How do investor-owned chains put a value on the hospitals they want to buy?
The most common standard is a multiple of EBITDA or EBDIT. EBITDA stands for earnings before interest, taxes, depreciation, minority interests and amortization. EBDIT is the same, minus amortization.
Buying hospitals traditionally has been based on a per-bed multiple, but buyers and sellers today say EBITDA and EBDIT numbers are a more accurate indicator of how much a hospital is worth. After all, about 30% of the average hospital's revenues came from outpatient services last year, according to HCIA, a Baltimore-based healthcare research firm. That makes a valuation based solely on inpatient beds kind of an anachronism.
This month, Healthtrust-The Hospital Co. bought Dallas-based Epic Healthcare Group, a 34-hospital company, for $1 billion. Nashville, Tenn.-based Healthtrust paid seven times EBITDA for Epic, an amount that's at the high end of the expenditure range for most investor-owned chains.
However, Healthtrust executives hope to make Epic's hospitals far more profitable than they have been to date. Under that scenario, the price may not be so high.
In other words, Healthtrust bought Epic at seven times trailing EBITDA (based on the past 12 months). But if Healthtrust can cut costs and boost revenues in the first year after acquisition to a point that increases Epic hospitals' EBITDA by 15% annually, the multiple will shrink to six.
This would put it in the range of three to six times EBITDA, which is considered reasonable by most of the investor-owned chains.
Houston-based Community Health Systems prefers to pay in the range of four to six times EBITDA, said Tyree Wilburn, the company's acquisitions executive. But, that's EBITDA after the first year of acquisition, he noted.
In fact, Community has purchased hospitals for as much as 20 times trailing EBITDA. However, those were hospitals Community believed it could operate substantially more profitably, Mr. Wilburn said.
In addition, if a hospital is losing money, the multiple is fairly meaningless, several acquisition officers noted.
"You have to remember that with not-for-profit hospitals, the EBDIT performance is not as good as in the proprietary industry," said Earl Holland, chief operating officer for Naples, Fla.-based Health Management Associates. "You have to look at upside potential."
Hospital chains also typically analyze the hospital's building, the need for capital expenditures and how much physician recruitment will be necessary.
In the end, the deciding factor is how a facility fits into a hospital chain's organization, said Richard Francis, Healthtrust's vice president of acquisitions. "One hospital may be worth more to you than to someone else if it fills a key piece in your network."
In those instances, it may come down to how badly the buyer wants the hospital. Noted David Vandewater, COO of Columbia/HCA Healthcare Corp.: "We're going to pay what's necessary."