A growing trend in healthcare is for hospitals and health systems to sell, partner or merge to form larger, more integrated organizations. These transactions offer several benefits to all parties involved, including improved efficiencies, cost savings and streamlined services. Hospitals that are selling can optimize the outcomes of the sale by learning how to increase the value of their facility.
The simple answer to increasing value is to increase earnings and decrease costs. But, in a time of declining reimbursements and a slowly recovering economy, manipulating the earnings/costs dichotomy becomes more difficult. Hospital leaders have no control over certain external factors, such as if the state has a certificate of need process, competition, demographics and geography, that influence the hospital's value. Hospitals in states without CONs are likely to have a lower value than those with CONs because there is no limit on where new hospitals are built. If a new hospital is built in the same town as an existing hospital, for instance, the latter will see a decrease in value. However, there are factors leaders have control over that can increase the hospital's value.
1. Proper staffing. Two primary cost containment measures regarding hospitals are salaries, wages and benefits (SWB) and supplies. Jim Rolfe, managing director of VMG Health's Transactional Services Division, says leaders should evaluate every position in every department to ensure proper utilization and adjust accordingly. "The most efficient and profitable hospitals have SWB running at about 40 percent of net revenue," he says. Leaders can reach this level by downsizing staff and shifting some personnel to part time, according to Mr. Rolfe. However, hospital leaders need to maintain a focus on patient care while reducing costs. "The process of bringing a hospital's SWB to an ideal point should never interfere with quality of care, safety and efficiencies, and needs to be done methodically and over time. The last thing a hospital needs is a mass exit of good, quality staff members," Mr. Rolfe says.
2. Re-evaluate your group purchasing organization contract. "There is a huge opportunity for hospitals, especially non-profits, to evaluate their existing group purchasing contracts, yet they will rarely do it," says Bill Siren, practice leader of Healthcare in the Financial Advisory Services unit at consulting firm AlixPartners. He suggests approaching multiple GPOs to compare cost and then negotiate the lowest possible price for supplies. "Don't be afraid to change GPOs if necessary," Mr. Siren says.
3. Build relationships with physicians. Strong hospital-physician relationships can increase the value of the hospital. "It's really important that you show a prospective buyer a solid relationship between the hospital and medical staff," Mr. Siren says. CEOs play an important role in building these relationships. Mr. Siren, a former hospital administrator, suggests CEOs take a proactive approach to working with medical staff. "Spend time in physicians' offices instead of waiting for doctors to come in. Spend time in the doctors' lounge engaging with them," he says. In contrast, poor relationships between physicians and the hospital can lower the facility's value. "If there's significant contention between [hospital] management and physicians, the acquisition may become tainted," says Neil Shroff, managing director of the mergers and acquisitions firm Orion Capital Group.
4. Improve efficiencies. Mr. Siren says potential buyers often look at the performance of a hospital in the last 12 months to help determine its value. Thus, Mr. Siren says, as soon as hospitals decide to sell they should start making improvements, such as reducing unnecessary expenses, right-sizing staff and lowering accounts receivable. "One of the specific metrics acquirers seek in hospital acquisitions is low nursing hours per patients. Reducing the average number of hours each nurse spends on any particular patient shows long-term growth and high efficiency," says Mr. Shroff. Making improvements to a hospital will take time, however. Mr. Rolfe says, "If a potential buyer is interested in purchasing a hospital and the expenses have material decrease overnight, the prospective buyer will make adjustments back to higher levels or just walk away."
5. Increase patient satisfaction. Mr. Rolfe says high patient satisfaction can also increase the value of a hospital. "If the patient's experience starts out badly (a long wait time, poor service) then it is hard to regain their satisfaction. Having satisfied patients equals increased volume," he says. Part of patient satisfaction is also providing services targeted to the community. Mr. Shroff says, "There is a significant amount of segmentation in healthcare and different demographics and geographic regions favor different types of treatment. If you offer types of medical care that are not aligned with the community, [the hospital] will not demand a higher valuation."
Related Articles on Hospital Transactions and Valuation Issues:
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The simple answer to increasing value is to increase earnings and decrease costs. But, in a time of declining reimbursements and a slowly recovering economy, manipulating the earnings/costs dichotomy becomes more difficult. Hospital leaders have no control over certain external factors, such as if the state has a certificate of need process, competition, demographics and geography, that influence the hospital's value. Hospitals in states without CONs are likely to have a lower value than those with CONs because there is no limit on where new hospitals are built. If a new hospital is built in the same town as an existing hospital, for instance, the latter will see a decrease in value. However, there are factors leaders have control over that can increase the hospital's value.
1. Proper staffing. Two primary cost containment measures regarding hospitals are salaries, wages and benefits (SWB) and supplies. Jim Rolfe, managing director of VMG Health's Transactional Services Division, says leaders should evaluate every position in every department to ensure proper utilization and adjust accordingly. "The most efficient and profitable hospitals have SWB running at about 40 percent of net revenue," he says. Leaders can reach this level by downsizing staff and shifting some personnel to part time, according to Mr. Rolfe. However, hospital leaders need to maintain a focus on patient care while reducing costs. "The process of bringing a hospital's SWB to an ideal point should never interfere with quality of care, safety and efficiencies, and needs to be done methodically and over time. The last thing a hospital needs is a mass exit of good, quality staff members," Mr. Rolfe says.
2. Re-evaluate your group purchasing organization contract. "There is a huge opportunity for hospitals, especially non-profits, to evaluate their existing group purchasing contracts, yet they will rarely do it," says Bill Siren, practice leader of Healthcare in the Financial Advisory Services unit at consulting firm AlixPartners. He suggests approaching multiple GPOs to compare cost and then negotiate the lowest possible price for supplies. "Don't be afraid to change GPOs if necessary," Mr. Siren says.
3. Build relationships with physicians. Strong hospital-physician relationships can increase the value of the hospital. "It's really important that you show a prospective buyer a solid relationship between the hospital and medical staff," Mr. Siren says. CEOs play an important role in building these relationships. Mr. Siren, a former hospital administrator, suggests CEOs take a proactive approach to working with medical staff. "Spend time in physicians' offices instead of waiting for doctors to come in. Spend time in the doctors' lounge engaging with them," he says. In contrast, poor relationships between physicians and the hospital can lower the facility's value. "If there's significant contention between [hospital] management and physicians, the acquisition may become tainted," says Neil Shroff, managing director of the mergers and acquisitions firm Orion Capital Group.
4. Improve efficiencies. Mr. Siren says potential buyers often look at the performance of a hospital in the last 12 months to help determine its value. Thus, Mr. Siren says, as soon as hospitals decide to sell they should start making improvements, such as reducing unnecessary expenses, right-sizing staff and lowering accounts receivable. "One of the specific metrics acquirers seek in hospital acquisitions is low nursing hours per patients. Reducing the average number of hours each nurse spends on any particular patient shows long-term growth and high efficiency," says Mr. Shroff. Making improvements to a hospital will take time, however. Mr. Rolfe says, "If a potential buyer is interested in purchasing a hospital and the expenses have material decrease overnight, the prospective buyer will make adjustments back to higher levels or just walk away."
5. Increase patient satisfaction. Mr. Rolfe says high patient satisfaction can also increase the value of a hospital. "If the patient's experience starts out badly (a long wait time, poor service) then it is hard to regain their satisfaction. Having satisfied patients equals increased volume," he says. Part of patient satisfaction is also providing services targeted to the community. Mr. Shroff says, "There is a significant amount of segmentation in healthcare and different demographics and geographic regions favor different types of treatment. If you offer types of medical care that are not aligned with the community, [the hospital] will not demand a higher valuation."
Related Articles on Hospital Transactions and Valuation Issues:
Rethinking Your Hospital's Independence?
Private Equity Funds Are Changing the Face of U.S. Hospitals
4 Ways to Ensure a Successful Hospital Merger or Acquisition