Q: How much have sales increased?
Kemp Dolliver: Sales are up substantially. The value of acquisitions, based on hospital revenues, was about $2.4 billion last year. This year it’s shaping up to be more than $6 billion. There had been a slowdown in sales for about two years and hospitals realized they had to move forward. A little over $2 billion of this year’s increase comes from just two transactions, the sales of Caritas Christi Health Care in Boston for $830 million and of Detroit Medical Center for $1.4 billion.
Q: Who is buying whom?
KD: For-profit systems are doing most of the buying. Most of the hospitals up for sale are owned by city, county and other government entities. They need to recapitalize but increasing taxes is simply not politically viable. In addition, independent, stand-alone hospitals without much market share have been offered for sale. The conventional wisdom is that these hospitals will not be able to survive.
Q: What has been causing the new spike in sales?
KD: It has more to do with a change in attitude of the potential sellers rather than buyers. Sellers seem to have brought down the asking price. Sales prices as a multiple of average revenue have fallen. Until 2007-2008, hospitals were selling at 0.9 times annual revenues. Now they are selling at 0.5-0.6 times revenues.
Q: Why are sellers accepting lower prices?
KD: One key reason is that selling hospitals could not get the capital they needed on their own. Financial institutions have become less willing to lend. While Caritas Christi and Detroit Medical Center have improved financially in recent years, they had poor financial results before then, and they still couldn’t get access to capital.
Furthermore, passage of the healthcare reform law moved sellers off the fence by providing some clarity about the future landscape. Selling hospitals no longer had an excuse to wait. The law will cover most of the uninsured, consequently the attractiveness of hospitals with high levels of uninsured patients has improved substantially. With the purchase of DMC and Caritas, the for-profits have entered market areas they historically shunned.
Q: How long will this surge last?
KD: This new round of buying is part of a cycle. It hearkens back to the 1990s, when for-profit hospital systems snapped up non-profits. Because there is a lot of pent-up demand, the high volume of sales probably will continue for a couple of years. It can’t last much longer than that because the for-profits only have so much money to spend. For-profits represent just 20 percent of U.S. hospitals
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