A recently released study by Healthcare Transaction Advisors analyzes the financial performance of a large sample of healthcare businesses, including hospitals, before and after major ownership changes.
The study builds on the findings of a 2014 study by Healthcare Transaction Advisors that analyzed the financial performance of more than 5,000 hospitals, skilled nursing facilities and home health agencies that reported changes of ownership over a 17-year study period. The 2015 study examines the subset of the transactions from the 2014 study that were unprofitable during the year prior to their reported change of ownership.
Here are seven findings from the 2015 study.
1. The study indicates that successful hospital financial turnarounds after a change of ownership require sustained growth in net revenues. For the study, a successful turnaround is defined as a business that became profitable by the third year after the change of ownership. Unsuccessful turnarounds are defined as businesses that were still unprofitable three years after the change of ownership.
2. "In gross terms, short-term post change of ownership revenue growth is not alone a predictor of long-term success," said Jeff Cohen, an attorney at Florida Healthcare Law Firm. "The healthiest businesses are those that bring effective management to the table to take care of the 'blocking and tackling' on a daily basis to ensure continued growth."
3. Hospitals that executed turnarounds increased total annual inpatient days 24 percent over four years, compared to 11 percent for the unsuccessful turnarounds, according to the study. "While hospitals may be rushing to acquire physician practices or ancillary businesses and employ doctors, it is evident that the inpatient day metric is most relevant to a successful operation," said Stuart A. Neiberg, director of HealthCare Appraisers. "An entity can be very aggressive with their acquisitions, but if it does not create additional inpatient activity, it is unlikely to improve the business."
4. The 2015 study identifies a strong correlation between increased growth in outpatient services, inpatient psychiatric unit services, intensive care unit services, outpatient clinic, emergency department and SNF services and successful hospital turnarounds.
5. The study also identifies several other correlations with successful turnaround performance. The correlative factors include:
- Overall inpatient day growth for all payers
- Ability to restrict building and fixture cost growth
- Increased movable equipment spending
- Increased growth in most ancillary service cost centers
- Enhanced ability to limit medical supplies cost growth
6. "There appears to be a high correlation of success for those hospitals investing heavily in moveable equipment and technology versus the unsuccessful providers that continue to invest in more traditional real estate," said Matt Lindsay, senior vice president at Lancaster Pollard. "Generally, hospitals that continue to add acute care beds and invest in inpatient facilities are seeing ongoing margin compression as the return on cost on building and fixed equipment continues to decline."
7. There is no correlation between reductions or increases in staffing, building square footage, and costs for operating room, recovery room and physical therapy services with successful turnaround performance, according to the study.
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