units 100 Furniture & Fixtures 125,000 Total Equity Financing 1,500,000 Total Cap Ex 1,975,000 17

18 Financial Projections Financial Projections Free Cash Flow (In Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Net Revenue 5,674 6,857 8,039 8,809 9,023 Salaries and Benefits 1,270 1,292 1,517 1,772 1,834 Medical Supplies 1,702 2,067 2,436 2,683 2,761 Rent Expense Management Fee Other Operating EBITDA 1,658 2,350 2,810 2,980 3,000 Debt Service (419) (593) (593) (593) (593) Capital Expenditures - (20) (30) (40) (49) Changes in Working Capital (825) (172) (170) (110) (30) Free Cash Flow 415 1,565 2,017 2,237 2,329 Per Case Data Year 1 Year 2 Year 3 Year 4 Year 5 Case Volume 2,424 2,722 3,292 3,636 3,692 Revenue 2,341 2,519 2,442 2,423 2,444 Salaries and Benefits Medical Supplies Returns Analysis Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investor Cashflow (1,500) 1,505 1,665 2,017 2,237 2,329 Annual Return 100.3% 111.0% 134.5% 149.1% 155.2% Cumulative Return 0.3% 111.3% 245.8% 394.9% 550.2%

19 Summary Financial Analysis Construct a free cash flow analysis is to view the opportunity from a realistic, albeit conservative, set of assumptions Free Cash Flow Analysis These assumptions include: 19 Case count Reimbursement Supply cost FTE count Other operating Capital expenditures Working capital and debt service Free Cash Flow (In Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Net Revenue 5,674 6,857 8,039 8,809 9,023 Salaries and Benefits 1,270 1,292 1,517 1,772 1,834 Medical Supplies 1,702 2,067 2,436 2,683 2,761 Rent Expense Management Fee Other Operating EBITDA 1,658 2,350 2,810 2,980 3,000 Debt Service (419) (593) (593) (593) (593) Capital Expenditures - (20) (30) (40) (49) Changes in Working Capital (825) (172) (170) (110) (30) Free Cash Flow 415 1,565 2,017 2,237 2,329 Per Case Data Year 1 Year 2 Year 3 Year 4 Year 5 Case Volume 2,424 2,722 3,292 3,636 3,692 Revenue 2,341 2,519 2,442 2,423 2,444 Salaries and Benefits Medical Supplies Percent of Revenue Year 1 Year 2 Year 3 Year 4 Year 5 Salaries and Benefits 22.4% 18.8% 18.9% 20.1% 20.3% Medical Supplies 30.0% 30.2% 30.3% 30.5% 30.6% Rent 3.6% 3.1% 2.7% 2.5% 2.5% EBITDA 29.2% 34.3% 34.9% 33.8% 33.3% Distribution Analysis (In Thousands) Year 1 Year 2 Year 3 Year 4 Year 5 Free Cash Flow 415 1,565 2,017 2,237 2,329 Beginning Cash Balance 1, Minimum Cash Balance (200) (100) (100) (100) (100) Distributions 1,505 1,665 2,017 2,237 2,329 5-Year Investor Returns Analysis (In Thousands) Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Investor Cashflow (1,500) 1,505 1,665 2,017 2,237 2,329 Annual Return 100.3% 111.0% 134.5% 149.1% 155.2% Cumulative Return 0.3% 111.3% 245.8% 394.9% 550.2%

20 Partnership Structure

21 Partnership Structure Real Estate Partnership 15 year lease ASC Partnership Real Estate Partnership Separate partnership is formed RE partnership captures land purchase, site, utilities, fees & permits, shell building and tenant construction allowance Includes physicians from the ASC partnership Investment: Land ($6.50 to $14.00sf.) 1.54 acres ($436-$939k) Site Improvements/AE/soft costs - ($30sf.) Building Shell ($100 to $110sf.) TI construction cost allowance ($45sf.) Investment Thesis: 15 year lease term with personal guarantees (5 yrs) Total investment: (ASC freestanding or w/mob)» Equity: 30% -- Debt: 70%» Guarantees pro-rata Cash-on-cash returns 14% to 20% over 15 year term 21

22 Partnership Structure Real Estate Partnership 15 year lease ASC Partnership 22 Surgery Center Partnership ASC partnership Physician owners + management partner Investment includes: 8500 sf. Interior construction cost» $1.36mm ($160 sf.)» TI allowance - $40 sf. ($340k) (RE provides) Equipment ($1.750mm) Working capital ($1.5mm) Investment Thesis: Total investment: $4.995,000 Equity: $1.5mm 1% pro-rata $15K Debt: $3,495,000 Guarantees -1% pro-rata - $35k 15 year lease term Cash-on-cash returns 40% +

23 23 Planning - Schematics

24 24 Ambulatory Surgical Center

25 What Must be Considered?

26 Reimbursement Make Sure You Get Paid! Reimbursement Getting paid is a critical step in the business plan Spine procedures historically not approved by Medicare Medicare 2015 approved 9 spine codes» Neck spine fuse & remove belc2» Neck Spine fusion» Lumbar spine fusion» Neck spine disc surgery» Low back disc surgery» laminotomy single lumbar» Removal of spinal lamina» Removal of spinal lamina» Decompress spinal cord Only uni-condylar knees are recognized by Medicare MC Bundle Program may lead to fee schedule for TJR Must convince the insurance company these procedures are safe in an ASC Insurance companies are beginning to develop ASC fee schedules for spine This is a negotiation between the ASC and insurance companies Becomes a major problem if OON is prohibited and you can t get a contract 26

27 Implant Cost Implant Costs Addressing implant cost is essential Negotiate carve-outs Having solid cost data is important when negotiating with the payors Off-load implant cost to a third-party company 27

28 Equipment Considerations Equipment Costs Hire an experienced equipment planner to assist Expense up to $ k per operating room Microscope - $80-120k C-arm - $150k Drill set - $30,000 Spine instrument trays cervical and lumbar $50k+ Lumbar table $35k 28

29 Operations Staffing Staffing Hire a staff that has spine/tjr experience Hire a staff that has worked with your surgeons Understanding the challenges and needs of the patients pre and post-operatively will make a significant difference in success out of the gate 29

30 Operations Patient Discharge Plan Home Care Develop a program with Home Care Patient plan after discharge to home Pain protocol developed Physical therapy plan developed Develop a process that produces high patient satisfaction Skilled Nursing Discharge patient to rapid recovery center Hotel-like amenities Licensed as a skilled or immediate care facility Transportation Pain protocol developed Physical therapy plan developed Develop a plan of that produces high patient satisfaction 30

31 31 Rapid Recovery

32 32 Rapid Recovery

33 Summary Spine & TJR Ortho surgeons are evaluating opportunities to develop/join ASCs Driven by desire to control their surgical environment Increase productivity, simplify their lives and increase income No change in what you do --- just where you do it Incremental cash Advancements in technology drive spine & TJR into an outpatient setting MIS product and instrument design Improvements in anesthesia and pain control Evolution of surgeon acceptance and comfort in an outpatient setting Planning is essential for a successful outcome Careful business plan development is critical Seek assistance from professionals with specific experience 33

34 Thank You! Kenny Hancock President & Chief Development Officer Meridian Surgical Partners