1

Ambulatory Service Center Pro Forma

1.0 Executive Summary

The purpose of this report is establish the need and costs to add Digital Radiology (DR)

to the Ambulatory Surgery Center (ASC). The ASC was built at a cost of $2.9 million

dollars. The report will disclose financials and operating costs. The Ambulatory Surgery

Center is a corporation that provides outpatient outpatient treatments to patients in its

targeted area.

1.1 Services

The ASC offers outpatient services to adults and children in the targeted area. These

services include consultation and outpatient procedures. A source of secondary

revenue for the Ambulatory Service Center is MRI, CAT scan, ultrasound, and other

diagnostic services provided to patients through the ASC’s ultramodern facility. The ASC

employs two radiologists who provide these services to outpatients using existing in

equipment.

1.2 Mission Statement

The Ambulatory Service Center’s mission is to provide outpatients with specialized and

general high-tech care at reasonable costs and with an eye toward compassion.

1.3 The Center

2

The ASC was established 10 years ago by a physicians group with over 30 years

experience in the healthcare. This ASC achieved profit within the year of operation.

1.4 Forecasts

Ambulatory Surgery Centers (ASCs) provide same day surgery and medical care including

diagnostic care and preventative healthcare. ASCs area modern concept healthcare

locations where patients can have outpatient procedures and other procedures

performed in a professional and ultramodern facility without being admitted to a

hospital. ASCs have were introduced in the United States in the 1970s and have

expanded in number and services so that today they are looked to for their exceptional

care capacity, high quality personnel and equipment, and customer service attitude.

Medical care costs have become prohibitive for much of the population. In order to

obtain health care services and benefit from high-end technology most out-patients

travel to large hospitals and medical centers. ASCs continue to change that by providing

millions of people with an alternative to in hospital outpatient procedures.

1.5 Growth

The ASC expanded faster than had been expected and was servicing a wider market

than originally planned within the first three years.

2.0 Ambulatory Service Center Finance Summary

2.1 Registration

3

Ambulatory Service Center, Inc.

2.2 Funds Needed

At this time, the Ambulatory Service Center requires $80,000.00 in order to purchase

new Digital Radiology equipment recommended.

3.0 Services

Below is a description of the services offered by the Ambulatory Service Center.

3.1 Outpatient Services

The main source of revenue for the Ambulatory Service Center is outpatient services

performed onsite. In ASCs the standard assumption is that patients stay between 6 to

10 hours onsite depending on the procedure. The ASC has three ultramodern operating

rooms plus a recovery room. The procedures currently offered include outpatient

procedures, cosmetic procedures, and emergency outpatient services. The ASC receives

payments from co-pays, Medicare, and insurance companies.

3.2 Diagnostic Services

Approximately 85% of the ASC’s current patients use private insurance, Medicare, or

Medicaid.

4.0 Economic Outlook

4

There is going to be huge growth in the ASC industry. The “Value Based Purchasing”

options available via The Affordable Care Act have already been established. This plan

allows for payments to ASCs similar to those that are already popular under the

Medicare program. The report to Congress referred to need to improve payment

quality and speed for ASC services. The intention is to reward ASCs for providing “better

value, outcomes, and innovations, instead of merely volume” (Centers for Medicare &

Medicaid Services, 2013).

Because of the changes in the population that will enjoy medical care in the future, ASCs

are in position to service the demographic of out-patients who will be seeking disease

management, surgery, and other payer made decisions. The issues facing ASCs will be

complicated and ASC growth will need to be planned in order to meet the increasing

demands for ASC services.

This ASC has consistently operated at a profit. Even during periods of recession,

outpatient centers enjoy economic stability. People always need specialized diagnostic

care and cancer patients require radiation treatments continuously. Costs for providing

outpatient care is paid by insurance and healthcare systems, in the future this will

include ACA payments.

4.1 Industry Analysis

There are over 200,000 outpatient service facilities in the United States. These

outpatient facilities produce approximately $180 billion dollars in revenue annually and

5

employ almost 2 million people. As the population increases so does the demand for

outpatient treatment. The predicted growth rate of outpatient care in the next two

decades is expected to grow rapidly as the baby-boomers demand treatment.

Analysis reveals three factors that traditionally define the number of outpatient

procedures performed at ASCs. Firstly, there is an acknowledged need for increased

healthcare and medical procedures on an out-patient basis. The healthcare procedures

performed relate to the population served, the protocols for screening used by a given

facility, and the advancement and availability of technology (equipment). Secondly, a

determination must be made as to whether a give procedure requires the patient be

admitted for a hospital stay or if the patient can receive treatment as an outpatient.

This is often a technologically driven decision based on the services provided by the ASC

as well as issues related to anesthesia and outpatient technology and techniques

available. Thirdly, there is a site-of-service decision to be made. This decision takes into

account the ambulatory setting, for example, the ASC, the physician’s office, or a

Hospital’s Outpatient Department.

The demand for ASCs increase based on the medical cause of the patient’s treatment.

For example, as the baby boomers age there is an increased demand for disease

management, this includes screening, diagnostics, and consultation. Cost becomes an

issue and leads to the necessity for analyzing not only the quantitative aspects of care

but also the corresponding quality of that care.

4.2 Customer Profile

6

At issue is that 85% to 90% of patients will have health insurance or a medical cost

reimbursement program. The lower cost of ASC will attract patients who are paying for

their own procedures, for example cosmetic surgery procedures.

5.0 Marketing

Ambulatory Service Center conducts extensive marketing campaigns out-sourced to a

professional team.

5.1 Objectives

Continue assertive marketing campaign and maintain premier presence in public.

Advance relationships with hospitals in order to garner surplus of outpatient needs.

Advance continuing relationships with physicians and surgeons in target market.

5.2 Strategies

The marketing campaign is aimed at cosmetic surgery patients, private pay patients, and

the physicians and surgeons who refer these patients. ASC will continue to contact

physicians while simultaneously offering them literature that displays the ultramodern

equipment and highly trained staff at the Ambulatory Service Center. These literature

packets contain material about ASC’s location, hours, and accepted insurances. Print

advertisements placed in regional and local medical journals have been very successful.

The ASC website was professionally developed and is professionally maintained, it has

been a huge source of business.

7

6.0 Trends

6.1 Assumptions

PubMed includes studies that address growth factors in ambulatory surgery, as well as

predicted changes in the ambulatory aspect of healthcare and private payment trends.

A study of the growth rate of ASCs reveals that between 2000 and 2007 Medicare-

certified ASCs grew at an average rate of 7.3% per year. The amount of payments from

Medicare to ASCs over the same period increased 11.4% per year (MedPAC, 2008). Of

note is that Medicare payments to hospitals for outpatient services during the same

period increased 6.9% per year (MedPAC, 2008). Demand for outpatient services has

increased and the use of the Hospital Outpatient Department (HOPD) at medical centers

and ASCs will continue to increase in the future. ASCs provide advantages over HOPDs

such as location, shorter wait times, and flexible schedules (MedPAC 2009). Co-

payments are lower at ASCs than they are at HOPDs. There are also reports that the

focused nature of care at ASCs as are Medicare program payments for services

(Chukmaitov, et. al., 2004). An important draw for patients is that ASCs provide them

access to ultramodern technology.

Based on Medicare data for the period 2000 to 2007 supplied by Medicare

Physician/Supplier Procedure Summary (PSPS) growth in outpatient services for all kinds

will continue to increase and this means updated technology will be required for ASCs,

HOPDs, and physician offices as well as other facilities that offer alternative sites for of

outpatient procedures. We conducted a comprehensive study of the growth factors for

8

ASCs. The predicted growth in ASCs will mirror the movement away from hospital

inpatient surgeries to outpatient settings. ASCs need to be prepared to use disease

screening for common procedures, for example, colorectal cancer. Because these

patients will have a choice, they will be drawn to ASCs that can provide them with

improved technology, fast recovery times, pharmaceutical services, and modern ex-ray

procedures.

6.2 Sensitivity Analysis

Healthcare businesses are immune from negative changes in the economy due to the

simple fact that people will continue to get sick and require outpatient treatments.

Additionally, these treatments are often paid for by private insurance companies and

publicly funded health systems. As such, the Ambulatory Service Center should have no

issues generating top line income or receiving payments from its patient base.

It is possible that ASCs are held to even higher standards that HOPD and physician

offices because of the newness of ASCs and the remarkable growth in their facilities as

those of choice for patients. Compliance with state and national standards means on-

site surveys during which the ASC is subject to evaluation. Licensures differ according to

the state and ASCs need to be prepared for on-going re-inspections. When Medicare

patients are involved, the ASC must meet federal facility standards. There are several

accreditation organizations, the main one being The Joint Commission and the

Accreditation Association for Ambulatory Health Care (AAAHC). The reason it is so

important for an ASC to offer the best possible technology is that they are expected to

9

use innovations in all aspects of outpatient care including ex-ray, anesthesia, and

outpatient techniques. The development of minimally invasive techniques, including

the technology that replaced intraocular lens is now expected. Procedures such as this

are used one million times every year to treat Medicare patients for cataracts. These

and other procedures that used to take place in hospitals are now performed at ASCs

with greater customer service and at lower costs.

6.0 Ultra Focus 100 from FAXITRON BIOPTICS, LLC

The following information has been provided by Faxitron Bioptics, Llc3440 E Britannia Dr, Suite 150Tucson, Arizona 85706 UsaToll Free: +1.877.910.0030General Inquiries: +1.520.399.8180Fax: +1.520.399.8182

This Ultra Focus 100 unit is a compact and fully shielded x-ray cabinet. The placement of

the unit in the ASC is flexible. The multiple detector sizes coupled with the wide energy

range from 10-100kV makes the Ultra Focus ideal for imaging a broad range of samples.

The 8µm focal spot and 6X geometric magnification provide 60lp/mm resolution images.

The advanced Automatic Exposure Control allows the system to select the appropriate

exposure time and kV settings for the sample automatically, with a single click of the

mouse.

No additional X-ray shielding required

No specialized X-ray knowledge needed to operate

Plugs into any standard A/C outlet

Stainless steel inner chamber designed for easy cleaning

10

Laser centering guide & transparent window ensure proper sample positioning

Magnification shelf with field of view guides and automatic position detection provides for up to 6X geometric magnification with accurate measurements at any level

Single click calibration with auto object detect allows for simple, error-free calibration

One button operation with Automatic Exposure Control (AEC) optimized for a variety of samples (manual exposure settings also available)

Images instantaneously displayed on 22” high resolution 2.3 MP monitor

Remote diagnostic and support over the Web

Datasheet

Energy range 10 - 100 kV

Sample imaging area A) 23cm x 29cm (9" x 11.5")

B) 10cm x 15cm (4" x 6")

Pixel pitch A) 74.8µm

B) 48µm

Spatial resolution A) Up to 40+ lp/mm at 6X geometric

magnification

B) Up to 60lp/mm at 6X geometric

magnification

Tube current 0.3mA max (isowatt limited to 12 W from 41-

100 kV)

Focal spot size, nominal <20 µm

Window filtration 0.01" Be, tungsten source

Typical image acquisition

time

10 seconds

Power 100-240 VAC+/- 10% 50/60 Hz, 150 VA

Dimensions, external 23” W x 21” D x 36” H (59cm x 54cm x 90cm)

Dimensions, internal 15.4” W x 15.4” D x 22.2”H (39cm x 39cm x

56cm)

Weight 415 lbs (188 kg)

7.0 Net Benefit

11

7.1 Lease

At this time, the basic purchase cost of the ex-ray equiptment will be $80,000.00. To

lease this equipment the following quotes and terms were delivered from

Lease Term $ Monthly Payments12 months 7432.4824 Months 3905.7636 Months 2727.4448 Months 2150.6460 Months 1804.56This program is based on a Capital Lease 100% Buy OutEquipment Cost $80,000.00

The reason this lease was chosen is because it is a Capital Lease. It offers a 100% Buy-

Out, thereby allowing the ASC to own the Digital Radiology Equipment in full at the end

of the lease. ASC will be building equity throughout the payment process.

7.2 Purchase

Another financing

alternative is to raise

the $80,000.00

purchase price from

12

the current cash reserves or from an investor or investor group. The following Capital

Budgeting Analysis of Replacement Equipment Purchase. Its purpose is to offer a

spreadsheet analysis in conjunction with this formal report. This analysis supports the

decision to buy a Faxitron Digital Radiology Device.

13

Net Present Value demonstrates that this will be a good investment.

Name: ASCMachine: Faxitron

Month: 2 Loan: $80,000Day: 6 Rate: 9.25%

Year: 1 Term, yr: 4.0Pmt: 1=Ann,2=Mon>

2

Monthly Payment: $2,000.31 First pmt: 1=yr 1, 2=yr 2> 1

Data to Calculate Discount Rate:NOMIMAL WACC: 7.00% REAL AFTER TAX

MARGINAL TAX RATE:

30.00% DISCOUNT RATE: 1.84%

INFLATION RATE: 3.00% NOMINAL AFTER TAX

DISCOUNT RATE: 4.90%

Name: ASCMachine: Faxitron

Month: 2 Loan: $80,000Day: 6 Rate: 9.25%

Year: 1 Term, yr: 4.0Pmt: 1=Ann,2=Mon>

2

Monthly Payment: $2,000.31 First pmt: 1=yr 1, 2=yr 2> 1

Data to Calculate Discount Rate:NOMIMAL WACC: 7.00% REAL AFTER TAX

MARGINAL TAX RATE:

30.00% DISCOUNT RATE: 1.84%

INFLATION RATE: 3.00% NOMINAL AFTER TAX

DISCOUNT RATE: 4.90%

14

Amount Amount of/ Timing years Present PresentItem before tax after tax Start End value factor value= = = = ===-----===--- = =

OUTFLOWS $ $ $- -

Eqpt price less trade-in value 80,000Unrecovered cost on trade-in 0

Down payment at time of sale 0 0 1.0000 0Amount financed 80,000

Prin & Int : Year 1 24,003.72 22,000 1 0.9533 20,9732 24,003.72 22,502 2 0.9088 20,4493 24,003.72 23,052 3 0.8663 19,9704 24,003.94 23,656 4 0.8258 19,5365 0.00 0 5 0.0000 06 0.00 0 6 0.0000 07 0.00 0 7 0.0000 08 0.00 0 8 0.0000 09 0.00 0 9 0.0000 0

10 0.00 0 10 0.0000 011 0.00 0 11 0.0000 0

(Cash rec'd) : sale of old eqpt 0 1.0000 0Taxable gain (loss) on eqpt sale 0 0 1 0.9533 0ITC recapture on disposition 0 1 0.9533 0Incr costs or decr returns /yr 0 0 1 10 9.0560 0

----------INFLOWS NET OUTFLOWS (1) $80,928

The monthly payments on the purchase of the equiptment on a standard equipment

loan are approximately the same as the payment on a 48-month lease with a 100% Buy

Out. However, tax credit wide the discounts are much more beneficial on a purchase.

The bottom line of the Net Present Value calculation of the purchase of a new Faxitron

as opposed to keeping the old ex-ray machine shows that a new machine would be a

15

good investment. The Net Present Value is the difference between outflows and

inflows, and is discussed in this spreadsheet in terms of after-tax and present value

basis.

Savings or added returns from equip purch: Avoided repairs on old eqpt 5,000 3,500 1 1 0.9819 3,437

Reduced annual repairs 1,000 700 1 5 4.7348 3,314 Annual fuel savings 200 140 1 5 4.7348 663 Improved timeliness 0 0 1 5 4.7348 0

Cost recovery on eq purch (MACRS -less than 40% of assets purchased in 4th qtr; half-yr conv) Sec 179

10,000 3,000 1 0.9533 2,860

Annual Recovery %: 15.00% 10,500 3,150 1 0.9533 3,003 less depr lost 25.50% 17,850 5,355 2 0.9088 4,866 on trade & sale. 17.85% 12,495 3,749 3 0.8663 3,247

16.66% 11,662 3,499 4 0.8258 2,88916.66% 11,662 3,499 5 0.7873 2,754

8.33% 5,831 1,749 6 0.7505 1,3130 0 7 0.7154 00 0 8 0.6820 0

Incr in end value because of new machine purchase 5,000 3,500 5 0.9127 3,194

State Inv. Tax Credit 700 1 0.9533 667 ----------

NET INFLOWS (2) $32,208* * * * NET PRESENT VALUE (2-1) ($48,720)

Spreadsheets continued.

NOMIMAL WACC: 7.00% MARG TAX RATE: 30.00% ELECTION: $10,000

INFLATION RATE: 3.00% LOAN - AMOUNT: $80,000 REAL AFTER TAX RATE: 9.25% DISCOUNT RATE: 1.84% TERM, YRS: 4.0 NOMINAL AFTER TAX MONTHLY PAYMENT: 2000.31

16

The analysis of purchasing new Digital Radiology Equipment versus repairing and

maintaining the old equipment is performed using a cash flow analysis. A capital

purchase should mean that ASC would accomplish a positive net present value. Over

the period of use the inflows should exceed the outflows. These results identify the

timing and size of inflows and outflows, and consider income taxes, inflation, and

interest rates. Present value analysis is a standard method for estimating the benefits of

the purchase decision over time.

AMORTIZATION TABLE FOR MONTHLY PAYMENTS

$80,000 Loan Amount9.25% Rate

4.0 Years$2,000.31 Monthly Payment

Pymt Monthly Prin Int BalanceNo. Pymt After pymt

- - - - -$ $ $ $

80,000.001 2,000.31 1,383.64 616.67 78,616.362 2,000.31 1,394.31 606.00 77,222.053 2,000.31 1,405.06 595.25 75,816.994 2,000.31 1,415.89 584.42 74,401.105 2,000.31 1,426.80 573.51 72,974.306 2,000.31 1,437.80 562.51 71,536.507 2,000.31 1,448.88 551.43 70,087.628 2,000.31 1,460.05 540.26 68,627.579 2,000.31 1,471.31 529.00 67,156.26

10 2,000.31 1,482.65 517.66 65,673.6111 2,000.31 1,494.08 506.23 64,179.5312 2,000.31 1,505.59 494.72 62,673.9413 2,000.31 1,517.20 483.11 61,156.7414 2,000.31 1,528.89 471.42 59,627.8515 2,000.31 1,540.68 459.63 58,087.1716 2,000.31 1,552.55 447.76 56,534.6217 2,000.31 1,564.52 435.79 54,970.1018 2,000.31 1,576.58 423.73 53,393.5219 2,000.31 1,588.73 411.58 51,804.7920 2,000.31 1,600.98 399.33 50,203.81

17

21 2,000.31 1,613.32 386.99 48,590.4922 2,000.31 1,625.76 374.55 46,964.7323 2,000.31 1,638.29 362.02 45,326.4424 2,000.31 1,650.92 349.39 43,675.5225 2,000.31 1,663.64 336.67 42,011.8826 2,000.31 1,676.47 323.84 40,335.4127 2,000.31 1,689.39 310.92 38,646.0228 2,000.31 1,702.41 297.90 36,943.6129 2,000.31 1,715.54 284.77 35,228.0730 2,000.31 1,728.76 271.55 33,499.3131 2,000.31 1,742.09 258.22 31,757.2232 2,000.31 1,755.51 244.80 30,001.7133 2,000.31 1,769.05 231.26 28,232.6634 2,000.31 1,782.68 217.63 26,449.9835 2,000.31 1,796.42 203.89 24,653.5636 2,000.31 1,810.27 190.04 22,843.2937 2,000.31 1,824.23 176.08 21,019.0638 2,000.31 1,838.29 162.02 19,180.7739 2,000.31 1,852.46 147.85 17,328.3140 2,000.31 1,866.74 133.57 15,461.5741 2,000.31 1,881.13 119.18 13,580.4442 2,000.31 1,895.63 104.68 11,684.8143 2,000.31 1,910.24 90.07 9,774.5744 2,000.31 1,924.96 75.35 7,849.6145 2,000.31 1,939.80 60.51 5,909.8146 2,000.31 1,954.76 45.55 3,955.0547 2,000.31 1,969.82 30.49 1,985.2348 2,000.53 1,985.23 15.30 0.00

Totals 96,015.10 80,000.00 16,015.10

Radiology equiptment is an important part of the Ambulatory Service farm business

operation – important for getting work done on time and important as a cost of doing

business. When machinery is purchased, large sums are committed to assets, some of

which may be used only a few days a year. This is especially true of some growing and

harvesting equipment. Making an effort to analyze such replacement purchases

objectively can be an important step in the process of controlling equipment costs.

18

An Investment Tax Credit recapture is possible.

Adj tax basis: 80,000 (purchased machine)

5 YEAR AND 7 YEAR RESPECTIVELY (Half-Year Convention w/switchover to SL)15.00% 10.71% 5 YEARS 7 YEARS25.50% 19.13% Cost Recovery Class Cost Recovery Class17.85% 15.03%16.66% 12.25%16.66% 12.25%

8.33% 12.25%12.25%

6.13%

Above percents produce annual recovery amounts essentially equalto calculated amounts below for 5 & 7 year property @ 150% DB.

10,500 7,50017,850 13,39312,495 10,52311,662 8,26811,662 8,662

5,831 8,6628,6624,331

70,000 80,000 = adjusted tax basis of new machine

Purchasing new equipment in this case is a better decision than continuing with the old

equipment. This spreadsheet shows savings when using Digital Radiology (DR)

equiptment that includes software and does not use film or other consumables

compared to the average cost of Computer Radiology (CR) equipment. The savings

expected per month is based on the number of reading assuming a read time of 20

minutes per procedure.

Surgical Procedures per Month 10 15 20 25$70 1400 2100 2800 35000

19

0 0 0$80 1600

02400

03200

040000

$90 18000

27000

36000

45000

$100 20000

30000

40000

50000

Whether the decision to acquire this new technology is based on a Capital Lease with a

100% Buy Out or a direct purchase the new radiology equiptment benefits empirically

and via quantitative cost analysis.