Four years after netting $26 million, the S&B Surgery Center in Beverly Hills, Calif., declared bankruptcy. The stunning fall can be blamed on issues that have grounded other high-flying centers: excessive spending, deadweight docs and questionable investment decisions. Today, S&B Surgery Center has a new name, a new equity distribution, a growing revenue stream and renewed hope for a return to past successes. But to truly appreciate and maintain their current turnaround, the center's physician-investors must always remember and learn from what went so very wrong.

Down and out in Beverly Hills
After opening its doors in 1998, S&B Surgery Center was run by the Salus Surgical Group, a now-defunct management firm headed by Randy Rosen, MD, the anesthesiologist that founded S&B. The 5-room multi-specialty center was largely successful, building its caseload to more than 15,000 annual procedures. Physician-investors flocked to the facility, swelling its roster to 42 of the top docs in Beverly Hills, who cared for movie stars and all-star athletes.

According to bankruptcy court documents, annual net revenues soared to more than $26 million in 2004. "Why were we so successful? It was a combination of good docs performing revenue-producing cases," recalls John Sherman, MD, a gastroenterologist who invested in the center in 2000. "Like anything else, a quality product attracts people to it."

On the surface and on the ledger sheet, things were going well. So well, in fact, that the Salus Surgical Group decided to buy Century City Doctors Hospital in Los Angeles when Tenet Healthcare Corporation put the facility up for sale in 2004.

It was a bold move — too bold, in hindsight, says Dr. Sherman — that marked the beginning of the end for S&B's first life. Century City cannibalized patients and revenue away from S&B; the approximately 15,000 procedures performed at the surgery center in 2003 dropped to nearly half a year later. By 2008, S&B hosted only 5,306 procedures, a 65% drop from the 2003 high-water mark. Revenue fell, too, dropping to just under $15 million in 2008, a 65% dip from 2003, according to court records.

S&B's business model also started to crack under the burden of deadweight docs. Thirty-five percent of the center's equity was tied up in physician-investors who didn't bring cases to the center; Dr. Rosen, an anesthesiologist, held another 25%. That 60% equity block spurred an exodus of volume-producing surgeons and discouraged new investors from signing on, court documents show.

Century City, a hospital that boasted private rooms with hardwood floors and flat-screen televisions, state-of-the-art equipment and a Wolfgang Puck-inspired menu, couldn't support its lavish ways. In 2008, it filed for protection under Chapter 7 bankruptcy, shut its doors and took S&B down with it — the center's net worth was leveraged for around $30 million in loan agreements for the hospital, according to court records. When Century City folded, the creditors came calling, demanding that the profitable center pony up for the hospital's financial obligations.

Debt wiped clean
The first, albeit small, step toward a turnaround actually began when Century City folded and S&B's board of directors ousted the Salus Surgical Group, replacing the management company with the Sparta, N.J.-based Ambulatory Surgical Group, a turnaround specialist that helped lead the long journey back.

"We're doctors, not businessmen, and spend most of our time doing what we do best," explains Dr. Sherman, in reference to the benefit of working with a corporate partner that focuses on saving troubled facilities. "We were told we had a good product that needed to be updated, organized and better run. No one here had the time or the inclination to do that."

After months of negotiating with creditors (who refused to strike a pre-bankruptcy deal), countless closed-door meetings with their new management firm and a stark dose of reality from the center's accountant, the physician-owners realized the financial burden thrust upon the center by Century City's closure was too much to dig out from. In April 2009, they filed for bankruptcy protection under Chapter 11.

"No one wants to file for bankruptcy, but it wasn't that hard of a decision when we dug into the finances of S&B and understood the full extent of our obligations," says Dr. Sherman. He and his partners had 2 options: file for bankruptcy protection under Chapter 7 and close the center's doors forever, or file for Chapter 11 and work to revive a center that still had a pulse and a prayer. Dr. Sherman remembers thinking at the time, "If we could eradicate some of the significant debt we owed, we felt we could continue to function as an excellent surgery center."

The U.S. Bankruptcy Court for the Central District of California confirmed S&B's reorganization plan on Dec. 1, 2009, according to S&B's attorney Sam Maizel, a bankruptcy lawyer in the Los Angeles office of the Pachulski Stang Ziehl & Jones law firm. Under the terms of the reorganization, the surgery center's physician-investors paid S&B's creditors $1.5 million. The selling of S&B stock raised another $1.5 million toward its debt reconciliation; $500,000 more was generated from S&B's pre-bankruptcy accounts receivables, according to the law firm. The bankruptcy protection cleared $36 million in debt obligations from the center's ledger — the creditors received 6 cents on the dollar for the money they were owed — and wiped away the surgery center's former equity distribution, which let it resyndicate without having to buy out the old guard.

Hollywood ending
Now known as Spalding Surgical Center, the facility is today back on sound financial footing, hosting 500 cases a month and securing net collections 20% higher than they were a year ago, before filing for bankruptcy protection. Of the 26 current physician-investors, about half are newly active. "We've gone through some peaks and valleys, felt elated and disappointed," says Dr. Sherman. "At this point we're upbeat from having emerged from the reorganization and have a positive feeling moving forward."