When community hospitals go up for sale, the price is based primarily on current earnings, so it is important to maximize those earnings before sale, according to Jim Rolfe, a managing director for transactions at Dallas-based VMG Health.
Mr. Rolfe, who has experience both in buying and selling hospitals and previously served as a vice president of acquisitions for Community Health Systems, says the hospital is typically sold in the neighborhood of 5.5-7.5 times EBITDA.
Maximizing earnings, he says, can be a challenge. Since a hospital up for sale is often in financial straits, it doesn't have access to revenue-generating options requiring capital, such as physician recruitment, adding services or enhancing the physical plant, he says. But here are five ways to increase EBITDA, provided the hospital has 6-9 months to implement them so that they can show up in the hospital's bottom line before sale, according to Mr. Rolfe.
1. Reduce the cost of salary and benefits. This area needs to be evaluated before anything else because it is typically the hospital's largest single expense item. Significant savings are possible here because a community hospital up for sale often has salary and benefit expense levels well above 50 percent of net patient revenue, compared with 32-42 percent at a successful hospital. A hospital can save a great deal by restoring salary levels to industry norms and reducing or postponing retirement and other benefits.
2. Reduce supply costs. This is normally the second-highest expense item for a hospital and it can get significantly out of control when physicians or managers have blanket authority to order equipment and supplies. While a hospital should respond to physician preferences, it needs to gain control over ordering. The first step should be consolidating equipment purchases with a few vendors, winning lower prices in return for higher purchasing volume per vendor.
Consolidate supply orders under one person and require purchasing orders for all items over a certain price. If the hospital is not part of a group purchasing organization, it should consider joining one as a way to add value and reduce supply costs.
3. Improve efficiency of the OR and ED. The hospital needs to get control of the OR to improve utilization and lower costs. When surgeons don't use the time blocked out for them in the OR, they have a full staff with nothing to do. Meanwhile, the ED is one of the first areas a potential buyer looks at. Improving efficiency here will reduce patients' waiting times and foster a great deal of goodwill in the community for the new owner.
4. Increase revenue. There are ways to increase revenue without spending a lot of money. Evaluate the hospital's chargemaster to determine if charges have been adjusted in the past two or three years. Make sure hospital bills are being coded correctly. And try to renegotiate current managed care contracts to see if reimbursements can be raised.
5. Align with physicians. While strong physician alignment is hard to measure through EBITDA, it can increase a hospital's value. Physicians who freely choose to refer patients to the hospital are an invaluable asset for a healthcare system looking to buy a hospital as a way to consolidate market share.
Contact Mr. Rolfe at rolfe@vmghealth.com. Learn more about VMG Health at www.vmghealth.com.
Mr. Rolfe, who has experience both in buying and selling hospitals and previously served as a vice president of acquisitions for Community Health Systems, says the hospital is typically sold in the neighborhood of 5.5-7.5 times EBITDA.
Maximizing earnings, he says, can be a challenge. Since a hospital up for sale is often in financial straits, it doesn't have access to revenue-generating options requiring capital, such as physician recruitment, adding services or enhancing the physical plant, he says. But here are five ways to increase EBITDA, provided the hospital has 6-9 months to implement them so that they can show up in the hospital's bottom line before sale, according to Mr. Rolfe.
1. Reduce the cost of salary and benefits. This area needs to be evaluated before anything else because it is typically the hospital's largest single expense item. Significant savings are possible here because a community hospital up for sale often has salary and benefit expense levels well above 50 percent of net patient revenue, compared with 32-42 percent at a successful hospital. A hospital can save a great deal by restoring salary levels to industry norms and reducing or postponing retirement and other benefits.
2. Reduce supply costs. This is normally the second-highest expense item for a hospital and it can get significantly out of control when physicians or managers have blanket authority to order equipment and supplies. While a hospital should respond to physician preferences, it needs to gain control over ordering. The first step should be consolidating equipment purchases with a few vendors, winning lower prices in return for higher purchasing volume per vendor.
Consolidate supply orders under one person and require purchasing orders for all items over a certain price. If the hospital is not part of a group purchasing organization, it should consider joining one as a way to add value and reduce supply costs.
3. Improve efficiency of the OR and ED. The hospital needs to get control of the OR to improve utilization and lower costs. When surgeons don't use the time blocked out for them in the OR, they have a full staff with nothing to do. Meanwhile, the ED is one of the first areas a potential buyer looks at. Improving efficiency here will reduce patients' waiting times and foster a great deal of goodwill in the community for the new owner.
4. Increase revenue. There are ways to increase revenue without spending a lot of money. Evaluate the hospital's chargemaster to determine if charges have been adjusted in the past two or three years. Make sure hospital bills are being coded correctly. And try to renegotiate current managed care contracts to see if reimbursements can be raised.
5. Align with physicians. While strong physician alignment is hard to measure through EBITDA, it can increase a hospital's value. Physicians who freely choose to refer patients to the hospital are an invaluable asset for a healthcare system looking to buy a hospital as a way to consolidate market share.
Contact Mr. Rolfe at rolfe@vmghealth.com. Learn more about VMG Health at www.vmghealth.com.