Volume of hospital transactions is rising. When the economy went sour from late 2008 through early 2010, there was a general slowdown in mergers and acquisitions of hospitals. This made distressed hospitals realize they would need to have a capital partner. An easing of capital markets in early 2010 opened pent-up demand of organizations that wanted to acquire a hospital and pent-up supply of distressed hospitals. Rolfe says this created a “perfect storm” for M&A activity that should extend into 2011.
Setting a price for acquisitions. To set a price for these acquisitions, the normal method of calculating a multiple of earnings is typically not used. The distressed hospital normally has low or no current earnings. Instead, a good starting point to determine the price is calculating a multiple of net revenue. Many deals taking place in the past year have multiples from 0.3 to 0.6 of net revenue. Hospitals at the high end of this range have a variety of factors in their favor. In a highly regulated state, for example, a hospital’s CON makes it more valuable. Other factors include favorable managed care rates, prices and expense containment.
What buyers are looking for. Acquiring hospitals tend to be both for-profit and not-for-profit systems. Ultimately, the buyer wants to provide quality healthcare, grow revenue and not lose money. But during the past several years, hospitals have seen decreases in reimbursements, upward pressure on wages for clinical staff, a decrease in admissions and an increase in unemployment, which means more unpaid care. All these factors make it more difficult for the new owner to being a hospital into the black.
The buying entity wants to turn the distressed hospital around as quickly as possible. It is looking for a distressed hospital with the potential to be operated more efficiently. For example, there is room to improve its salary and benefits structure and enhance revenue, such as in negotiations for better rates with payors. The buyer expects that when these factors are improved, it will get a return on its investment.
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