Factors Driving Hospital Valuation: Q&A with Colin McDermott of VMG Health

Colin McDermott, senior manager with VMG Health, discusses influential factors and current trends for hospital valuations.

Question: How are hospitals being priced today?

Colin McDermott:  Hospital's today are being priced on a multiple of revenue. Most recent hospital sales involve distressed facilities with low profit margins. Multiples of revenue typically range from 0.4 to 0.8 times and have increased to the high-end of the range during 2011.  

Q: What key factors are assessed in determining a hospital's value?

CM:  Many of the for-profit buyers have robust acquisition pipelines and are considering opportunities for facilities where the operating results can be improved. Most of the current sellers are in a distressed financial position with low single-digit margins, which compares to the EBITDA margins of the public hospital operators in the mid-teens.  

The current acquirers are looking for a facility that they believe can be turned around over a two-to- three year window. Typically, these acquirers look to enhance the acquired facility through service line development, physician recruitment, changes in staff levels and supply cost reductions.   

Q: How has recent hospital pricing compared to historical pricing?

CM:  In 2011, the multiples paid for recent hospital transactions have increased over levels seen in 2010. Many of the recent target hospitals have been more attractive as compared to the facilities [that] sold during 2010. These recent sales involved larger hospitals or multi-hospital systems, which have maintained their physical plant and are in strong demographic markets.  

Additionally, the current attractive capital markets and the strong financial performance of the for-profit buyers have changed the way buyers are thinking about the deployment of capital. With the low interest rate environment, the for-profit buyers are not paying down debt so their options are to grow their existing business through acquisitions or the buy-back of stock. Most of the for-profit hospital operators are looking to make acquisitions and with this demand, the multiples have increased to the high-end of the range typically seen for a hospital. This trend is expected to continue during 2012.  

Q: Does pricing depend on the hospital being non-profit or for-profit or the size of the system that owns it?

CM: There is currently no discernible difference in pricing a non-profit versus for-profit hospital. The key factor in pricing a hospital is the perceived ability to improve operations.
[Additionally,] There is no difference in the pricing of a hospital due to the size of the parent system. What we have noticed in the market is more opportunities exist to acquirer larger hospitals and multi-system facilities which typically command a premium [valuation] multiple.  

Q: How does a hospital's geographic or physical region change its valuation?

CM: Demographics is one of the key drivers of the valuation multiple paid for a hospital target. Hospitals in markets with low unemployment and strong population growth will command a higher multiple.  

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