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Due Diligence in Distressed Community Hospitals
A “community hospital” is generally located in a smaller town but can also include urban facilities that serve a market segment distinct from a major teaching hospital. A community hospital is generally not-for-profit and historically not affiliated with a larger system. Many community hospitals are in distress. The causes are varied but have a constant theme — the cost to adapt to a rapidly changing environment. Potential investors in distressed community hospitals will similarly need to be nimble in their due diligence.
What is the Patient Population?
Initially, customer-based due diligence appears standard. Is the current customer base increasing or decreasing? Can the customer base be expanded? With hospitals, there are additional concerns. Is the population served by the hospital increasing or decreasing in age? Is the market segment growing or shrinking? Is there any future event that would change the demographics?
There are also questions unique to community hospitals. The Emergency Medical Treatment and Active Labor Act (EMTALA) requires hospitals to treat any patient who stumbles into an emergency room regardless of insurance status or ability to pay. If admitted, a patient can't be transferred unless accepted by another facility or discharged by a physician. An understanding of the percentage of uninsured patients is critical. Less obvious is a determination of the percentage of unpaid claims attributable to under-insured patients who cannot to pay their deductibles.
Medicare provides a Disproportionate Share Hospital Adjustment (DSH) for hospitals that serve a significantly disproportionate share of low-income patients. The Affordable Care Act assumed that DSH hospitals would have a newly insured population and significantly reduced DSH payments. Unfortunately for many community hospitals, the uninsured population was joined by the under-insured population, with decreased Medicare payments, and regulations, which are being revised.
What Is the Projected CAPEX?
Again, it begins with standard due diligence. Does the physical plant need improvements? Is there deferred maintenance? Would additional investments improve performance? In healthcare, regulatory changes, technological advances and new forms of competition may all affect CAPEX requirements.
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