The challenges hospitals and health systems face in valuing assets are wide ranging—from increased competition to burdensome reporting requirements, uncertainties in healthcare legislation, and complex laws and regulations that define fair market value.

Timothy BakerStuart NeibergIn determining the value of a facility—whether a long-term or acute care hospital, an ambulatory surgical center, or an outpatient rehabilitation facility—issues of productivity and quality play an important role, says Timothy Baker, managing partner, Principle Valuation LLC, a Member of Prism Healthcare Partners in Chicago. “Anything that enhances operations, reduces expenses, and improves quality is going to affect valuation, including technological infrastructure, such as software and hardware like EHR [electronic health record] systems,” he explains. “Efficient clinical integration affects operations and in turn can affect valuation.”

Where We Are Now

When it comes to appraising a property or business, a health system’s tangible assets, on the balance sheet (real estate and equipment), liabilities, and other assets, such as physician practices, are determining factors. The old saying, “location, location, location,” also holds true as perhaps the single most important feature affecting ease of access and number of patients with commercial insurance. Nonetheless, value also is determined by the following factors and the essential questions concerning them.

Facility condition. Are equipment, capital improvements, and technology up to date?

Medical staff. Are physicians employed, contracted, or privileged? Is there is a nursing shortage?

Demographics. What are the socioeconomic circumstances of the neighborhood? At what stage of development is the market?

Community support. Are capital projects funded through taxpayer dollars?

Reporting. How do purchasing and coding requirements increase reporting burdens?

Where We’re Going

Efficiency in a hospital’s operations and finances is the best hedge against the uncertainty of the coming year, Baker says. “The best course of action is to make sure that your books are in order and that you are operating as efficiently as possible so that any adjustments to healthcare programs or reimbursement can be appropriately addressed,” he cautions.

Operations. Any successful efforts by a hospital to improve operations, such as monitoring productivity and quality, can affect its value. Within operations, several specific areas, discussed below, are especially important.

The first of these areas, technology, continues to grow in importance as it relates to valuation. A well-implemented technological infrastructure improves operational efficiency. It enables information to be obtained more quickly and services to be delivered to the patient more efficiently and cost effectively. Data that are easily accessible greatly enhance the capabilities of the overall operation. Appraisers also will factor in the age and use of technology systems; foundational systems such as those that support coding and documentation, which then affects payment and quality scores; and insurance for technology.

Clinical performance metrics and quality ratings also influence a property’s value. When assessing performance, hospitals should use industry quality metrics as a basis of comparison to identfy areas that may need performance improvement efforts to achieve improved ratings and value.

Close consideration also should be given to demand for services. Hospitals should determine what to do with unprofitable lines.

Payer mix also is important. Being able to negotiate insurance contracts can have a dramatic effect on a hospital’s value.

Finally, a hospital’s physician population affects its value because patients tend go to hospitals for specific physicians or specialties. Appraisers look at a variety of factors, such as whether the physician group is owned, its size, and the demographics of providers, including age.

Finances. Accounting accuracy, assets, and the balance sheet are financial aspects that are fundamental to valuation. Hospitals should strive for account accuracy in everything from billing to coding to asset maintenance. They should ensure their assets—including real estate, equipment, and physicians—add measurable value and work for them. They should consider, for example, the cost of owning versus renting certain assets.

Assets should be accurately reflected in the balance sheet. Assets that no longer exist or are no longer in use should be removed, resulting in a more realistic remaining life of functioning assets, and ensuring appropriate and reasonable capital expenditure estimates and insurance costs. Given that so many metrics of rating agencies use depreciation expense in their formulas, an accurate balance sheet is essential.

Another factor is the industry’s shift in payment focus to quality, which is increasing the need for appraisals of risk-shared entities such as accountable care organizations, says Stuart Neiberg, partner, Healthcare Appraisers, Delray Beach, Fla. Neiberg also notes that consolidation of ambulatory surgery centers, physician and imaging practices, and other such assets will continue to drive appraisals for acquisitions. Moreover, valuations of individual business lines or special, intangible assets such as care management programs also are increasing.

“With the continued move to quality and population health, we’re also seeing more activity in healthcare IT,” explains Neiberg. “People are increasingly interested in access to assets such as big data, programming, and intellectual property, as well as risk sharing and IT entities, which help contain costs and control quality.”

Maintaining quality metrics is another key to showing how a health system compares with its competitors regarding operations, staffing, pay, and patient and contract mix.

“With rules that are constantly changing, the best strategy is to keep all your assets in order and operate as efficiently as possible,” Baker emphasizes.

A hospital’s assets and operations are key to its valuation and appraisal. Hospital leaders therefore should monitor balance sheets with special attention given to the following.

  • Cost and depreciation. These elements should always be up to date and properly indexed.
  • Billing and coding. Attention should be given to whether billing and coding are producing optimum payment levels.
  • Contracts and capital expenditures. Both these elements should be easily monitored and well in order.
  • Technology. Both hardware and software should be kept current and up to date.

Publication Date: Wednesday, March 08, 2017