North End HealthCare: Pediatric Ambulatory Surgery Center Expansion Strategy

PH5-060
2015
North End HealthCare: Pediatric Ambulatory Surgery

Center Expansion Strategy
Brian WalkerFounder and Chairman of North End HealthCare (NEHC)waited under one of
the stone gates at the edge of Harvard Yard as the late-night traffic muddled past him on
Massachusetts Avenue. Though the unexpected rain had proved an annoyance, he didnt really
mind waiting for a lull in the weather as he contemplated the next steps for the healthcare
organization he had founded nearly three years earlier. In November of 2010, Brian had filed
articles of organization in Texas for a new pediatric ambulatory surgical center. The facility
Houston Childrens Surgicalcurrently provided pediatric oral surgery services, and Brian was
anxious to expand its offering to other surgery types and locations. The company had performed
well since inception and showed real potential as a model for future growth of similar facilities
in Texas and throughout the United States. Still in thought as the rain subsided, Brian stepped
out and began his walk home. Can this business model be replicated in other cities and how will
I make it a sustainable enterprise, he wondered. He had already signed a lease, with an
accompanying personal guarantee, for a new center in San Antonio, Texas, and needed to nail
down his growth strategy within the month.
Ambulatory Surgical Centers and Pediatric Surgeries

Ambulatory Surgical Centers (ASCs), or outpatient surgery centers, have grown rapidly in the
United States since the first ASC was created in the early 1970s. According to the Ambulatory
Surgery Center Association (ASCA), today [m]ore than 5,300 ASCs in the United States
perform 23 million surgeries annually. Medicare grants approval for ASCs to perform more than
3,500 procedures.1 An alternative to hospital outpatient departments, surgery centers provide
treatment to relatively healthy patients who seek elective surgeries and can be discharged from
the facility within 24 hours of surgery. Many of the surgeries that fit this characteristic
including oral surgeriescan be performed in a traditional office setting as well.
Ownership structure and operating authority of ASCs can take many forms. Most are jointlyowned by physicians and management services organizations. Hospitals, seeing many of their
surgeries leave the hospital, have also sought a financial interest in surgery centers. Despite the
many different ownership scenarios, over 90% of ASCs have some kind of physician ownership.
These physician ownerstypically surgeons who also practice at the ASCprovide the majority
of the patient volume from their office-based practices.
2015 by the President and Fellows of Harvard College. This case was written by Brian Walker, SM, under the
supervision of Richard B. Siegrist, CPA, MS, MBA, Harvard T.H. Chan School of Public Health, as the basis for class
discussion and education rather than to illustrate either effective or ineffective handling of an administrative or public
health situation. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted,
without the permission of Harvard T.H. Chan School of Public Health.
North End HealthCare: Pediatric Ambulatory Surgery Center Expansion Strategy
PH5-060
The ambulatory surgery center industry is fairly fragmented, consisting of a handful of large
companies, several medium-sized companies, and many stand-alone operations. Of the large
ASC companies, Amsurg (AMSG), United Surgical Partners (USCI), Hospital Corporation of
America (HCA), and Surgical Care Affiliates (SCAI) together comprise less than 15% of the total
surgical centers in the United States.3 Historically, these large players have grown primarily
through acquisitions, rather than organically (see Exhibit 1).
The effects of the Affordable Care Act (ACA) on ambulatory surgical centers are unclear.
However, the ACAs call for Accountable Care Organizations (ACOs)integrated networks of
providers responsible for the full spectrum of a patients careprovides some directional
guidance. ACOs, whether insurance-based or hospital-based, will likely lean toward providing
services to patients at points of care that provide the highest quality at the lowest cost. Though
surgery centers are well-positioned to provide services in these kinds of networks, power
dynamics with hospitals and insurance carriers may prove problematic. The CEO of Ambulatory
Surgical Centers of America, Luke Lambert, noted the following regarding the Affordable Care
Act, I think the real opportunity for ASCs is to figure out your place in the region and then
position yourself to become part of the organizations and networks.4
Pediatric surgeries in the United States are typically completed at general hospitals, pediatric
hospitals, multi-specialty surgery centers, or pediatric-focused surgery centers. Though
pediatric hospitals and multi-specialty surgery centers have proliferated in the United States,
pediatric-focused surgery centers are rare and the companies that operate them typically do not
have more than one facility. The power of local childrens hospitals and the relatively low
reimbursement rate paid by Medicaid and the Childrens Health Insurance Program (CHIP),
which together cover approximately 43 million of the 73 million children in the United States,
may explain the lack of proliferation in the pediatric surgical center space.5/6
North End HealthCare

After graduating from college, Brian spent four years in Dallas, Texastwo years working in
consulting and an additional two years as a private equity investor. Leaving his job in late 2010,
Brian began a self-funded search for a small business acquisition target. During this time, he
gravitated toward the healthcare industry and considered several different companies in the
space. After further due diligence, he came upon several ambulatory surgical centers operating
in California that sparked his interest. These centerswhich were each owned by separate
physician groupsstood out to Brian because they were utilizing a unique and attractive
business model (see business models discussion below) that proved financially sustainable with
a high percentage of patients paying for services with Medicaid benefits. Though hesitant, Brian
ended his search and decided to open a pediatric-focused ambulatory surgical center in
Houston, Texas, which had a large pediatric population with Medicaid benefits. Furthermore,
the Medicaid rates for the surgery that he planned to target firstoral surgerieswere much
more attractive than the rates in California. By the end of 2010, he had created two entities:
North End HealthCare (the parent company) and Houston Childrens (a pediatric ambulatory
surgical center) (see Exhibit 2). These companies were capitalized by Brian and three other
contributors, and equity was split based on capital contributions, idea formation, and expected
2
PH5-060
management efforts. A time-based equity vesting schedule was created for the management
team.
Brian quickly proceeded through the steps of surgery center development: architectural
modifications, equipment and supply purchasing, CMS and state survey preparation, policy and
procedure implementation, and physician recruitment. Additionally, he began developing a
referral network of dentists, pediatricians, and nurse practitioners. To do this, he would
personally visit medical and dental offices throughout the Houston area and discuss their
referral methods. And as he did so, he often found that physicians had a difficult time finding
specialists that accepted Medicaid payment for pediatric surgeries. Though setbacks and dark
days were abundant, the facility began to receive many of these referrals and was able to
achieve cash flow breakeven within four months of completing its first surgery. In total, $330K
in equity was invested in the business, all of which was used to fund operating losses until cash
flow breakeven. Vendor financing for equipment was obtained as well and totaled ~$250K.
Fortunately, no investment was needed to build or retrofit the surgery center facility, as Brian
was able to negotiate a lease for a ten-year old surgical center that had just been vacated by a
lap-band surgery group.
By mid-2012, all equity investments were recouped (a 16-month payback) and Brian was
contemplating next steps. As the acting Administrator at Houston Childrens, Brian often
observed the preparation, surgery, and recovery of the young patients at his center, and was
disturbed by the lack of teamwork among health care professionals and the disparity in methods
used to complete each surgery. He began to visit local hospitals and other surgery centers where
he observed the same phenomenon. This concern led him to seek out current and evidencebased research in quality improvement and patient safety. Harvard Universitys involvement in
the development of the safe surgery checklist prompted him to apply and be accepted to a twoyear program at the Harvard School of Public Health.
Prior to his departure for school, Brian hired a new Administrator and the daily operations of
the business were transferred to him. Fortunately, the facility continued its strong performance,
allowing Brian the opportunity to focus on his studies and consider future growth plans.
Houston Childrens ended 2012 with $1.2M in EBITDA and $1.1M in free cash flow. By 2013, the
center generated ~$2.2M in EBITDA and $2.1M in free cash flow (see Exhibit 3). As the
referral network strengthens and additional pediatric surgeries are introduced to the center,
EBITDA realization could reach up to $3.5M per center at full utilization.
While in school, Brian began developing an expansion plan for North End HealthCare. He
believed that with no outside equity capital, NEHC could open at least two additional centers in
2014 and then at least four more centers each year thereafter. The companys growth plan was
divided into three phases over the next three years: Replicate, Own Texas, Expand Regionally
(see Exhibit 4).
PH5-060
Business Model
North End HealthCare deploys a fundamentally different business model than its typical ASC
counterparts, which allows the company to profitably provide services at a much lower price
point. This model, in turn, allows NEHC to offer its services to patients with Medicaid coverage
who often have few options for specialty care. To note, the actual costs to the companyfacility
lease, utilities, equipment, supplies, personnelare all the same as any other surgery center.
Traditional ASC Model

The vast majority of surgical centers in the United States are physician-owned and rely on
surgeon-owners for virtually all patient volume. For example, children who are experiencing
discomfort in their ears will typically be taken to see a pediatrician. Upon examination, the
pediatrician may determine that ear tubes are required to remedy the problem, and the patient
will then be referred to an otolaryngologist (i.e., an ENT or ear, nose, and throat doctor). If the
diagnosis is confirmed, the otolaryngologist will then set up an appointment for the procedure
usually at a facility where he or she has joint ownershipand complete the treatment. The
patient will then receive three separate bills: one from the otolaryngologist, one from the
anesthesiologist, and one from the facility. Upon payment, each provider retains 100% of the
separate fee streams (see Exhibit 5). As one surgeon would typically not be able to provide
enough volume from his practice to generate profitability at the surgery center, multiple
surgeons share ownership in the facility and split their time between private practice and
surgery. This model has several benefits: surgeons have more touch points and the opportunity
to develop deeper relationships with their patients during visits to their individual offices prior
to surgery; many surgeons receive a high compensation rate from both private practice fees and
surgical center ownership; and the volume in the surgical center is relatively predictable and
based on historical trends at the surgeons private practices. Thus, surgeons that gravitate to this
model often own their practices and prefer the opportunity to engage patients multiple times.
North End HealthCare Model

North End HealthCares facilities have no surgeon-owners and, instead, attract patients through
a citywide referral network of pediatricians, primary care physicians, nurse practitioners, and
dentists. This network is built by a Marketing Director that develops personal relationships with
the referring physicians and associated staff. Surgeons who are privileged to perform procedures
do not themselves contribute any patient volume to the facility. Continuing the example above, a
pediatrician may choose to forego a referral to an otolaryngologists private practice and instead
refer the patient directly to an otolaryngologist privileged at one of North End HealthCares
facilities. These referring physicians may choose a North End HealthCare facility for several
reasons: a shorter lag time from referral to surgery, communication back to the referral partner
about outcomes, acceptance of certain insurancesespecially Medicaidor simply because a
relationship of trust has been built by the Marketing Director during her visits to the providers
office. Upon confirmation that surgery is required, the otolaryngologist at NEHC completes the
surgery and refers the patient back to the pediatrician for ongoing care. The patient receives a
consolidated bill for the entire surgery, and the insurers receive their respective bills if
applicable. This consolidated bill is for transparency and convenience only; by law, North End
4
PH5-060
HealthCare is required to bill from three separate fee schedules: surgeon, anesthesia, and
facility. Upon payment, the surgeon pays a fee dictated by a Management Service Agreement
(MSA) to North End HealthCare and the anesthesiologist typically retains 100% of his or her
fees. In this model, all of the volume at the center is provided by a citywide referral network.
This model also has several benefits: the management fee received from the physicians allows
for profitability at a lower price point and volume mix; there is no incentive for a physician to
refer to his or her surgery center, which could be viewed as a conflict of interest; and surgeons
are able to perform more surgeries than their peers as they are no longer splitting time at the
office. Surgeons that lean toward this model are more focused on perfecting their surgical skills
and are often prefer employment in a clinic, ASC or at a hospital over private practice
ownership.
Expansion Opportunities and Sustainability

North End HealthCares success with Houston Childrens was encouraging, but Brian believed
that a short window existed to effectively expand the business model to additional cities; the
financial returns experienced-to-date suggested that new entrants may copy NEHCs business
model, and first mover advantage with a referral network business was crucial. However, given
the relatively new nature of this business model and no apparent rationale for other
entrepreneurs or established companies pursuing it in the past, he understood that expansion
into new cities and new surgeriesbeyond oral surgerymight prove unsuccessful. Brian
initially modeled out expansion using a traditional approach: estimate volume, input price,
project expenses, and examine multiple scenarios. Though this approach was helpful, Brian
decided to employ the Discover Driven Planning methodology described in the 1995 Harvard
Business Review article by Rita McGrath and Ian MacMillan.7 Central to this process was the
Reverse Income Statement that called for a bottoms-up accounting of all costs associated with
expansion first in order to determine the required revenue to cover these costs and provide an
attractive return on investment.
After accounting for unable to reach patients and same-day cancellations (approximately 30%
of all referral volume), Houston Childrens was completing approximately 12 surgeries and
generating roughly $23K in revenue per day. Utilizing the operating results from Houston
Childrens, Brian initially built a one-center Reverse Income Statement for expansion to San
Antonio. The results showed that, assuming consistent costs in Houston and San Antonio,
NEHC would invest ~$300K to achieve a $1.4M run-rate EBITDA within a year if it could reach
approximately 50% of Houston Childrens annual oral surgery volume (see Exhibit 6).
Encouraged by his findings, Brian expanded his search beyond San Antonio to other cities
within and beyond Texas. In short order, he had a list of at least 10 locations that seemed
attractive for pediatric surgery center expansion, based on favorable Medicaid reimbursement
rates and enrollment volume. Quickly, he developed a reverse income statement for each
locationtaking into account reimbursement rates that vary by stateand aggregated the
results (see Exhibit 7). Though marginal changes in total EBITDA and equity investment
resulted, Brian saw an opportunity to quickly expand to multiple locations organically and
without additional equity capitalization.
5
PH5-060
Despite his excitement, several glaring concerns were apparent about expansion and the
sustainability of the business model. First, the stickiness of a referral partner had not really
been tested. Even though NEHC may capture first mover advantage in some of the cities it was
targeting, future competition could dramatically change the referral network. All referrals must
be based solely on clinical factors and are ultimately determined by the referring physician.
Federal and state anti-kickback statutes required that no incentive or remuneration be offered,
and NEHC was focused on obeying the spirit and the letter of the law. Second, dynamics in the
healthcare markets in new cities were difficult to fully identify and predict. For example, many
referring physicians were uninterested in speaking to Brian about potential referral volume
solely based on a hypothetical future facility in their city. Furthermore, as the Medicaid
programs were different in each state, and navigating the government programs and Managed
Care Programs attached to them was a monumental task. And third, expansion beyond oral
surgeries had not been fully tested at the existing facility in Houston. Although Houston
Childrens was licensed and accredited to complete additional pediatric surgeries, it had not yet
recruited other physician types or sought referrals for these services.
Strategic Decision
As Brian neared home, the rain picked up again but he barely noticed as he continued to
struggle with North End HealthCares strategy. Was expansion a wise decision and, if so, how
could he improve his probability of success and create a sustainable enterprise? What methods
could be deployed to help referral partners stick as competition in a market picked up over
time? Could he create any meaningful legal arrangements with referral partners that would
avoid improper kickbacks or unethical referrals to the facility? Should he just focus on
optimizing his facilities in Houston and San Antonio? As he reached home, he decided on an
initial strategy: he would compare the financial and non-financial benefits and risks of
expansion and decide on a course of action from there.
PH5-060
Exhibit 1: Historical Surgery Center Acquisitions

Date
1/7/2007
3/25/2007
4/24/2007
1/27/2006
12/1/2001
11/11/2004
1/31/2000
7/1/2002
2/21/2006
7/13/2007
11/15/2001
11/15/2001
10/4/2000
11/1/2007
7/19/2006
8/15/2005
11/17/2003
12/3/2001
7/31/2004
1/31/2000
1/21/2000
8/3/2007
4/24/2001
1/3/2001
12/2/2005
2/23/2001
12/20/2000
Target / Issuer
United Surgical Partners International Inc.
Surgical Care Affiliates
Symbion Inc.
Surgis, Inc.
Surgis, Inc.
Surgery Center of Kirkwood
Southern Alambama Surgery Center LLC
San Jacinto Surgery Center
NovaMed Surgery Center of Dallas, LP
PSHS Alpha Partners, Ltd.
San Gabriel Valley Surgical Center
Surgi-Center of Central Virginia, Inc.
Memorial Village Surgery Center Ltd.
Barranca Surgery Center, Inc.
Clearview Surgical Institute
Center for Outpatient Surgery
MediSphere Health Partner, Inc.
The San Carlos Hospital
NovaMed Surgery Center of Palm Beach, LLC
The Las Vegas East Opthalmology ASC, LLC
The Glendale Opthalmology ASC, L.P.
PSHS Beta Partners, Ltd.
Westbank Ambulatory Care Center
East Houston Surgery Center, Ltd.
Point Loma Surgical Center
Piney Point Ambulatory Surgical Center
Surgi+Group Inc.
Buyers / Investors
Deal Value ($M)
Welsh, Carson, Anderson & Stowe
1,866.98
TPG Capital
945
Crestview Partners, L.P.
662.59
United Surgical Partners International, Inc.
200
New Mountain Capital, LLC
70
Symbion Inc.
25.8
AmSurg Corp.
14.22
SurgiCare Inc.
12.88
NovaMed Inc.
12.45
Surgery Partners LLC
12.3
12
11.2
SurgiCare Inc.
10.28
Medical Facilites Corp
9.5
NovaMed Inc.
9.01
NovaMed Inc.
8.1
Symbion Inc.
8.04
United Surgical Partners Europe, S.L.
7.38
NovaMed Inc.
7.18
AmSurg Corp.
5.2
AmSurg Corp.
4.63
Surgery Partners LLC
4.11
Tenet HealthSystem Surgical, LLC
1.8
East Houston Physician Surgical Services, LTD, L.P
1.65
First Physicans Capital Group, Inc.
1.25
Dynacq Healthcare Inc.
1
Dynacq Healthcare Inc.
0.38
Source: Avandale Partners, Amsurg Initiating Coverage Report, 2010
Note:
Deal Value: consideration paid for actual stake acquired
Enterprise Value: market capitalization + debt - cash
EV ($M)
1,835.24
945
636
200
70
51.6
21.88
20.78
19.15
19.39
14.7
13.35
16.09
18.63
14.77
15.88
8.04
7.38
11.97
8.67
9.08
6.46
1.8
-
2.45
1
0.38
EV / Revnue
3.17
-
2.04
2.32
-
-
-
-
-
-
-
-
3.7
4.44
-
-
-
-
-
-
-
-
-
-
-
-
-
EV / EBITDA
9.44
-
8.11
11.52
-
-
-
-
-
-
-
-
12.72
-
-
-
-
-
-
-
-
-
-
-
-
-
-
PH5-060
Exhibit 2: NEHC Structure
Future Centers
Note: North End HealthCare is a Texas Limited Liability Company and currently owns 100% of
Houston Childrens and San Antonio Childrens.
PH5-060
Exhibit 3: NEHC Historical Financials

NEHC Historical Financials
Professional Revenue
Facility Fee Revenue
Total Revenue
2011
$860,829
133,252
$994,081
2012
$2,275,037
1,001,354
$3,276,392
2013
$3,564,093
1,362,251
$4,926,344
Surgeon Compensation
Anesthesia Compensation
Clinical Compensation
Contractual Services
Supplies & Materials
Total Cost of Goods Sold
$168,758
76,100
114,963
83,326
139,599
$582,745
$455,722
88,100
209,438
95,291
284,548
$1,133,099
$851,046
0
242,672
97,376
396,554
$1,587,648
Gross Profit
$411,336
$2,143,292
$3,338,696
Advertising
General & Administrative Expenses
Total SG&A
$17,146
479,641
$496,788
$20,328
955,318
$975,646
$15,038
1,083,536
$1,098,574
EBITDA
($85,452)
$1,167,646
$2,240,122
Debt Service
Depreciation
Other Income / Expenses
Total Interest, Depreciation, & Other
$19,237
23,751
8,156
$51,144
Net Income
Free Cash Flow (Net Income + Depreciation)
($128,440)
($104,689)
$21,930
31,942
(272)
$53,601
$1,113,774
$1,145,716
$12,986
32,986
(78)
$45,894
$2,194,150
$2,227,136
Cost Category Guidance:

Anesthesia Compensation: NEHC initially employed an individual anesthesiologist and paid
directly for his services. In 2012, NEHC transitioned to an anesthesia group that receives
payment through direct billing for patient services.
Clinical Compensation: All healthcare professional compensation (e.g. nurses, assistants, etc.)
excluding surgeons and anesthesiologists.
Contractual Services: Costs associated with biohazard removal, pharmaceutical services,
terminal and facility cleanings, linens processing, and other minor direct costs.
9
PH5-060
Exhibit 4: Expansion Plan
2014
2015
2016
Phase 1: Replicate
Phase 2: Own Texas
Phase 3: Expand Nationwide
San Antonio and Dallas

Initially, NEHC plans to replicate
its business model in markets that
have the most similar
characteristics and payment
environments to the market in
which it currently operates
Austin, McAllen, El Paso

The following year, NEHC will
enter the remaining attractive
Texas markets that have similar
payment environments but less
similar metro markets to its
portfolio
Oklahoma, Kansas, New Mexico,

Arizona
Expansion beyond Texas will begin
in 2016. Markets with similar
demographics to its portfolio and
attractive Medicaid rates will be
targeted first
Note: Regional expansion within Texas is prioritized given similar billing environments, referral relationships, and regulatory
specifications.
PH5-060
Exhibit 5: Example Economics by Model
Business Model Overview

Traditional Model
The vast majority of surgical centers in
the United States have physician
ownership and rely on these surgeon-
owners for virtually all of the centers
volume. Surgeons typically only treat
their individual referrals using block
time at the center. Surgeons,
anesthesiologists, and the facility retain
all of their individual fees.
NEHC Model
NEHC has no physician ownership and
obtains its full volume from a c ity-wide
referral network of primary care
physicians, nurse practitioners, and
dentists. One surgeon is hired to treat all
patients and is paid 25% of the total
surgeon fees. The facility retains all of its
facility fees plus 75% of the surgeon fees
for management services.
Example Economics by Model

Traditional Model
Volume
Surgeon Owner #1 Referrals
Total Referrals
NEHC Model
Annually
400
400
400
400
400
2,000
Volume
Referral Network
Total Referrals
Annually
2,000
2,000
Fees
Surgeon Fees
Anesthesia Fees
Facility Fees
Total Fees per Patient
Per Surgery
$1,500
250
1,000
$2,750
Fees
Surgeon Fees
Anesthesia Fees
Facility Fees
Total Fees per Patient
Per Surgery
$1,500
250
1,000
$2,750
Total Revenue
Per Surgeon (x5)
Per Anesthesiologist (x1)
Per Facility
Annual
$600,000
$500,000
$2,000,000
Total Revenue
Per Surgeon (x1)
Per Anesthesiologist (x1)
Per Facility
Annual
$750,000
$500,000
$4,250,000
Total Health Care System Cost $5,500,000
11
Total Health Care System Cost $5,500,000
PH5-060
Exhibit 6: Reverse Income Statement: Single Surgery Statement P&L
Reverse Income Statement: Single Surgery Center P&L

Months
Facility Fees
Professional Fees
Total Revenue
Q1 2014
$0
0
$0
Q2 2014
$0
0
$0
Q3 2014
$0
26,000
$26,000
Q4 2014
$0
153,400
$153,400
Q1 2015
$10,400
338,000
$348,400
Q2 2015
$137,800
473,200
$611,000
Clinical Compensation
Contractual Services
Supplies and Materials
Total Cost of Services
$0
0
0
$0
$2,280
650
24,563
$27,493
$13,796
7,652
17,581
$39,030
$52,942
7,652
28,341
$88,936
$108,212
13,652
39,101
$160,965
$145,660
13,652
49,092
$208,405
Gross Profit
$0
($27,493)
($13,030)
$64,464
$187,435
$402,595
$0
8,071
$8,071
$9,100
38,331
$47,431
$12,250
70,721
$82,971
$12,150
140,647
$152,797
$12,050
141,305
$153,355
$12,000
150,025
$162,025
($8,071)
($74,925)
($96,000)
($88,333)
$34,080
$240,570
$3,375
0
0
$3,375
$5,113
0
0
$5,113
$5,982
0
0
$5,982
$5,982
0
0
$5,982
$11,364
3,753
0
$15,117
$14,135
5,685
0
$19,820
($11,446)
($80,037)
($94,314)
$18,963
$220,750
Marketing
General and Administrative
Total SG&A
EBITDA
Interest
Debt Amortization
Capex
Total Interest and Capex
Free Cash Flow
12
($101,982)
PH5-060
Exhibit 7: Reverse Income Statement: Consolidated Summary

Reverse Income Statement: EBITDA Summary
Reverse Income Statement: Investment Summary
EBITDA
Houston
San Antonio
Dallas
McAllen
El Paso
Ausitn
Kansas City
Albuquerque
Phoenix
Tucson
Oklahoma City
Denver
Colorado Springs
Atlanta
Charlotte
Washington D.C.
Total
Negative FCF
Houston
San Antonio
Dallas
McAllen
El Paso
Ausitn
Kansas City
Albuquerque
Phoenix
Tucson
Oklahoma City
Denver
Colorado Springs
Atlanta
Charlotte
Washington D.C.
Total
2014
2015
2016
2017
2018
$2,120,000 $2,120,000 $2,120,000 $2,120,000 $2,120,000
(267,778)
959,087
1,370,548
1,370,548
1,370,548
(83,045)
89,116
1,370,548
1,370,548
1,370,548
0
(267,778)
959,087
1,370,548
1,370,548
0
(179,046)
528,758
1,370,548
1,370,548
0
(83,045)
89,116
1,370,548
1,370,548
0
(8,071)
(288,160)
1,735,346
2,209,416
0
0
(290,756)
570,165
854,939
0
0
(179,191)
401,155
1,012,582
0
0
(83,045)
50,859
1,012,582
0
0
(8,071)
(250,731)
974,418
0
0
0
(293,596)
974,466
0
0
0
(182,171)
425,049
0
0
0
(83,045)
63,567
0
0
0
(8,071)
(241,893)
0
0
0
0
(276,384)
$1,769,177 $2,630,264 $5,588,835 $10,912,653 $15,981,484
2014
$0
(288,229)
(91,533)
0
0
0
0
0
0
0
0
0
0
0
0
0
($379,762)
2015
2016
2017
$0
$0
$0
(6,155)
0
0
(202,851)
0
0
(288,229)
(6,155)
0
(193,515)
(100,869)
0
(91,533)
(202,851)
0
(11,446)
(328,445)
0
0
(311,207)
(33,803)
0
(193,661)
(103,378)
0
(91,533)
(205,505)
0
(11,446)
(301,141)
0
0
(314,047)
0
0
(196,640)
0
0
(91,533)
0
0
(11,446)
0
0
0
($793,728) ($1,246,166) ($1,257,492)
2018
Total
$0
$0
0
(294,384)
0
(294,384)
0
(294,384)
0
(294,384)
0
(294,384)
0
(339,890)
0
(345,010)
0
(297,038)
0
(297,038)
0
(312,586)
(37,220)
(351,267)
(154,627)
(351,267)
(205,126)
(296,659)
(294,694)
(306,140)
(296,835)
(296,835)
($988,502) ($4,665,650)
The results of the aggregated reverse income statements are shown above. On the left (Reverse Income Statement: EBITDA
Summary), NEHCs expansion plan by year is shown. As noted in the case, two additional centers were to be started in 2014 and then
one additional center opening would follow quarterly. NEHC developed a specific, three-year expansion plan through 2016 (See
Exhibit 2: Expansion Plan), additional expansion cities in 2017 and 2018 are shown in this reverse income statement summary.
One the right (Reverse Income Statement: Investment Summary), the total contemplated investmentby yearis summarized for
each new location. For example, NEHC anticipates investing $294K in total equity to develop its San Antonio surgical center ($288K
in 2014 and $6K in 2015). Differences in total investment by center are the result of varying reimbursement rates by state.
13
PH5-
Endnotes
1
From ASCA website http://www.ascassociation.org/AboutUs/WhatisanASC/History, accessed November 2013.
From ASCA website http://www.ascassociation.org/AdvancingSurgicalCare/AboutASCs accessed November 201
Public Filings (annual and quarterly) for Amsurg (240 as of 2012), Hospital Corporation of America (108 as of 20
United Surgical Partners (213 as of 2012), and Surgical Care Associates (168 as of 2013). Assumes 5,300 surgical
centers.
3
From Beckers ASC website, http://www.beckersasc.com/asc-turnarounds-ideas-to-improveperformance/healthcare-reform-s-impact-on-ambulatory-surgery-centers-how-to-navigate-2014.html, accessed

November 2013.
4
From the Annie E. Casey Foundation website, http://datacenter.kidscount.org/data, accessed November 2013.
From Medicaid.gov website, http://www.medicaid.gov/Medicaid-CHIP-Program-Information, accessed Novemb

2013.
6
McGrath, R. G. & MacMillan, I. C. 1995. Discovery Driven Planning. Harvard Business Review, 73:4 (1995): 44
54.
7
14

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