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 ASCs ultramodern facility. The ASC employs two radiologists who provide these services to outpatients using existing in equipment.

1.2 Mission Statement

The Ambulatory Service Centers 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 ASCs 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 physicians office, or a Hospitals Outpatient Department.

The demand for ASCs increase based on the medical cause of the patients 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 ASCs 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 Medicarecertified 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). Copayments 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 onsite 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, Llc 3440 E Britannia Dr, Suite 150 Tucson, Arizona 85706 Usa Toll Free: +1.877.910.0030 General Inquiries: +1.520.399.8180 Fax: +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 8m 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

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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 Sample imaging area 10 - 100 kV A) 23cm x 29cm (9" x 11.5") B) 10cm x 15cm (4" x 6") Pixel pitch A) 74.8m B) 48m Spatial resolution A) Up to 40+ lp/mm at 6X geometric magnification B) Up to 60lp/mm at 6X geometric magnification Tube current Focal spot size, nominal Window filtration Typical image acquisition time Power Dimensions, external Dimensions, internal Weight 100-240 VAC+/- 10% 50/60 Hz, 150 VA 23 W x 21 D x 36 H (59cm x 54cm x 90cm) 15.4 W x 15.4 D x 22.2H (39cm x 39cm x 56cm) 415 lbs (188 kg) 0.3mA max (isowatt limited to 12 W from 41100 kV) <20 m 0.01" Be, tungsten source 10 seconds

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 12 months 24 Months 36 Months 48 Months 60 Months This program is based on a Capital Lease Equipment Cost

$ Monthly Payments 7432.48 3905.76 2727.44 2150.64 1804.56 100% Buy Out $80,000.00

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

12 raise the $80,000.00 purchase price from 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.

14 Name: ASC Machine: Faxitron Month: Day: Year: 2 6 1 Loan: Rate: Term, yr: $80,000 9.25% 4.0 2 $2,000.31 1

Pmt: 1=Ann,2=Mon> Monthly Payment: First pmt: 1=yr 1, 2=yr 2> Data to Calculate Discount Rate: NOMIMAL WACC: 7.00% MARGINAL TAX 30.00% RATE: INFLATION RATE: 3.00%

REAL AFTER TAX DISCOUNT RATE: NOMINAL AFTER TAX DISCOUNT RATE:

1.84%

4.90%

Name: ASC Machine: Faxitron Month: Day: Year: 2 6 1 Loan: Rate: Term, yr: $80,000 9.25% 4.0 2 $2,000.31 1

Pmt: 1=Ann,2=Mon> Monthly Payment: First pmt: 1=yr 1, 2=yr 2> Data to Calculate Discount Rate: NOMIMAL WACC: 7.00% MARGINAL TAX 30.00% RATE: INFLATION RATE: 3.00%

REAL AFTER TAX DISCOUNT RATE: NOMINAL AFTER TAX DISCOUNT RATE:

1.84%

4.90%

Item = OUTFLOWS -

Amount before tax = = $

Amount of/ after tax = $

Timing years Start End ===-----===---

Present value factor =

Present value = $

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Eqpt price less trade-in value Unrecovered cost on trade-in Down payment at time of sale Amount financed Prin & Int : Year 1 2 3 4 5 6 7 8 9 10 11 (Cash rec'd) : sale of old eqpt Taxable gain (loss) on eqpt sale ITC recapture on disposition Incr costs or decr returns /yr INFLOWS 80,000 0 0 80,000 24,003.72 24,003.72 24,003.72 24,003.94 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0 0 0

0 22,000 22,502 23,052 23,656 0 0 0 0 0 0 0 0 0 0 1 2 3 4 5 6 7 8 9 10 11 1 1 10 NET OUTFLOWS (1)

1.0000 0.9533 0.9088 0.8663 0.8258 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 0.0000 1.0000 0.9533 0.9533 9.0560

0 20,973 20,449 19,970 19,536 0 0 0 0 0 0 0 0 0 0 0 ---------$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

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.

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Savings or added returns from equip purch: Avoided repairs on old eqpt Reduced annual repairs Annual fuel savings Improved timeliness

5,000 1,000 200 0

3,500 700 140 0

1 1 1 1

1 5 5 5

0.9819 4.7348 4.7348 4.7348

3,437 3,314 663 0

Cost recovery on eq purch (MACRS -less than 40% of assets purchased in 4th qtr; half-yr conv) Sec 10,000 3,000 1 179 Annual Recovery %: 15.00% 10,500 3,150 1 less depr lost 25.50% 17,850 5,355 2 on trade & sale. 17.85% 12,495 3,749 3 16.66% 11,662 3,499 4 16.66% 11,662 3,499 5 8.33% 5,831 1,749 6 0 0 7 0 0 8 Incr in end value because of new machine purchase 5,000 3,500 5 State Inv. Tax Credit 700 1 NET INFLOWS (2) * * * NET PRESENT VALUE (2-1)

0.9533 0.9533 0.9088 0.8663 0.8258 0.7873 0.7505 0.7154 0.6820 0.9127 0.9533

2,860 3,003 4,866 3,247 2,889 2,754 1,313 0 0 3,194 667 ---------$32,208 * ($48,720)

Spreadsheets continued.

NOMIMAL WACC: MARG TAX RATE: INFLATION RATE: REAL AFTER TAX DISCOUNT RATE: NOMINAL AFTER TAX

7.00% 30.00% 3.00% 1.84%

ELECTION: LOAN - AMOUNT: RATE: TERM, YRS: MONTHLY PAYMENT:

$10,000 $80,000 9.25% 4.0 2000.31

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

17 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 9.25% 4.0 $2,000.31 Pymt No. Loan Amount Rate Years Monthly Payment Monthly Pymt $ 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 $ 1,383.64 1,394.31 1,405.06 1,415.89 1,426.80 1,437.80 1,448.88 1,460.05 1,471.31 1,482.65 1,494.08 1,505.59 1,517.20 1,528.89 1,540.68 1,552.55 1,564.52 1,576.58 1,588.73 1,600.98 1,613.32 1,625.76 1,638.29 1,650.92 1,663.64 1,676.47 1,689.39 1,702.41 Prin $ 616.67 606.00 595.25 584.42 573.51 562.51 551.43 540.26 529.00 517.66 506.23 494.72 483.11 471.42 459.63 447.76 435.79 423.73 411.58 399.33 386.99 374.55 362.02 349.39 336.67 323.84 310.92 297.90 Int $ 80,000.00 78,616.36 77,222.05 75,816.99 74,401.10 72,974.30 71,536.50 70,087.62 68,627.57 67,156.26 65,673.61 64,179.53 62,673.94 61,156.74 59,627.85 58,087.17 56,534.62 54,970.10 53,393.52 51,804.79 50,203.81 48,590.49 46,964.73 45,326.44 43,675.52 42,011.88 40,335.41 38,646.02 36,943.61 Balance After pymt

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29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 Totals 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.31 2,000.53 96,015.10 1,715.54 1,728.76 1,742.09 1,755.51 1,769.05 1,782.68 1,796.42 1,810.27 1,824.23 1,838.29 1,852.46 1,866.74 1,881.13 1,895.63 1,910.24 1,924.96 1,939.80 1,954.76 1,969.82 1,985.23 80,000.00 284.77 271.55 258.22 244.80 231.26 217.63 203.89 190.04 176.08 162.02 147.85 133.57 119.18 104.68 90.07 75.35 60.51 45.55 30.49 15.30 16,015.10 35,228.07 33,499.31 31,757.22 30,001.71 28,232.66 26,449.98 24,653.56 22,843.29 21,019.06 19,180.77 17,328.31 15,461.57 13,580.44 11,684.81 9,774.57 7,849.61 5,909.81 3,955.05 1,985.23 0.00

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.

19 An Investment Tax Credit recapture is possible.

Adj tax basis: 80,000 (purchased machine)

15.00% 25.50% 17.85% 16.66% 16.66% 8.33%

5 YEAR AND 7 YEAR RESPECTIVELY (Half-Year Convention w/switchover to SL) 10.71% 5 YEARS 7 YEARS 19.13% Cost Recovery Class Cost Recovery Class 15.03% 12.25% 12.25% 12.25% 12.25% 6.13%

Above percents produce annual recovery amounts essentially equal to calculated amounts below for 5 & 7 year property @ 150% DB. 10,500 7,500 17,850 13,393 12,495 10,523 11,662 8,268 11,662 8,662 5,831 8,662 8,662 4,331 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

20
$70 $80 $90 $100 14000 16000 18000 20000 21000 24000 27000 30000 28000 32000 36000 40000 35000 40000 45000 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.