Not-For-Profit Hospitals: Valuation Approaches and Issues

Health Care

August 08, 2012
by Lisa Cribben, CPA/ABV, ASA, CMA

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Lisa Cribben Lisa Cribben, CPA/ABV, ASA, CMA

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Merger and acquisition (M&A) volume within the health care industry is on the rise. According to industry sources, health care M&A spending during 2011 reached $227.4 billion, representing an 11% increase over 2010.
The passage of the Patient Protection and Affordable Care Act and the current shortage of physicians have been key drivers behind the trend. As reimbursements decrease and reporting requirements increase, not-for-profit (NFP) hospitals are looking to collaborate, affiliate, consolidate, acquire and merge. With the need to modernize facilities, implement electronic health records, and establish Accountable Care Organizations (ACOs), such transactions will continue to escalate.

M&A transactions involving NFP hospitals are unique because NFP hospitals are mission-based versus profit-based, answer to their communities instead of shareholders, and may face requirements to justify their tax-exempt statuses. In addition, the Stark Law and the concept of “fair market value” add to the complexity and all these issues require hospitals to proceed with care when entering into an acquisition or affiliation.

With such strict laws and regulations guiding what can be paid when purchasing an NFP hospital, how does a business valuation fit into the complex mix? How does one value an NFP hospital and why is a valuation of an NFP necessary when cash is not necessarily changing hands between two NFP entities? This article addresses these questions.

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Length: 2 pages (PDF 150 kB)

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