Irving Levin Associates recently hosted a webinar, "Key Growth Sectors in the Health Care Merger & Acquisition Market," featuring a panel of experts with a wide range of experience in healthcare mergers and acquisitions. One of the panelists, Joshua Nemzoff, president of Nemzoff & Company, a provider of M&A advisory services to hospitals, discussed current activity and the future of the hospital M&A market.
Hospital market: Who is selling?
According to Mr. Nemzoff, in order to answer the question of who is buying hospitals, one must first ask who is selling hospitals, and the answer is distressed hospitals.
There are a few stages of distress that hospitals can be in. According to Mr. Nemzoff, the three main factors are the hospital's debt service coverage, cash on hand and EBITDA margin.
For example, if a hospital has debt service coverage around 2.5, 90 days of cash on hand and an 8 percent EBITDA margin, it may be time to call a turnaround firm, but that does not necessarily mean the hospital has to sell, said Mr. Nemzoff.
Going down the line, if a hospital has debt service coverage of 1.5, 60 days of cash on hand and an EBITDA margin below 8 percent, it is potentially a prime target for a sale.
Finally, a hospital with debt service coverage of 1.0, 30 days of cash on hand and an EBITDA margin around 2 percent may be beyond the point where a sale could save it, said Mr. Nemzoff.
Hospital market: Who is buying?
While there may be a large proportion of distressed hospitals interested in acquisitions, there is still a variety of players in the market. Large, small, public and private hospitals are all involved. However, the organizations look for different elements in a transaction.
"For-profit buyers look at hospitals in market and out of market. They buy facilities that are near hospitals they already have, but they also buy facilities that are nowhere near other hospitals," said Mr. Nemzoff. "The non-profit buyers are different because their access to capital is exclusively debt. They are looking for hospitals near their existing hospitals. An exception is large non-profit systems, but generally, it is rare for a non-profit to buy another hospital that is not close to its original market."
The effect of the Patient Protection and Affordable Care Act
Although it may seem like there has been a lot of hospital M&A activity in the past few years, Mr. Nemzoff believes that implementation effects from PPACA will accelerate the hospital M&A market even more.
"The anxiety level has gone up dramatically. There was a period of a year or two where people thought healthcare reform would save their hospital, but it will not. The profitable hospitals will do even better under [the PPACA] and the ones that are struggling will do worse," said Mr. Nemzoff.
As a result, hospitals may pursue consolidation to remain viable. However, to what extent hospital M&A activity will accelerate is unclear. While there will be consolidation, the hospital market is incredibly geographically dispersed, which will prevent the type of consolidation seen in other healthcare markets, such as payors and managed care, said Mr. Nemzoff.
Carsten Beith, managing director and group head of tax-exempt M&A for Cain Brothers and another panelist in the webinar, ended the discussion of the hospital market by mirroring Mr. Nemzoff's point.
"Until [the hospital market has] dramatic changes at the Federal Trade Commission level, [it] will never see the consolidation seen in other [healthcare] sectors. The FTC looks at consolidation in a market-by-market basis, which will be a significant barrier to what I would term as broad market consolidation," said Mr. Beith.
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Hospital market: Who is selling?
According to Mr. Nemzoff, in order to answer the question of who is buying hospitals, one must first ask who is selling hospitals, and the answer is distressed hospitals.
There are a few stages of distress that hospitals can be in. According to Mr. Nemzoff, the three main factors are the hospital's debt service coverage, cash on hand and EBITDA margin.
For example, if a hospital has debt service coverage around 2.5, 90 days of cash on hand and an 8 percent EBITDA margin, it may be time to call a turnaround firm, but that does not necessarily mean the hospital has to sell, said Mr. Nemzoff.
Going down the line, if a hospital has debt service coverage of 1.5, 60 days of cash on hand and an EBITDA margin below 8 percent, it is potentially a prime target for a sale.
Finally, a hospital with debt service coverage of 1.0, 30 days of cash on hand and an EBITDA margin around 2 percent may be beyond the point where a sale could save it, said Mr. Nemzoff.
Hospital market: Who is buying?
While there may be a large proportion of distressed hospitals interested in acquisitions, there is still a variety of players in the market. Large, small, public and private hospitals are all involved. However, the organizations look for different elements in a transaction.
"For-profit buyers look at hospitals in market and out of market. They buy facilities that are near hospitals they already have, but they also buy facilities that are nowhere near other hospitals," said Mr. Nemzoff. "The non-profit buyers are different because their access to capital is exclusively debt. They are looking for hospitals near their existing hospitals. An exception is large non-profit systems, but generally, it is rare for a non-profit to buy another hospital that is not close to its original market."
The effect of the Patient Protection and Affordable Care Act
Although it may seem like there has been a lot of hospital M&A activity in the past few years, Mr. Nemzoff believes that implementation effects from PPACA will accelerate the hospital M&A market even more.
"The anxiety level has gone up dramatically. There was a period of a year or two where people thought healthcare reform would save their hospital, but it will not. The profitable hospitals will do even better under [the PPACA] and the ones that are struggling will do worse," said Mr. Nemzoff.
As a result, hospitals may pursue consolidation to remain viable. However, to what extent hospital M&A activity will accelerate is unclear. While there will be consolidation, the hospital market is incredibly geographically dispersed, which will prevent the type of consolidation seen in other healthcare markets, such as payors and managed care, said Mr. Nemzoff.
Carsten Beith, managing director and group head of tax-exempt M&A for Cain Brothers and another panelist in the webinar, ended the discussion of the hospital market by mirroring Mr. Nemzoff's point.
"Until [the hospital market has] dramatic changes at the Federal Trade Commission level, [it] will never see the consolidation seen in other [healthcare] sectors. The FTC looks at consolidation in a market-by-market basis, which will be a significant barrier to what I would term as broad market consolidation," said Mr. Beith.
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