5 Tips for Hospital Valuation in Today's Economy From David Felsenthal of Principle Valuation

Here are five recommendations for getting the most from a hospital valuation by veteran hospital valuations expert David Felsenthal, principle with Principle Valuation. Mr. Felstenthal advises hospital executives thinking of obtaining a valuation in this unstable economic era to consider.

1. Patient service mix. In assessing the overall quality of a facility's earnings, appraisers often look at the intensity of the patient services provided at the facility.

"Generally speaking as the services offered at a facility expand, earnings become less volatile," Mr. Felsenthal says. And valuations experts attach less risk to a more predictable earnings stream.
"All other things being equal, a diverse patient service offering will result in a higher valuation."

He says the current economic climate could drive many hospitals to bankruptcy, which creates opportunities for health systems with strong cash positions and solid access to capital.

2. Physician relationships. A hospital's relationship with its admitting physicians is critical to assessing the overall value of a facility.

"I don't think there's anything more important. Doctors admit patients," Mr. Felsenthal says. "And close hospital ties to a physician core tend to enhance the overall value of an operation. We have seen increased demand for hospital systems to affiliate with specialty physicians and that tends to enhance profits at the hospital. Find a hospital in trouble and you'll usually find a CEO who can't relate to physicians."

3. Physical plant and equipment expenditures. The fixed plant and equipment at a hospital facility represent a significant investment for any hospital enterprise. The level of historical capital expenditures tends to indicate the level of modernization and technical proficiency of a hospital facility.

"Those facilities that have not kept up with medical advances often have lower operating margins than those that have reinvested their earnings," Mr. Felsenthal observes. "Nobody wants to purchase a hospital requiring a lot of renovation. That can be a deterrent in this tough credit market."

4. Competitive environment. Another important factor in assessing the potential value of a facility is its market position, Mr. Felsenthal says. Is the hospital the predominant provider in the area, or does it has potential to be added to a larger system's network?

"If you can answer yes to either question, the value of the facility would tend to be higher," he says.
He predicts the current economic malaise will trigger hospital mergers or affiliations, particularly in cities and towns with only two hospitals. "If they can get regulatory approval, sometimes two competing hospitals struggling to survive in small communities are better off merging. The doctors would like it better and patient services often improve."

5. Regulatory roadblocks. Facilities operating in states that require a Certificate of Need (CON) approval tend to sell at higher multiples than comparable counterparts in non-CON states, all other things being equal, because of the barriers new competitors must overcome to enter the market, particularly in one hospital towns.

Mr. Felsenthal cited one example, the recent rejection by the Illinois Health Facilities Planning Board of Naperville, Ill.-based Edward Hospital's attempt to secure a CON to build a new hospital in a neighboring Chicago suburb.

"When earnings are present, CON's tend to set up barriers to entry that when avoided add value to an enterprise"

He says other legal or regulatory barriers could also include the Stark law, which prohibits physicians from referring patients to many entities in which they hold financial interests.

David Felsenthal (dsf@principlevaluation.com) is a veteran valuations expert in the hospital industry who has been instrumental in the growth of the valuations sector of the business. He is a founding member of Principle Valuation, a Chicago-based firm specializing in valuations of hospitals and other healthcare facilities. Mr. Felsenthal has worked in healthcare valuations for more than 50 years and valued hundreds of hospitals and healthcare facilities.