Acute Care Hospitals

Acute care hospitals (ACHs) diagnose, treat, and care for patients with a wide range of conditions including severe episodes of illness resulting from disease or trauma. According to the national health expenditure data published by CMS, spending on hospital services accounts for the largest percentage of total personal health expenditures in the United States. With well over 4,000 facilities nationwide, the acute care hospital industry has experienced headwinds in recent years with declining inpatient admissions due to the migration of care to outpatient settings, new regulatory requirements, required investment in information technology, reimbursement pressure and rising costs. As a result of the challenges faced, the acute care hospital industry has gone through a wave of consolidation and engaged in a multitude of other ancillary transactions. With most of these trends expected to continue for the foreseeable future, the acute care hospital industry is poised to continue to see significant transaction activity.

At VMG Health, we have extensive experience working with the pre-eminent health systems in the United States on all types of transactions that involve acute care hospitals. Types of engagements include:

• Fair Market Value (FMV) of a controlling interest in an ACH for purposes of an acquisition/sale or to support the conversion of an ACH from non-profit to for-profit status.
• FMV of ACHs to establish relative equity contributions in the formation of a joint venture (JV).
• FMV analysis of joint operating agreement (“JOA”) which help establish pro-rata allocation of available earnings through collaboration between entities.
• Brand valuation services to establish a FMV royalty rate or contribution included in a JV or other affiliation.
• Fairness opinions for boards or state attorney generals.
• Purchase price allocations and goodwill impairment studies.
• Valuation consulting for litigation support.
• Market study, black box reimbursement, feasibility, due diligence and quality of earnings analyses.

In addition to providing services for transactions involving acute care hospitals themselves, we also work with them on in-market or other ancillary transactions including, but not limited to, physician practices, ASC’s, imaging centers, radiation therapy centers and other outpatient services. Furthermore, VMG has been involved in hundreds of hospital department carve outs and valuation engagements.

Value Drivers for Acute Care Hospitals

Determining the FMV of an ACH is reliant upon numerous variables and can be quite complex. Key factors that can determine the value of an ACH include the following:

1. Profile/strength of the local market and relative market share position.
2. Brand of the health system and reputation with patients in the community.
3. Payor mix, reimbursement and negotiating leverage with commercial insurers.
4. Relationship with local independent physicians, physician employment strategies and referral patterns.
5. Regulatory considerations (Medicaid expansion or CON state, provider taxes, DSH, etc.).
6. Cost/expense structure.
7. Condition of physical plant, IT infrastructure and future capital requirements.