An Investigation of the Variables Incorporated Into the Purchase Price of Not-For-Profit Hospitals as Compared to the Free Cash Flow Accounting Valuation Model

Date of Submission


Document Type


Degree Name

Doctor of Science in Management Systems (Sc.D.)




Steven Shapiro

Committee Member

Lynn Ellis

Committee Member

Margaret Frank

LC Subject Headings

Voluntary hospitals--Prices--United States, Valuation

Call No. at the Univ. of New Haven Library

AS 36 N290 Mgmt. Syst. 1997 no.3


Not-for-profit (NFP) hospitals, a predominant subsystem of the U.S. health care system, are being acquired by investor owned (IO) hospital corporations in record numbers in response to an intensely competitive health care environment. Acquisition prices (PRICE) negotiated establish amounts IO hospitals corporations are required to remit to communities or newly-created charitable organizations in exchange for NFP hospitals.

The intent of this study was to identify characteristics of NFP hospitals associated with PRICE to develop a NFP hospital pricing model. The following factors were considered: (1) free cash flow valuation (VALUE), (2) managerial efficiency (i.e., length of stay, case mix index and occupancy rate), (3) capital investment requirements and (4) relative size. NFP hospital social responsibility factors, measured by income levels, concentration of Medicare patients and case mix index, were also included. A NFP hospital pricing model provides a basis to evaluate PRICE which may be useful in future acquisitions to stakeholders of NFP hospitals and I0 hospital corporation management. Government regulators, concerned with the effect of NFP hospital acquisitions on the health care system, could use such a model for public policy decisions.

A supplementary purpose of the research was to evaluate NFP hospital operations through identification of factors relevant in the determination of VALUE and the detection of short and/or long-term economies or diseconomies of scale. To increase profitability, hospital administrators could modify operational policies to emphasize factors which emerged as significant in the determination of VALUE.

A cross-sectional study was conducted with a sample of 32 acquisition transactions involving 39 NFP hospitals. Acquisitions sampled occurred between 1992-1996 across 14 states. Multiple regression models of PRICE and VALUE were developed to test valuation, economies of scale, managerial efficiency, social responsibility and capital investment hypotheses. Other variables tested on an exploratory basis included: teaching status, percentage of outpatient revenue, percentage of institution acquired, population size, geographic location and acquisition date.

Relative to NFP hospital operations, higher VALUE was observed where NFP hospitals were more efficiently managed (i.e., occupancy rate was higher). In addition, slight diseconomies of scale were detected in short-term NFP hospital operations controlling for an inflationary factor. These results could be valuable to NFP hospital management in development of operational strategies. More recently acquired NFP hospitals also seemed to have higher VALUE which could be reflective of an industry-wide increase in cash flow and/or acquisition of more financially stable NFP institutions over time.

VALUE itself was significant in the explanation of PRICE. Therefore, both managerial efficiency and time appear to have a secondary relationship to PRICE through VALUE. VALUE was, however, consistently lower than PRICE and negative in many cases. This suggests PRICE is adequate compensation for NFP hospitals. As a result, regulators should be recommended to control, not necessarily ban future NFP hospital acquisitions. Also relative to PRICE, economies of scale were detected in NFP hospital acquisitions (i.e., larger hospitals were less expensive on a per bed basis).