BVR Logo
Share on Twitter Share on LinkedIn

Issue #28-1 | October 23, 2014
Healthcare Wire Header

New protection for hospitals’ lost profits due to Ebola

The recent case of Ebola patient Thomas Eric Duncan may have required half a million dollars in treatments, but the hospital may never collect a dime. Duncan had no health insurance, so the hospital may have to write this off as charity care. Ebola treatments can cost a hospital $1,000 a day, according to a report from Bloomberg.

New insurance: Hospitals can now purchase insurance that would cover losses due to a shutdown and quarantine due to an Ebola outbreak, reports Healthcare Dive. The insurance was created by Lloyd's of London underwriter Ark Syndicate, Miller Insurance Services LLP, and U.S. broker William Gallagher Associates.

Insurance coverage for lost revenue arising out of a non-physical-damage event such as a voluntary or involuntary quarantine of facilities and medical professionals is not available on most business interruption coverage forms, according to the companies that announced the new insurance.

New study says hospitals are using 340B program to improperly boost profits

Hospitals are using the 340B drug discount program to boost profits rather than help low-income and uninsured patients, concludes a new study in Health Affairs.

Allegations of abuse: The 340B program (created by the Veterans Health Care Act of 1992) allows not-for-profit hospitals that serve large numbers of underinsured patients to buy medications from manufacturers at reduced prices. The study’s findings support allegations that hospitals participating in the program are looking to bring in extra money by targeting wealthier and/or insured patients. Hospitals participating in the 340B program aren't required to pass the discount along to patients or insurers and can subsequently turn a profit by charging the full price for medications the hospital bought at a discount. Hospital groups have vehemently denied that 340B providers engage in this practice.

Extra: In a forceful response, the Safety Net Hospitals for Pharmaceutical Access (SNHPA) says the article “misses the mark.” For several reasons, “the article does not support the criticism that 340B DSH hospitals are no longer serving vulnerable patients.”

Hospitals look to grow profits by providing medical insurance

Many large hospital systems believe they have the branding power to launch a new line of business: selling insurance coverage to their patients.

Infrastructure in place: Montefiore Medical Center in New York City will unveil insurance coverage to small business groups in 2015, reveals a report in Crain's New York Business. The hospital system, which currently treats one in three residents in the Bronx (where it’s based), already has the analytic infrastructure in place to run an insurance company. An integrated system such as Montefiore already has a significant portion of its costs under control and can share risk. This allows it to take advantage of the fact that group payers look for provider networks that are both clinically and financially accountable, according to Crain's.

Two other providers in New York are also in the medical insurance business. The North Shore-LIJ Health System introduced the CareConnect insurance company in 2013, while the upstate multispecialty practice Crystal Run Healthcare also decided to get into the insurance business.

Healthcare services sector trading performance and multiples

The S&P Healthcare Services Index “has increased by 16.5% over the last three months [June-August 2014], significantly outperforming the S&P 500,” according to the September 2014 Healthcare Sector Update
from Duff & Phelps. The best-performing sectors were home care/hospice (up 29.5%) and acute care hospitals (up 28.9%), and the worst-performing sectors were care management/TPA (down 7.8%), long-term care (down 5.3%), and diagnostic imaging (down 4.9%), says the report.

Latest multiples: The current median LTM revenue and LTM EBITDA multiples for the healthcare services industry overall are 1.65x and 11.2x, respectively. The sectors with the highest valuation multiples include: consumer-directed health and wellness (4.31x LTM revenue, 26.9x LTM EBITDA) and HCIT (3.45x LTM revenue, 17.6x LTM EBITDA).

The report also provides data on the pharmaceutical/medical devices/life sciences sectors.

Cost-cutting opportunity in managing medical devices

Hospitals can significantly reduce costs by improving the supply management for medical devices, according to a new study in the American Journal of Managed Care.

Three procedures: The study analyzed nearly 9,800 patients treated at 10 hospitals in a single metropolitan area between 2008 and 2010 for joint replacement, spine fusion, or cardiac rhythm management. It found that costs per procedure could drop by 14.5% for joint replacement, 18.8% for spine fusion, and 29.1% for cardiac rhythm management with better device purchasing.

The authors of the study focused on those three procedures because they are typically high-volume and high-margin procedures for hospitals. The authors are James C. Robinson, Ph.D., and Timothy T. Brown, Ph.D., who are on the faculty of the University of California, Berkeley, School of Health.

CMS says ACOs improve quality and save money

Accountable care organizations created under the Affordable Care Act are meeting their goals of improving patient care while saving Medicare money, according to a Fact Sheet  from the Centers for Medicare & Medicaid Services.

Dollar savings: ACOs in the Pioneer ACO Model and Medicare Shared Savings Program generated more than $372 million in total program savings for Medicare ACOs, the agency says. ACOs also qualified for shared savings payments of $445 million; they saved the Medicare Trust Fund $386 million, the agency says.

The results come from preliminary quality and financial results from the second year of performance for 23 Pioneer ACOs (which have more experience with coordinating care) and final results from the first year of performance for 220 Shared Savings Program ACOs, the CMS says.

Value-based revenue emerging for not-for-profit hospitals

Reimbursements to healthcare providers are shifting from fee-for-service to value-based, but that shift is happening gradually for not-for-profit hospitals.

More than three-quarters of not-for-profit hospitals recently surveyed report that less than 10% of their revenue is associated with any form of risk-bearing contract, reveals a Kaufman Hall survey. However, almost two-thirds of respondents believe that within the next two years value-based payments will account for 10% of their revenue or more.

Findings are based on an online survey of executives at not-for profit hospitals of varying sizes: 41% of respondents have 400 licensed beds or more, 26% have 200 to 399 beds, and 32% have 199 beds or fewer. Two-thirds are located in urban areas.

Healthcare M&A stays strong
in 3Q14

Healthcare merger-and-acquisition activity increased again in the third quarter of 2014, according to Health Care M&A News. Deal volume rose 10% versus the previous quarter, to 326 transactions. M&A activity in the quarter was up 19% versus the third quarter a year ago, when 275 deals were announced. Services transactions accounted for 53% of the 3Q14 deal total, and technology transactions made up 47%.

New records: Deal value hit a new record for third-quarter spending on healthcare transactions. The combined total for M&A activity in the third quarter reached $117.2 billion, which was actually 13% lower compared with the blistering pace for spending set in the second quarter ($135 billion). Even so, deal value in 3Q14 was 133% higher than the same period a year ago, when the combined deal value totaled just $50.2 billion.

Spending on transactions in the technology sectors reached $104.7 billion and accounted for 89% of the quarter’s total. While that total is a record for any previous third quarter, it represents a decrease of 13% compared with the high-flying second quarter. The pharmaceutical sector made up 21% of all 3Q14 deals but 74% of all spending ($86.7 billion). The majority came from the largest deal of the year announced so far, the $54.7 billion acquisition of Shire plc by AbbVie Inc. Five of the quarter’s 10 largest deals were for pharmaceutical targets.

On the services side, deal volume increased by 12% compared with the previous quarter, with 173 deals. Dollar volume was stagnant at $12.5 billion, representing a gain of just 1% in the same period. Long-term care transactions reached a new record with 80 deals and $9.6 billion in spending. The sector’s deal activity comprised 29% of the total deal volume and 8% of the total deal value.

“The third quarter was busy, and the fourth quarter could be even busier,” said Lisa E. Phillips, editor of Health Care M&A News. “Even though the federal government clamped down on companies taking advantage of lower corporate tax rates abroad, deal volume hasn’t slackened. 2014 could be one for the record books.”

Extra: Should hospital M&As reduce costs and thus reduce prices? The Catalyst for Payment Reform says in the Wall Street Journal that its research indicates mergers within the hospital industry only serve to drive up prices—they’re up 3% in recent years.

Identifying debt synergies after a hospital merger

Hospital CFOs looking for post-merger synergies should evaluate how to improve the debt structure of the combined organization, according to a report from investment advisory group Lancaster Pollard. These debt synergies can be defined as cash-saving opportunities derived from refinancing, consolidating, or restructuring debt after the merger.

Several ways: Given today’s historically low interest rates, the most obvious saving opportunity is reducing overall debt service through refinancing at a lower rate. Other ideas:

  • Extend amortization on existing debt to lower debt service. If assets with longer lives (30 years) were previously financed with aggressive amortization schedules (15, 10, or seven years), an opportunity exists to extend these amortizations with a refinance to provide significant debt service savings;
  • Restructure the obligated group. Depending on pro forma operating metrics, the hospital system may be able to exclude a foundation or other previously obligated entities that hold significant assets of the organization by restructuring the obligated group, thus creating greater financial flexibility;
  • Renegotiate covenants. The ability to provide greater financial flexibility by changing covenants is another benefit from a post-merger debt restructure; and
  • Release restricted assets. Sometimes existing debt structures may have required a debt service reserve, especially with more challenging credits. Thus, an improvement of a credit profile post-merger along with a refinance may provide the ability to release a restricted cash account, thus improving the unrestricted liquidity of the system.

Managing debt levels and debt service will also improve liquidity, which is important to rating agencies and debt investors, the report says. 

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:

Healthcare Resources



Training Programs

Free Resources

Business Valuation Resources, LLC
1000 SW Broadway, Suite 1200, Portland, OR 97205
(503) 291-7963 |