Focused Hospital Investments: Psych Hospitals, Micro-Hospitals, Surgical Hospitals, Specialty Hospitals & Other Hospital Investments – 5 key points

by McGuireWoods LLP

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference focuses on opportunities for investment in micro-hospitals and other specialty hospitals.


Investors’ and providers’ interest in micro-hospitals and other specialty hospitals has grown as the delivery of healthcare has increasingly shifted from large, full-service acute care hospitals to smaller, lower cost, and more focused settings, according to experts who spoke on a panel at McGuireWoods 15th Annual Healthcare and Life Sciences Private Equity and Finance Conference on February 21.

Experts included Samuel Cappellanti, President, Bellwether Group, LLC and Jeffrey Peterson, Partner, McGuireWoods LLP with Rex Burgdorfer, Vice President, Juniper Advisory as the panel moderator.

Here are five key points from the panel discussion.

1. Facilities such as micro-hospitals, psychiatric hospitals and other specialty hospitals have been touted as having the capacity to offer lower cost, patient-centric care that is more highly tailored to the applicable populations’ needs. Micro-hospitals, in particular, can play an important role in areas where there is not enough demand for a full-sized/full-service hospital and can serve as a backup to community hospitals in other areas. When part of a larger healthcare system, these micro-hospitals can serve as a portal into the healthcare system for higher acuity patients.

2. A significant amount of recent activity in the specialized hospital field has involved partnerships and joint ventures among specialty operators, health systems, real estate investment trusts, and private equity funds. For example, private equity-backed Emerus has partnered with large health systems such as Dignity Health and Baylor Scott & White Health. REITs have often been involved in such deals helping to defray some of the initial capital costs.

3. Many larger hospitals and health systems have faced challenges due to economic pressures and uncertainty from reimbursement programs, such as potential changes with the 340B drug discount program and site-neutral payment policies, healthcare-related budget cuts in the President’s proposed Federal budget and continued emphasis on value-based care coupled with declining fee-for-service rates. This pressure not only affects existing hospitals and health systems, but it makes them re-think where to spend their limited capital in order to best serve their patient populations and fulfill their missions.

4. The new Secretary of the U.S. Department of Health and Human Services, Alex Azar, indicated that he is open to rethinking the ban on new physician-owned hospitals. If these ownership restrictions are lifted, it could present significant opportunities in the hospital sector for private equity investors in partnership with physician investors.

5. It appears that in response to the surge in micro-hospitals, the Centers for Medicare and Medicaid Services (CMS) issued guidance in late 2017 on the statutory definition of “hospital” and whether a hospital is “primarily engaged” in providing inpatient services. This guidance could present certain growth challenges to micro-hospitals and smaller specialty hospitals. CMS clarified that a hospital must have two inpatients at the time of survey in order for surveyors to directly observe the actual provision of care to inpatients. Additionally, CMS clarified that the use of benchmarks for average daily census and average length of stay will be two primary factors utilized to determine whether a hospital is “primarily engaged” in providing inpatient services. These hospitals and investors in this space will want to pay particular attention to these factors, among the others that CMS states it will consider in such an analysis.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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