Independent day hospital valuations for Australian private day hospitals and day surgeries

Day hospitals are valued on maintainable earnings: the profit the facility can sustain once non-recurring, non-commercial and owner-specific items are adjusted out, a process called normalisation. Those earnings are capitalised, or projected cash flows discounted, at a rate reflecting the facility's risks. The sector work is deciding what maintainable means when the right to operate is granted by a regulator, the price is set in contracts with insurers and the work is brought by doctors who can move their lists. See what is maintainable earnings.

How a day hospital earns, and what it does not own

A day hospital earns facility fees: the charge for the theatre, the recovery bed or chair, nursing, consumables and implants. The surgeon and the anaesthetist bill for their own professional services, and the sample consent form in the Department of Health, Disability and Ageing's second-tier default benefits guidelines lists both among the providers who may bill a patient separately from the facility. Services Australia states that for private patients in a public or private hospital the Medicare benefit is 75 per cent of the Schedule fee for services and procedures, and that this does not include hospital accommodation and items such as theatre fees and medicines. The facility's revenue is therefore funded outside Medicare, and pricing a day hospital from a surgeon's billing history confuses the two.

Licence, registration and declaration do not simply transfer

State and territory governments license and regulate health facilities, and in Victoria, New South Wales and Queensland a change of operator is a regulated event. In Victoria the proprietor of a registered day procedure centre may apply to transfer the registration, and the Victorian Department of Health assesses the incoming proprietor under section 93 of the Health Services Act 1988, including fitness and propriety, financial capacity, management and staffing, and the suitability of the premises and equipment. It has 60 days after receiving the application and fee to tell the applicant of its decision, or until 28 days after receiving the last information it requests, whichever is later.

In New South Wales a person taking over a private health facility applies to transfer the licence under section 15 of the Private Health Facilities Act 2007, with the current licensee's consent. The applicant must satisfy the Secretary of NSW Health that it, or its directors and managers, are fit and proper and that the facility can be conducted in accordance with the licensing standards. NSW Health advertises the application publicly and states that approval takes approximately 8 weeks from a completed application.

In Queensland a licence can be transferred only if the chief health officer grants an application, which only the proposed transferee can make, with the licensee's written consent. The chief health officer may grant it only if satisfied the transferee is a suitable person to hold the licence, and an application not decided by the end of a statutory period, which starts at 60 days after it is received and can be extended, is taken to be refused. The Act also provides that an instrument purporting to encumber a licence is of no effect.

A valuation therefore treats the licence as something the business carries only while its operator remains approved, not as an asset that changes hands with the equipment. Whether a sale of shares in the licensed entity engages the same process depends on the state's legislation and should be confirmed with your lawyer.

A second approval sits above the state licence. To receive private health insurance benefits for hospital treatment, the facility must be declared a hospital by the Minister under section 121-5 of the Private Health Insurance Act 2007. In deciding whether to declare or revoke, the Minister must have regard to matters including the nature of the facility, whether state or territory approvals have been obtained and whether accreditation requirements have been met. A declaration brings a hospital provider number, a place on the public list of declared hospitals and the ability to receive benefits from insurers, and the Commonwealth Department of Health, Disability and Ageing (the Department) states that a declared hospital must email it with updated details, including ownership and any new or amended licence or accreditation. A valuation assumes nothing about the declaration's continuity until the buyer has confirmed it with the Department.

Accreditation is the third approval. The Australian Commission on Safety and Quality in Health Care states that health regulators require all public and private hospitals and day procedure services to be accredited to the National Safety and Quality Health Service (NSQHS) Standards, with accreditation awarded for two or three years. Victoria makes accreditation, or formal engagement in the process, a requirement of registration, NSW makes engagement with the national scheme a licence condition, and the Commonwealth looks to accreditation both when declaring a hospital and when deciding second-tier default benefit eligibility. The Commission adds that a significant change such as a change in ownership may require an out-of-cycle assessment, so we ask where the facility sits in its cycle, what the last assessment found and whether a transaction would bring a reassessment forward.

Insurer agreements and default benefits

Revenue from privately insured patients is driven by contracts. Where a hospital has a negotiated agreement with a patient's insurer, which the Department's guidelines call a hospital purchaser-provider agreement, the agreed terms apply. Where it does not, the Private Health Insurance (Benefit Requirements) Rules 2011 require the insurer to pay at least a minimum accommodation benefit for most episodes and, for a hospital eligible for second-tier default benefits, an amount not less than 85 per cent of the average charge for the equivalent episode under that insurer's negotiated agreements with comparable private hospitals in the same state.

Eligibility is conditional: the hospital must be declared, be accredited against the NSQHS Standards, not bill patients directly for the minimum benefit, provide for informed financial consent and submit Hospital Casemix Protocol data with every claim for second-tier default benefits. It is granted hospital by hospital for a period ending 60 calendar days after the accreditation is due to expire. The Department places hospitals that treat patients only for periods of not more than 24 hours in their own comparison category, so a day hospital's default benefit is benchmarked against what that insurer pays comparable short-stay hospitals in the state.

The valuer's question is how much of the earnings depend on each agreement, and what happens to volume and price if one is renegotiated, lapses or is renewed on different terms. The Department's 2024 Private Hospital Sector Financial Health Check lists input costs not matched by revenue increases and workforce shortages among the factors behind variable earnings, and records that no episode-level cost data was available for day hospitals. That is one reason we work from the facility's own contracts and activity rather than a generic benchmark. See government funding exposure and business value.

Implants add a second regulated stream. The Department states that the law requires insurers to pay a benefit, subject to conditions, for a device on the Prescribed List of Medical Devices and Human Tissue Products used in hospital treatment, that the List sets the minimum benefit, and that the patient might pay the difference where that minimum is less than the product's cost. A facility whose lists use listed devices is therefore analysed on its device margin as the List changes, not on gross device revenue.

The proceduralists: sessions, concentration and doctor-owners

A day hospital does not hold patients the way a general practice does. Patients arrive because a surgeon, gastroenterologist, ophthalmologist or other proceduralist books them onto a list, with an anaesthetist where the procedure needs one. Under section 121-5 of the Private Health Insurance Act 2007, hospital treatment is treatment provided by, or under the management or control of, a person authorised by the hospital to provide it, so access to the theatres is a matter between each proceduralist and the facility. Victoria's transfer guideline asks an incoming proprietor for a medical credentialing policy, including scope of practice, and for details of any Medical Advisory Committee.

What a valuer tests is concentration and tenure: how many cases and how much theatre time come from the top few proceduralists, how long each has had lists at the facility, whether each also operates elsewhere, how evenly sessions are spread across the week and what happened to volumes when a doctor last reduced their lists or left. Where doctors own shares, we separate their return as owners from the volume they bring as users, and test whether the fees and session terms they receive match what an unrelated doctor would be offered. See patient and referral concentration.

Theatre utilisation, the share of available theatre sessions and recovery capacity actually used, links all of this. A facility near capacity has limited room to grow without further capital, and one with spare sessions may be exposed to the loss of a single list. Competition matters too: the Department's 2024 Health Check found that the increased share of same-day separations in private hospitals has largely been taken up by overnight hospitals rather than a shift to day hospitals, so a proceduralist's alternatives include overnight hospitals as well as other day hospitals.

Theatres, fit-out and the property

The building is part of the earning capacity. Victoria assesses the design, construction, fittings and equipment of the premises against the Australasian Health Facility Guidelines and states that a transfer may not be approved until a non-compliant facility is made compliant. NSW assesses those guidelines and the use of the premises as a Building Code of Australia Class 9a health care building, or Class 5 for chemotherapy and renal dialysis premises treating day-only patients. A purpose-built theatre suite is a capital asset the buyer must keep compliant, and a building that falls short is a cost the buyer carries.

Tenure is assessed too. Victoria requires the proprietor to show security of tenure: where it does not own the land, it must describe its leasing arrangements and confirm they will continue for the period of registration, which is ordinarily two years. NSW asks whether the applicant will be an owner or lessee and for a copy of any lease. Where the building sits in a separate property entity, which may be owned by the same doctors, the operating business is valued on a market rent, and the lease term, reviews and options become part of the operator's risk. See premises and lease terms in healthcare valuations. HPNA values the operating business and interests in it, and does not value real property; a registered property valuer values the land and building separately.

From earnings to value

Capitalising maintainable EBITDA (earnings before interest, tax, depreciation and amortisation) produces enterprise value, the value of the operating business before financing. Equity value is what remains after deducting interest-bearing debt and debt-like items and adding surplus assets. Because theatre equipment must be replaced, the earnings measure is tested against sustainable capital expenditure, and EBIT (earnings before interest and tax) is sometimes the better guide.

Working capital, the funding tied up between delivering a service and being paid, reflects receivables from insurers and patients, consumables and implant stock, and creditors, and a normal level is assumed to come with the business. Where shares or units are valued rather than the whole business, the interest matters: a minority stake that cannot set session terms, direct distributions or force a sale is typically worth less per share than a controlling one, and the report states which basis it uses. A shareholders agreement with its own exit formula may govern what is paid even though that is not market value.