Surgical & Specialty Hospitals

Specialty hospital is a term used to describe short-stay healthcare facilities that specialize in one line of care such as surgery, cardiac care, or orthopedics. Unlike general acute care hospitals which provide a wide range of care, specialty hospitals focus on a particular service. Specialty hospitals that focus on surgical procedures are commonly compared to ambulatory surgery centers (“ASCs”), as both entities are typically for-profit and focus on outpatient surgical procedures. However, unlike ASCs, specialty hospitals are equipped to provide overnight stays, and some are equipped to provide emergency services such as splinting, laceration repairs, intubations, as well as other procedures. Furthermore, specialty hospitals treating patients overnight must abide by the Emergency Medical and Labor Treatment Act (EMTALA), a federal statute requiring Medicare-participating hospitals with emergency departments to stabilize and treat any patient coming to an emergency department, regardless of their ability to pay.

One of the distinguishing characteristics of specialty hospitals, as compared to general acute care hospitals, is that specialty hospitals are commonly physician-owned, while acute care hospitals typically are not. CMS issued a temporary moratorium on hospitals with physician owners from November 2003 to February 2006. The Patient Protection and Affordable Care Act (“ACA”) placed a permanent moratorium on physician ownership in hospitals for providers that did not have an agreement in place as of December 31, 2010. As of this date, there were approximately 285 physician-owned specialty hospitals that were grand-fathered under the original whole hospital exception

On September 6, 2017, CMS issued a memo, which provided additional guidance on the Medicare definition of a hospital and the metrics used to determine whether a hospital is “primarily engaged” in inpatient services. This new guidance likely indicates CMS is becoming stricter on the reimbursement levels of non-traditional hospitals, such as specialty hospitals, who may not perform a significant level of inpatient services, however receive the same level of reimbursement as full service hospitals. If any hospitals are not in compliance with these new standards, they are at significant risk of losing their Medicare provider agreement. Going forward, it will be crucial for specialty hospitals that perform a low ratio of inpatient services to pay close attention to this new guidance in order to retain their status as a state-licensed hospital.

VMG Health has extensive valuation experience within the specialty hospital space, being involved with over 50 specialty hospital valuations per year. Specialty hospitals are typically valued for individual physician investment or the sale of the hospital to a management company and/or hospital buyer.

Value Drivers

Determining the FMV of specialty hospitals is reliant upon numerous variables and drivers of value. Similar to ASCs, a key factor in the valuation of a specialty hospital is understanding the physician utilizer attributes, such as ownership percentage (if any), age, specialty and any expected changes in practice patterns. In addition to the physician utilizers, other factors that can impact value include reimbursement, focus on cost containment strategies, such as staff and medical supplies, the projected capital expenditures and finally the competition in the marketplace.