An inpatient rehabilitation facility (“IRF”) is a post-acute entity which provides treatment and therapy services to patients after stabilization of acute care services. According to MedPac, the industry is predominately occupied by non-profit hospital based departments. Only 22.0% of the total inpatient rehabilitation facilities nationwide are owned by for-profit entities. Over the last three years, VMG performed over 100 inpatient rehab valuations across the United States.
IRFs are required to meet admission standards designated by Medicare. IRFs can be a freestanding entity (“Freestanding IRF”) or a distinct unit in an acute care hospital (“Department IRF”). Either designation will require the entity to meet IRF licensure standards to accept Medicare patients. It is important to note the distinction between the Freestanding IRF and Department IRF has critical implications on the approach to value.
IRFs are typically valued as a contribution of equity for a joint venture between for-profit and non-profit entities, 100.0% buyout by an operator or for special circumstances, such as a transaction of a certificate of need (CON). In any instance, VMG has skilled professionals who are able to identify these critical valuation and transaction issues within the inpatient rehab industry.
One of the most important consideration in the valuation of an IRF is site of service. More specifically, whether the IRF is freestanding (own tax ID number) or a hospital based department (bills under hospital provider number). While both a Freestanding IRF and a Department IRF are reimbursed under Medicare’s IRF prospective payment system (“PPS”), the reported revenue and cost structure under a Department IRF will most likely differ to that of a Freestanding IRF. Benchmarking becomes a critical factor in the analysis of financial and operational metrics.
Medicare is the IRF industry’s single largest payor. In 2015, Medicare paid out $7.4 billion in fee-for-service revenue to about 344,000 beneficiaries which accounted for 60.0% of the total discharges to IRFs (MedPac). Understanding Medicare reimbursement is critical, but equally as important is the relative relationship of the commercial and Medicaid payors to Medicare. A key value driver is to recognize the buyers’ ability to achieve historical reimbursement.
Maintaining the proper patient compliance levels, consistent levels of occupancy, and discharging patients back to a home setting are a few of the key consideration that should be taken into account in the proper analysis of an IRF’s historical and prospective volume.
Another value driver to consider is whether the IRF is located in a CON state. While not all CON states are comparable with regards to the political environment, market competition and CON application process, the recognition of this intangible asset plays an important part in the value determination of an IRF. In addition, the treatment of real estate, whether through a lease or contribution of asset, will impact the results of the appraisal.