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Issue #26-1 | August 21, 2014
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Trends in hospital transaction multiples

The Affordable Care Act has been the primary driver of transaction activity in healthcare, including hospitals, physician practices, other providers, and payers. The ACA’s emphasis on lowering reimbursements and at the same time increasing requirements for quality and access to care is pressuring providers to make up for potential lost revenue and also reduce operating costs to free up capital to invest in quality-of-care initiatives. This is causing hospitals to consider acquisitions, joint ventures, and partnerships. All of this activity is having its effects on price multiples.

Speaking during a recent BVR webinar, “Hospital Valuations in the Health Reform Era,” Don Barbo (Deloitte Financial Advisory Services LLP) and Robert Mundy (Pershing Yoakley & Associates P.C.) gave their observations on hospital transaction multiples.

Hospital Transaction Multiples
  Median Price to Revenue Median Price to EBITDA
2009 0.73 9.9
2010 0.60 8.3
2011 0.68 10.1
2012 0.60 7.9
2013 0.56 9.2
Source: Irving Levin Associates, Health Care Services Acquisition Report, 20th edition, 2014

The median price to revenue multiple has been declining to a level now of around 0.56 of net revenue. Mundy points out that some of the decline from 2011 could be the result of some smaller or financially distressed hospitals being bought up by more financially stable hospitals. “Healthcare reform pressures affecting smaller, rural hospitals could be putting downward pressure on the price to revenue multiple,” he says. Barbo agrees: “Yes, some hospitals could now be feeling the ‘teeth of health reform’ and experiencing a deterioration of performance, so they may be selling now at a lower price.”

The median price to EBITDA multiple has been on a roller coaster ride on its way to a current level of 9.2. Barbo observes that one reason for this is that the Levin data use the last one to two years of historic EBITDA, while buyers are using more current information. In some cases, they may be using pro forma information to drive the deal price.

Barbo also brings up an important point on the use of surveys. “Be careful when just using survey data on reported multiples,” he says. For example, how is “price” defined? Is it equity price? Is it total invested capital price? Also, what does the price include? Is real estate included? Was there an assumption of debt? His point is to drill down into the reported transactions so you can develop multiples that are more specific to your situation.

Bump in the road as bundled payments model gains steam

The number of healthcare providers participating in the new “bundled payments” model for Medicare has just tripled. At the same time, a new report reveals that a major pilot bundled payment program has failed.

More on board: According to an article in Modern Healthcare (subscription required), the Centers for Medicare and Medicaid Services (CMS) reports that 4,122 providers will be added to the exploratory phase (Phase 1) of the Bundled Payments for Care Improvement Initiative (BPCI), joining the 2,412 providers already participating. The move to bundled payments is one of the biggest changes under health reform.

Traditionally, Medicare made separate payments to the various healthcare providers involved in a patient’s care, such as the hospital, physician, rehab facility, and the like. Under bundled payments, one single payment will be made for all providers who render services during a patient’s entire “episode of care” for certain medical conditions. This is designed to increase the quality of care and reduce healthcare costs.

Unsuccessful pilot: The RAND Corp., a research organization, has released a report in the journal Health Affairs that says the $2.9 million bundled payments program led by the Integrated Healthcare Association (IHA) of California from 2010 through 2013 has failed.

"Bundled payments have great promise for controlling health care costs, but thus far efforts to put the strategy in place on a wider scale have struggled," says M. Susan Ridgely, the study's lead author and a senior policy analyst at RAND. "We've learned lessons from the early setbacks, but more work still needs to be done to realize the potential of this model of payment."

Legality of subsidies for insurance from federal exchanges up in
the air

Within hours of each other, two federal courts issued conflicting rulings concerning the ACA’s provision of subsidies for individuals at certain income levels to help them buy insurance from, as the law reads, “state-sponsored” exchanges. The government says the intention of this provision is that, if an individual qualifies for the subsidy, it doesn’t matter whether the insurance is purchased from a state-sponsored exchange or a federal exchange. However, a court disagrees with this interpretation.

At odds: In Halbig v. Burwell, the U.S. Court of Appeals for the D.C. Circuit ruled that individuals who buy the insurance through a federal exchange are not entitled to the subsidy. Two hours later, the 4th Circuit, in King v. Burwell, issued a contradictory ruling saying an individual who qualifies can receive the subsidy regardless of whether the insurance is purchased from a state-sponsored or federal exchange.

Affordable Care Act supporters say the Halbig ruling will not go into effect if the court grants an en banc rehearing the Obama administration said it will request. “We will be seeking an en banc review from the D.C. Circuit Court,” says Justice Department spokeswoman Emily Pierce, according to a report from Bloomberg BNA. “As that court's order says, it will not take effect until after the rehearing process concludes. The Department will be filing a petition for rehearing en banc so there is no need for the Department to seek a stay.”

Almost half of hospitals expect to outsource ICD-10 services

To help with the massive financial and administrative burden of converting to the new ICD-10 diagnostic and coding system, nearly half of the 650 hospitals in a recent survey say they will outsource the work. The deadline for converting to the ICD-10 system has been delayed several times and is currently set for Oct. 1, 2015.

Out of house: The survey, from Black Book Rankings, also found that 19% of hospitals surveyed are already outsourcing the coding, but that the number is anticipated to grow to 47%. Many hospitals simply do not want to deal with the tasks involved in the conversion from ICD-9 to ICD-10, which contain the disease codes hospitals use when submitting reimbursements to Medicare and private insurance. ICD-9 contains 17,000 diagnosis and procedure codes compared to 140,000 such codes in ICD-10.

Hospitals expect to rely more heavily on outsourcing for a wide range of coding and clinical documentation services, the survey found. For example, 25% of hospitals currently outsource clinical documentation audit, review, and programming, and that percentage is expected to increase to 71% by the third quarter of 2015 as hospitals adjust to the new codes.

"Transitioning to ICD-10 is a complicated process, and hospitals are leaning on the expertise and successes of outsourcing vendors," Doug Brown, managing partner of Black Book, said in prepared remarks.

Extra: For tips on using outsourced coders, read the article, “How to Manage an Outsourced ICD-10 Coding Program,” from Phoenix Health Systems.

How do your inpatient costs
stack up?

The average cost per inpatient day at for-profit hospitals was $1,629 in 2011 (the latest year for which data are available), according to the Kaiser Family Foundation. For state/local government hospitals, the figure was $1,667, and, for nonprofit hospitals, the average cost was $2,088 per inpatient day. Kaiser breaks down these statistics for all 50 states plus the District of Columbia.

Kaiser points out: “These figures are only an estimate of expenses incurred by the hospital to provide a day of inpatient care and are not a substitute for either actual charges or reimbursement for care provided.”

New tool helps cope with physician shortage

A huge challenge for hospitals is dealing with the physician shortage, which increases costs of attracting and retaining physicians. The Association of American Medical Colleges projects a physician shortage of 130,600 physicians (including 68,500 primary care physicians) by the year 2025.

New tool: Hospitals and health systems can use a new model to help with physician workforce planning. The FutureDocs Forecasting Tool has been developed by the Physicians Foundation and the Cecil G. Sheps Center for Health Services Research at the University of North Carolina-Chapel Hill. The tool estimates the supply of physicians at the substate, state, and national level. Users can create a scenario and see the projected shortage or surplus, the physician supply, or the use of healthcare services.

The developers say: “The tool is an important and innovative step forward for healthcare workforce modeling because it is interactive, Web-based, and user-friendly.”

Webinars of interest

BVR has an ongoing Online Symposium on Healthcare Valuation, which focuses on the challenges inherent in valuations in medicine, life sciences, and healthcare. Here are some upcoming webinars in this series:

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