In the wake of health reform, several health systems actively pursuing acquisitions have accumulated portfolios of non-core assets. These non-core assets fall into two categories: long-term care investments (skilled nursing facilities, assisted living facilities, and rehabilitation units) and ancillary outpatient businesses (ASCs, imaging centers, and cancer centers).
Since the challenges and value drivers of non-core assets often differ greatly from the health system's core line of business, these non-core assets may adversely affect a health system's bottom line and therefore be viewed by a system's stakeholders as non-performing investments. While these assets often lower a system's bottom line without the benefit of added referral sources, recently favorable market conditions may yield hidden value in these service lines.
Specialized long-term care and ancillary operators have the ability and expertise to operate non-core assets at higher efficiency and profitability than health systems, while also increasing the quality of care and outcomes. Niche operational expertise and knowledge of the competitive landscape within the industry allow specialized operators to unlock hidden value and potential synergies through the ownership of these assets. In short, valuable enterprises can be disguised as non-performing non-core assets.
Example of non-core value creation
In 2013, VMG Health was engaged to help a health system divest itself of a non-core SNF. This SNF had historically experienced financial losses, and the health system had low expectations for the divesting price.
VMG Health prepared an informational offering document and solicited market offers for the SNF. The market interest in the under-performing SNF exceeded the health system's expectations. Multiple bidders emerged and the SNF was sold for a very attractive price.
The following chart details the multiples and financial metrics of the transaction:
As the chart above demonstrates, the consideration received by the seller yielded a price beyond expectations. Expectations are set by the market and can be exceeded if the non-core asset possesses attributes desirable and/or unique to potential acquirers and the market.
Aside from the potential for monetary gain, other potential advantages accessed by the seller may include:
- Synergies with the acquirer across the continuum of care and the health system's strategic marketplace(s);
- Ability to retain or increase referrals from the acquirer; and
- (For joint ventures) Best practice collaboration between health system management and facility management companies.
The monetary consideration received in a non-core sale can not only strengthen cash positions (which are important to credit rating and bond covenants) but can also be deployed elsewhere throughout the system to repair, replace, or enhance operations. Through a sale, the health system may gain the needed capital to pay off debt, or the flexibility to deploy capital to equipment investments, renovations, or physician recruitment. In either instance, divesting a non-core asset in the current environment may be a viable approach to access capital in order to remain competitive in the current era of reform.