Industry Overview

Industry Overview

With more than $1 trillion in revenue, the U.S. hospital industry is enormous. There are approximately 5,200 acute care hospitals in the U.S. of which about 3,000 are community- based non-profits. Approximately 1,000 are public/government-owned non-profits and the remainder are for-profit facilities. The community-based non-profits and the public/ government-owned non-profits are StoneBridge Healthcare’s primary target category.


Hospitals also operate in a unique, highly political environment that includes extensive regulation, heavy sensitivity to government reimbursement rates, a front-and-center position in their communities and intimate involvement in life-and-death issues for their customers. Hospitals play a vital role in the overall health of the community. Hospital costs are inextricably linked to the environmental conditions of the communities in which they operate. This necessitates a specialized category of expertise from hospital operators, in order to improve healthcare delivery and service outcomes.


Hospitals have extremely high fixed costs, usually in the 50 percent to 60 percent range. They are also very labor intensive with labor costs ranging from 38 percent of expenses in some for-profit hospitals to 65 percent in some non-profits. Hospitals are capital intensive with significant needs for new technology and equipment.

Combining all these elements means two things.

  • First, small hospitals are generally not very creditworthy because it is difficult to spread their fixed costs over a small base.
  • Second, due to their high fixed costs, the bottom lines of all hospitals are sensitive to changes in volume.

Three key ratios provide insight into the credit strength of a hospital:

  1. Profitability
  2. Leverage
  3. Liquidity


These ratios are interdependent. A hospital with a great deal of cash and very little debt can keep going for many years even if its profitability is low. Conversely, a hospital with reasonable profitability and a very high debt load can be in great danger if it does not have much cash. And a hospital with low liquidity and low profitability can be in danger even if it does not have much debt, simply because its poor credit allows it very little access to capital — if anything goes wrong, it can deplete cash very rapidly.

Transaction Process


Once initial negotiations are completed, a letter of intent (LOI) is drafted. An LOI is essentially a term sheet that is not binding on either party, except that it usually requires the seller not to negotiate with anyone else and requires both parties to keep all discussions confidential. Nonetheless, the fact that the LOI has been signed frequently leaks to the news media.


The signing of the LOI means that the buyer and seller have agreed on a price and deal terms, all subject to due diligence. Due diligence starts when the parties begin negotiating a definitive agreement, which is essentially the contract of sale. Unlike a letter of intent, a definitive agreement is very binding. It is extremely unusual for a deal to fall apart after a definitive agreement has been signed. Due diligence and negotiations for the definitive agreement typically take about 90 days.



Due diligence related to the purchase of a hospital is an extensive undertaking involving financial, legal, market and facility considerations. There are three goals:

  1. Identify expense reduction opportunities. Is the hospital supply chain under control? How is staffing managed? Are IT costs reasonable? Is new equipment needed? How about a parking garage?

  2. Identify revenue enhancement opportunities. Can volume be improved? Are reimbursement rates reasonable? Is the revenue cycle working well? Are there other service lines to enter? Are surgeons with an interest in an ambulatory surgery center treating insured patients there and sending their uninsured patients to the hospital, where they also practice? What is the status of physician relations and recruitment?

  3. Identify red flags. These are deal killers; problems that simply cannot be fixed or are too risky. These might include environmental contamination, a heavy dependence on a large group of physicians whose departure would decimate the hospital, regulatory problems related to physician contracting or violation of patient rights.

The specific areas of due diligence that are typically examined include, but are not limited to, the following:

  • Environmental
  • Equipment/Assets
  • Expansion/Consolidation
  • Financial
  • Governance
  • Human Resources/Benefits
  • Information Services
  • Insurance/Risk Management
  • Labor Cost/Staffing
  • Legal/Contracts
  • Marketing
  • Public Relations
  • Purchasing
  • Real Estate
  • Regulatory/Managed Care
  • Revenue


The purpose of StoneBridge Healthcare’s due diligence is to determine if the hospital can be turned around. There are certainly hospitals that cannot be saved no matter who is running them and no matter what the purchase price. However, the StoneBridge Healthcare team has seen hundreds of examples over past decades where distressed hospitals that were sold or merged, looked like an A-credit or better a year later.


Target hospitals for StoneBridge Healthcare are distressed facilities that can be fixed. Given the collective experience and industry expertise of the team, the company is confident it will be able to determine if a hospital can be saved. If it can’t, it will move on to the next opportunity.


At the end of due diligence, StoneBridge Healthcare will be able to determine if the hospital can be turned around, acquired and be part of our strategy to manage or sell acquired facilities.


The definitive agreement contains all the terms of the deal and is a binding contract. It defines what assets will be bought and what liabilities will be assumed. Unless StoneBridge Healthcare buys a for-profit hospital, all the deals it completes will be “asset deals”, which means the company will be buying the assets of an organization and assuming most of its liabilities, except for debt, but will not be buying the corporation itself. Non-profit hospitals, as mentioned previously, are membership organizations and do not have stockholders. The membership of a non-profit cannot be purchased because they are not transferable securities. In a typical deal where a for-profit entity buys a non-profit hospital, the hospital entity that is selling keeps its legal status, usually its board members, and depending on the deal terms, keeps its cash and its debt. It pays off the debt and if there are any funds left over, it simply becomes a foundation. It does not own the hospital anymore. The buyer does. The definitive agreement defines all of these terms and contains various representations, warranties and indemnifications to the buyer. It is very important from a risk profile point of view to understand that many distressed hospitals are not in a position to make payments after closing because they have no money left over. So, for example, having a very strong representation from the seller that it will pay for any required refunds if money is owed to Medicare for prior years’ cost reports is worthless if the seller has no money. It is therefore important to conduct appropriate due diligence to determine if there is a problem before the definitive agreement is signed. StoneBridge Healthcare’s principals have been involved in conducting due diligence on hundreds of hospitals.



Once the agreements are signed, there are state regulatory requirements to meet before closing. Some require certificates of need; some require review by the state Attorney General and the transfer of dozens of licenses. This all can take from three to six months. StoneBridge Healthcare plans to sign consulting/management agreements with each hospital as soon as the definitive agreement is signed, and in some cases, when the LOI is signed. The purpose of these agreements is to get a head start on fixing the hospital’s problems. Since the due diligence process will identify the problem areas, there is usually no need to wait to start the process, which means that by the time StoneBridge Healthcare assumes ownership, it expects the run rate of the hospital to be substantially improved.


StoneBridge Healthcare’s turnaround approach does not rest on proprietary strategies. Rather it is built on superior execution of well-known strategies and leadership’s accountability for results. Further, we will ensure the hospitals continue to deliver high-quality, patient- centered care to the communities they serve. StoneBridge Healthcare is confident in its ability to deliver this high-quality management, and first-class health care because of the outstanding track record of its team.


The starting point for the team is putting proven metrics into place to measure its progress. The three main areas of focus are assuring proper staffing, effective revenue cycle management and effective supply chain monitoring. Additional steps members of the StoneBridge Healthcare team have typically taken in those areas, as well as other issues they have frequently addressed, include:

Patient-Focused Staffing

  • Focus staffing on patient care and allowing clinicians to work at the top of their license to improve employee satisfaction

  • Improve employee retention

  • Implement effective system for staffing based on patient volumes

  • Assess the quality, knowledge and performance of the current C-suite, and make changes if needed

  • Negotiate physician contracts based on realistic Fair Market Business Standards

  • Rally employees around the importance of successfully turning around the hospital for the good of the whole


  • Employ a strong medical director to improve claims documentation and communication with health plans
  • Deploy a continuous improvement model for revenue cycle processes
  • Place significant focus on proper and sustainable coding systems
  • Implement initial entry documentation of all available insurance coverage
  • Enhance collection of required patient co-pays


  • Eliminate many unneeded purchased service contracts
  • Use technology to better track supplies
  • Maximize market-moving GPO strategies Additional Areas
  • Reduce or eliminate overhead
  • Consider outsourcing non-core services
  • Increase quality scores through improved patient satisfaction and higher quality of care
  • Strengthen relationships with emergency services in the community
  • Identify underperforming programs, determine root causes and repair
  • Consider adding high-margin service line capabilities
  • Standardization to eliminate waste and reduce errors
  • Care models that address appropriate levels of care throughout patient continuum
  • Improve patient satisfaction and physician satisfaction while improving quality