Surgical Center Developer Sells One, Eyes More

Staff Reporter

In the first of what is planned as a series of buy-and-flip deals, Surgicenter of West Covina Inc. has closed on the $10.8 million sale of a majority stake in the San Gabriel Valley Surgical Center.

Led by investor Tim Paulson, who sees a market for lower-cost inpatient surgeries spurred by insurance companies seeking to rein in costs, the group sold an 80 percent stake in the West Covina center it purchased in August 2000 for $1.2 million.

"I'm a buy-and-sell guy or a develop-and-sell guy," said Paulson, a longtime surgical center administrator who wants to start centers in partnership with local physicians and then sell stakes to larger operators.

Paulson, whose 15 percent share of the San Gabriel Valley Surgical Center was valued at $2 million, said he will remain as the facility's administrator at a $100,000 annual salary.

The acquisition, tracked by Mergerstat, was made by United Surgical Partners International Inc. and signals the Dallas-based holding company's plans to create a regional presence in the rapidly growing out-patient care industry.

"We plan on developing a network of surgical facilities in the Greater L.A. area," said Brett Brodnax, chief development officer. "We can get economies of scale and leverage our management resources."

When the Paulson group bought the 20-year-old facility, it was breaking even, having conducted only 1,900 surgeries in 2000 mostly to correct orthopedic, pain management, and ear, nose and throat problems.

Paulson's group initiated cataract extraction as well as gastroenterology, colonoscopy, and esophagoscopy services. As a result, the facility performed 3,500 surgeries in 2001 and is expected to do 4,000 this year.

"It's a great business to be in because hospitals usually don't do outpatient very well," said Paulson. "If you schedule a surgery there, charges are it won't start on time and if an emergency occurs, your case can be bumped."

Surgery centers, which total 3,350 nationwide, offer a cost-friendly alternative to hospitals for patients in need of same-day surgeries and treatments. Overhead can be 20 percent less than at a hospital.

"Anything that's driving lower costs is your friend," said Bob Dorfman, a researcher for Chicago-based SMG Marketing Group, which tracks health care providers. "The overhead of operating a hospital is much larger than a smaller facility that's just geared for surgeries."

Paulson and another group of physician partners, backed by the health care lending arm of Citibank, plans to open a $1.5 million facility in Torrance specializing in gastroenterology and urology this April and a $1.8 million facility in Los Alamitos offering seven same-day treatments this September. Paulson said the plan was to sell the centers within three years.

United Surgical Partners, a 3-year-old holding company that had its $126 million initial public offering last June, has interests in 40 surgical centers nationwide, including the West Covina operation and a 35 percent interest Torrance-based Coast Surgery Center.

Company officials have targeted other Los Angeles locations in which to either to buy existing centers of to build new facilities, but would not release details.

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