Regulatory hurdles and political environment: A certificate of need or Stark Law considerations can slow or kill a deal; community or organization politics can beleaguer a deal; generally, when there are fewer regulatory and political hurdles, the value is greater.
There is another factor: the intangibles, such as the value of your hospital or health system name and reputation, physician relationships, or patient loyalty. This is often referred to as the value of goodwill and most frequently comes into play when a hospital or system is purchasing a physician practice; it’s less integral when two larger entities are participating.
There are a few red flags, however, that can cause a hospital to get a lower valuation, notes Nelson, who has helped numerous hospitals over the years with the valuation process.
“Increasingly, the valuation process includes a review of a hospital’s physician relations/retention, risk management, quality care scorecards, and compliance effectiveness. A hospital with a low-quality core measures scorecard or a number of ‘never 27’ patient events will have to include such findings as discounting the value of the hospital’s enterprise,” he says. “With Medicare and other third-party payers linking hospital reimbursement with patient quality and satisfaction scores, a hospital’s valuation can rise or fall on the ability of the hospital to deliver patient care.”
The valuation process also includes a review of the effectiveness of a hospital’s governance and leadership. “Ultimately, a hospital’s value is directly related to the ability of its leadership to exceed expectations. The hospital’s leadership track record of operating the enterprise at peak performance is the critical ingredient to monthly financial results as well as long-term enterprise valuation,” Nelson says.