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Medium M&A Profitability Financial Analysis

Hospital Mega Merger

#Healthcare
ProHub Comment

This case requires candidates to analyze a healthcare M&A opportunity by calculating net operating income (NOI) for both hospitals independently, identifying cost-saving synergies from the merger, and determining whether the combined entity would achieve a target NOI. The case tests both financial modeling skills and understanding of hospital-specific dynamics like service line complementarity and economies of scale.

Estimated Time 15 minutes
Difficulty Medium
Source ROSS
50 / 100
In the face of increasing healthcare costs and decreasing margins our client, the board of trustees for St. Scorekeepers Hospital, is exploring whether a merger would combat market forces. Another local health system also located in Washtenaw county, Mount Ricks Hospital, is a potential target and our client would like to evaluate whether a merger would be beneficial to both parties to combat market forces. What are your thoughts?

Clarifying Information

  1. Both hospitals have 2 different hospital facilities, all of which are in Washtenaw county
  2. St. Scorekeepers Hospital has the following departments: emergency, cardiology, OBGYN, and orthopedics
  3. Mount Ricks Hospital has the following departments: emergency, radiology, dermatology and oncology
  4. Brainstorm: Variable costs and fixed costs - FCs: capital expenditures, employee salaries and benefits, building maintenance, and utilities
  5. VCs: health care worker supplies, patient care supplies, diagnostic and therapeutic supplies, and medications
  6. Overhead: legal, IT, HR, and finance departments
  7. SK saw a total of 150,000 patients last year, RI saw of 200,000 patients
  8. Avg. revenue/patient – SK=$150 and RI = $100
  9. Total Revenue (SK) = 150,000 x $150 = $22.5M
  10. Total Revenue (RI) = 200,000 x $100 = $20M
  11. VC: Scorekeepers and Ricks is both X% of average revenue per patient
  12. SK = 150,000 x ($150 x 20%) = $4.5M
  13. RI = 200,000 x ($100 x 15%) = $3M
  14. FC: Scorekeepers and Ricks is both X% of average revenue per patient
  15. SK = 150,000 x ($150 x 40%) = $9M
  16. RI = 200,000 x ($100 x 30%) = $6M
  17. Overhead: SK = $4.5M and Ricks = $9.25M