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CON States: How to Open a De Novo ASC

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Certificate of need programs regulating ambulatory surgery centers exist in a little more than half of the 50 states. The structure and rigidity of these programs vary from state to state, but in these markets ASC owners need to obtain a CON to go from an idea to reality.

Frank Principati, COO of Physicians Endoscopy, and Joe Zasa, co-founder and managing founder of ASD Management, outline the process of navigating CON hurdles and successfully opening a surgery center in a CON state.

Upfront considerations
Upfront requirements for physicians to consider include:

JoeZasa•    Time commitment. "The CON process can delay a project for a year to two years," says Mr. Zasa.
•    Financial investment. The CON application process itself costs physicians, in addition to the investment associated with actually opening a center.
•    Dedication from a solid group of physicians. "You want physicians involved," says Mr. Principati. "They provide important data on payer Frank Principati2mix and drive the development of the business plan."
•    Market research to determine need. CON programs are designed to eliminate unnecessary services. Physicians will need to be prepared to present evidence that an ASC project is necessary in a particular area.

A firm grasp of a market is imperative for any prospective physician-owners, but particularly so in a CON market. "Researching state law is critical to understand what you can and cannot do," says Mr. Zasa.

Strategic planning
Developing a business plan, securing a site, plotting a course through legal requirements and finding an architectural firm can be daunting for a busy group of practicing physicians. A partnership with an ASC development company or consulting firm can give physician owners a strategic advantage. These potential partners will be familiar with the process from start to finish, helping to pave the road to a successfully opened center.

Increasingly, ASCs are choosing a joint venture model for the strength a hospital partner can provide. In the case of de novo ASC projects in a CON market a hospital can be an invaluable asset. "A hospital partner is a key in the start up and approval process," says Mr. Principati. "We have done projects without them, but in most states you need their support."

Facing the competition
CON markets tend to be less saturated due to the extra effort it takes to open an ASC, but those providers that do hold a CON can bar the way for competition. "You will be opposed by hospitals and ASCs who already have a CON," says Mr. Zasa. "CON is a bit of an 'oligopoly' whereby those who have it protect it and do their best to keep others from obtaining a license."

In April, a group of physicians and Kaleida Health lost a battle to obtain a CON for a joint venture ASC in Orchard Park, N.Y. In addition to being a notoriously difficult market to break into, the ASC project faced opposition from major hospitals and health systems including Catholic Health System, Lake Shore Health Care Center and Bertrand Chaffee Hospital.

Though opposition may be significant, ASC projects can ultimately move forward. Physicians Endoscopy and a group of North Carolina physicians received preliminary approval in 2011 for the construction of an endoscopy center. Nearby CaroMont Health mounted an appeals effort to prevent the project from moving forward. After three years, the North Carolina Court of Appeals denied CaroMont's claim. "We have gotten approval and we are looking to begin construction in May," says Mr. Principati.  

File an application
The process of filing a CON application and waiting for approval can take six months to a year. To begin the application process, the physicians and their partners will need a business plan, financing commitment, various formation documents and secured a site with a landlord that is willing to wait out the process with you.  

"If you are presenting a good quality program with physicians committed to the project, more often than not these proposals have gotten the support from the review board, says Mr. Principati."

Information helpful to supply with a CON application includes:

•    Analysis of the market based on demographics and need. Does the area need the additional ORs an ASC will bring?
•    Studies demonstrating the benefits of an ASC. Illustrate how ASCs achieve high patient satisfaction, quality care and lower infection rates.  

"Emphasize that you are increasing access to care and providing superior care at lower costs," says Mr. Zasa.

Financial considerations
As with any ASC project, physicians are making a significant financial investment. Costs may include:

•    Location or a signed lease
•    Legal fees
•    Consultant fees
•    CON submittal
•    Efforts to raise capital
•    Architectural and development fees
•    Accreditation fees

The price of filing for a CON varies from state to state, but combined with the legal fees and market studies required to complete the process is significant. "Spending $100,000 is not atypical," says Mr. Zasa.

Why open in a CON state?
The added expense and delicate dance of obtaining a CON may make physicians wonder if opening a de novo ASC in this type of regulated market is worth the effort, but the end result is answer enough. "[You are] improving access to care, have less competition, perhaps better payer contracting since there are likely less ASCs. The cases that are appropriate for an ASC are being performed in a hospital," says Mr. Zasa. "Thus the new ASC can provide the care for less cost, saving the payer and consumer."

"The commitment is to opening and providing a quality service offering for your patients," says Mr. Principati. "A CON site is very valuable to physicians and the community it is serving."

More Articles on Transactions and Valuation Issues:
New York Health Department Denies CON to Kaleida Health, Physician Joint Venture ASC
4 Recent Ambulatory Surgery Center Mergers & Acquisitions
5 Recent Hospital & ASC Joint Ventures

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