Finding Value in a Troubled Economy

The healthcare industry is generally thought of as “recession proof,” as the need for healthcare services doesn’t wane with the health of the economy. Although this is generally true — people do not stop getting sick in a down economy — people can lose their jobs, defer medical spending in favor of paying for day-to-day necessities, or seek work in new geographies. Unlike other industries, healthcare is very geographically focused. Because of this, even small fluctuations in a population can have a significant impact on the financial well being of a healthcare provider. Pair this with downward pressure on reimbursement and increasing operational costs, and even “recession proof” businesses can find themselves in financial difficulty.

Although there are varying levels of distress, there may come a point when a healthcare business owner must decide whether to continue operating the business and try to improve profits; close the business to avoid further losses; or sell the business to a buyer that may be able to operate it more successfully. It may seem counterintuitive, but distressed businesses are prime acquisition targets for management companies and/or health systems. These strategic buyers usually have experience turning around distressed businesses for a profit or have existing capacity constraints that would be alleviated through such an acquisition. Unfortunately these buyers are often precluded from paying more than fair market value for such an acquisition due to Stark, anti-kickback and/or private inurement concerns, and payment for strategic value elements must usually be avoided. For an unprofitable or marginally profitable business this may lead to the incorrect conclusion that fair market value is limited to the value of the furniture, fixtures and equipment. This is especially untrue when the business has valuable intangible assets such as a certificate of need.

Overview of Certificates of Need

Certificate of Need (CON) programs are designed to limit healthcare facility costs by restricting the capacity of a given type of health service — generally outpatient or long-term care. By restricting capacity within a geography, existing facilities are thought to experience higher utilization rates, and therefore, lower costs per unit of care (e.g., per patient, bed, case, etc.). CON laws are administered on a state by state basis, and according to the National Conference of State Legislatures, 36 states currently have some form of CON program in place.

Applications for CONs are frequently contested by existing healthcare providers in an attempt to preclude new competition and preserve their existing business volumes. Every state is different with regard to the parameters of the CON grant, with some going so far as to designate the specialty, number of ORs, square footage, etc. of the entity to be operated under the grant. Under strict guidelines an entity may be required to obtain a CON for the addition of services, facility expansion or relocation or change in ownership.