The Analysis and Valuation of Health Care Enterprises

by Arthur Gimmy, MAI
Published by Appraisal Institute, Chicago, 1997

Review by Stephen Traub, ASA

Copyright © 1997 Property Valuation Advisors, Newburyport, MA


ACCORDING TO THE AUTHOR, the US spends about $1 trillion annually on health care. Much of this is spent in the nation's 7,500 acute hospitals, 750 psychiatric or mental health facilities, 15,900 nursing homes, 10,000 rest homes, and about 30,000 ambulatory care facilities.

Oriented toward real estate and business appraisers, the book "aims to provide an understanding of, as well as the technical knowledge about this specialized field." Since most health care facilities contain operating businesses, most assignments require allocations of a variety of assets. These include personal property and business components. Intangibles at hospitals include patient lists, provider and physician contacts, staff in place, name reputation, etc.

Common pitfalls appraisers face in medical facility valuation is basing the income approach on a facility's performance unrepresentative of the norm. This can cause error (e.g., the difference between an 82% and 91% operating ratio can result in a net income available for capitalization that is off by 90%).

Facilities analyzed include:

Nursing Homes

Nursing homes brought in about $60 billion in the US in 1994. They are highly regulated, yet the risks of ownership come from newer alternatives such as congregate care retirement centers (CCRCs), assisted living facilities (ALFs) and home care. In the US, 1,715,000 beds exist in about 16,800 nursing homes. About 70% are for-profit, 23% non-profit, and 7% government run. About 67% are skilled nursing facility (SNF) beds, 27% intermediate care facility (ICF) beds, and 6% uncertified. The most common SNF has 90 to 100 beds.

The target group of SNFs, 85+ year olds, is expected to grow. In 1993 this group represented 3.3 million. By the year 2000 this number will grow to 4.6 million.

The nation's 381 chains operate 41% of all nursing home facilities. Two-thirds of SNF beds are paid for by Medicare, Medicaid, or other government program with states and the federal government sharing the expense.

SNFs that receive all Medicaid funding have the lowest profit margins, while those that focus on private pay patients have the largest profit margins. Nevertheless, some SNFs to boost earnings are focusing on sub-acute care. Compared to hospitals at $700 - $1,000 per day, sub-acute beds at a nursing home can charge only $300 - $500 per day. This strategy has boosted revenues and profits at SNFs.


To determine demand, a market analysis must be performed. This includes defining the bounds of the market area. The bounds may be delineated by hospital service areas, driving times, or current locational sources of existing patients. Demographics are important in determining demand: one state uses the following criteria:

-- Beds needed
per 1,000 population
(15 mile radius)
Under 65 -- 1.1
65 to 74 -- 20
75 to 84 -- 70
85 and over -- 200

Occupancy rates are considered key in determining the future outlook. The average occupancy rate in the US is 91%. In my neck of the woods, ME, NH, and MA, occupancies are running 97%. Many New England states currently have moratoriums on adding new beds. Nevertheless, nationwide in 1994, 45 projects were completed at an average cost per bed of $70,000. The average SNF size per bed has grown from 200 SF per bed (now considered cramped) to over 250 SF.

[Nursing] Valuation

With regard to the land, the author states that land is usually purchased on a per bed basis and typically contributes 15% to 20% to the total value. Of prime importance, however, is income and expenses and these are discussed in detail. The author provides tables of each state's absolute dollars spent on overall expenses per bed as well as a breakdown by major expense category. Expense to income ratios also are included. Lastly, risk factor premiums are looked at in relation to average commercial real estate investments in establishing discount or cap rates.

With regard to the Sales Comparison Approach, large variations in SNFs make its use difficult. The best for which one can hope is to establish a range of value. The most common unit of comparison is price per bed, with secondary measures including gross rent multipliers and price per SF.

Assisted Living Facilities (ALFs)

Regardless of age, those capable of independent living will remain independent until impairments with activities of daily living force them to seek assisted living arrangements. ALF costs are significantly less than around-the-clock home health care and SNFs. Moreover, ALFs typically are more home-like than SNFs. Residents with limitations in activities of daily living, therefore, find ALFs a good interim solution between independent living and a nursing home.

A growing area is
Alzheimer's care.

Currently about 40,000 ALF facilities house about 1,000,000. Turnover at ALFs can be a headache, however. Residents on average only stay 22 months. About 42% of those leave because they need more care. Another 16% leave as a result of death. It is prudent, therefore, for management to attract the most healthy individuals. They are more likely to stay for extended periods. This is not easy, however, since demand primarily is from those with multiple limitations.

Because of the specialized needs of ALF residents, ALF design is more expensive than regular apartments. It includes special height door latches, switches, and faucets for those in wheel chairs and a wide range of extras. Double occupancy units, therefore, can be attractive for those with limited incomes, while singles are more predominant in upscale facilities. Typically, units are located around a large common area with TV and recreational activities as well as a central dining facility -- though individual units may contain kitchenettes.

ALF Valuation

Most new projects are sized from 80 to 120 units. Costs (not including FF&E or land) are $70+ per SF. Recent acquisitions have had EGIMs of 2.9 and expense ratios of 55% to 70%.

A growing area is Alzheimer's care. About 10% of all facilities have special freestanding facilities or wings. Nearly 50% of new facilities include units for this group. Where these individuals used to be the "black sheep" of nursing homes -- often isolated or overmedicated -- they now are lodged in smaller scale, more home-like ALF atmospheres. They offer a better quality of life delivered at savings of about $20 per day as compared to a SNF. Facilities for Alzheimer's patients must have more staff than regular ALFs, however. Also special, secure areas and alarm systems must be in place for wanderers. Higher daily or monthly rates and occupancy rates, however, justify these added costs.

Subsequent chapters include valuation of medical office buildings and even business valuation of a family medical practice. The only two gripes I have are the typos: "licencing" and "dap rate" for example, and that some of the data is a year or two older than I would have liked.

Nonetheless, if you are involved or plan to be involved in the valuation of health care facilities, the book is a valuable resource. It provides a summary of state requirements/regulations for ALFs, a glossary of health facility terms, and an expansive bibliography. So as promised, the author fulfills his goal of providing "an understanding of, as well as the technical knowledge about this specialized field."

The book above is available on-line at Amazon Books.

Stephen Traub, ASA, the reviewer, is chief commercial appraiser for Property Valuation Advisors, 63 Hill St., Newburyport, MA 01950. He is a certified general appraiser in NH, ME and MA.

To contact the author of this review, e-mail to: [Mailbox] or contact him at the address above, or call 978-462-4347, or fax 978-465-2708.

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