Who's Buying Hospitals for Sale?
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When you think of buying commercial property, you probably envision offices, warehouses, flex industrial space, or apartment complexes. Seldom do hospitals and other medical facilities make that list.
However, hospitals are businesses that are collectively worth more than $1.3 trillion (yes, that's a “t”) in the US alone, and have incredible revenue-generating potential.
The last few decades have seen a growing trend of private owners buying healthcare facilities and hospitals for sale. But what does this mean for US healthcare and the overall economy as a whole?
Let's take a look at the hospital real estate market and see what all the buzz is about. We'll take a look at major players in the hospital industry and talk about how buying a hospital works.
How Does Hospital Ownership Work?
First, let's talk a bit about the structure of hospital ownership in the US. Non-government-owned hospitals fall under two categories: for-profit and non-profit.
#1 – For-Profit Hospitals
For-profit hospitals are owned by an investment group or larger holding company. Like other types of for-profit corporations, investor-owned hospitals are owned by shareholders and governed by a board of directors.
Private equity hospitals are for-profit because the board operates them for the benefit of investors.
#2 – Non-Profit Hospitals
The majority of hospitals in the US are non-profit and have an administrative board that answers to members, which are usually community individuals, hospital physicians, and group representatives.
The main difference is that non-profit hospitals do not generate profits for shareholders but give back additional capital to the community.
Is Private Equity Buying Hospitals for Sale?
In the last few decades, the total share of for-profit hospitals owned by private equity groups has risen to about 30%. In 2022, private equity saw the second-largest volume of deals in the healthcare facilities market.
Even though private equity still owns a minority of hospitals, its recent buying activity has left a marked effect on the US healthcare industry. According to Forbes, private equity firms bought over 570 physician groups between 2016 and 2020.
Despite what many might believe, private equity-owned hospitals are not necessarily more unstable compared to non-private-equity hospitals. In fact, private equity can actually increase hospital financial performance by cutting costs and streamlining administration.
Why Buy a Hospital?
Lots of people might not think of buying hospitals for sale when they think of investing in commercial space, but they can be incredibly profitable. Based on a 2016 study, over 45% of hospitals turn a profit, with the top 2.5% profiting nearly $2,500 per patient discharge. Those are 2016's numbers, too; they're most likely even higher now.
Moreover, hospitals make for a solid commercial real estate investment because healthcare demand is relatively inelastic, making hospitals recession-resistant. In fact, hospitals' employment share actually increases during economic downturns.
More generally, healthcare real estate, like hospitals, medical warehouses, clinics, and rehab centers are some of the best investments because they often have tenant retention rates as high as 80%.
Who Owns the Most US Hospitals?
Of the 6,129 total US hospitals, about 5,157 are privately owned. Of those 5,157, about 2,798 are non-profit and about 1,235 are for-profit. The federal government only directly owns about 206 hospitals.
Further, 3,357 non-federal hospitals are part of a larger hospital system. The single largest hospital system in the US is Nashville-based HCA Healthcare, which owns 210 hospitals. The second and third largest systems are Universal Healthcare Systems and CommonSpirit Health, which own 180 and 164 hospitals, respectively.
What's the Biggest Money-Maker for Hospitals?
Perhaps unsurprisingly, hospitals make the majority of their operating revenue from providing patients with healthcare services. The average hospital's annual net patient revenue is about $207 million.
All other things being equal, the larger the hospital, the higher the hospital's net patient revenue. Hospitals in Northeast and Western states also tend to have higher net patient revenues.
How Do You Buy a Hospital for Sale?
As you might expect, you'd have to have extremely deep pockets to outright buy a hospital or build a new one. Assuming an average per-bed cost of $200,000, a 500-bed hospital would cost about $100 million. These high costs are one reason why many medical groups lease commercial medical space instead of buying.
Investors can pursue real estate financing for hospital purchases and construction through a wide range of both public and private channels. For example, California has the Healthcare Expansion Loan Program II (HELP II) to provide capital for small, non-profit community hospitals. These loans can be used to purchase land for construction or to buy completed facilities.
Regardless of where you want to buy a hospital for sale, we highly recommend you work with a commercial real estate broker. A broker can help you negotiate any sales contracts and help you analyze property financials to find the most desirable properties.
Hospital Operating Costs
Hospital operating costs differ drastically depending on the city and state. However, you can break down hospital operating costs into three main categories.
#1 – Administrative
Hospitals have extensive management costs given the size and scope of their operations. Most states heavily regulate hospital quality and safety, and the board of the hospital is responsible for making sure they adhere to requirements. Studies have found that administration accounts for about 25% of hospital expenditures.
#2 – Supplies
Supplies are another major hospital cost and include things like medicine, medical equipment, office equipment, beds, sheets, hospital food, and more. Between 2017 and 2021, average hospital spending on supplies grew 6.5% per year to nearly $39 million.
#3 – Wages
Wages and salaries are the third main pillar of hospital operating costs. In 2021, the average hospital spent about $103 million on wages and salaries, and average hospital salary expenditures grew 4% a year between 2017 and 2021.
Should I Invest in Hospitals?
Investing in the healthcare industry, including hospitals and hospital groups, is almost always a good idea: Healthcare venture funds generated a 22.5% return in 2021, and an increasingly aging population is projected to spend billions on healthcare in the next few decades.
Additionally, the development of advanced technologies, like medical robots and AI, stand to vastly improve hospital productivity and efficiency.
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