A Value Creation Plan (VCP) is how the consolidator defines the opportunity to create value for the enterprise. There are two parts to VCP: Arbitrage and Margin Expansion.
Arbitrage is the value that is generated through the acquisition of hospitals under one platform by offering a low multiple to the seller and after accumulation, a certain number of hospitals. The entire enterprise will be sold to another larger consolidator, usually with a bigger multiple.
Margin Expansion is a process of optimization of the top line, bottom line and scalability of the enterprise by using various tactics. Top line initiatives are often referred to as “Growth Levers”.
These may include: Marketing Improvements, Fill Rate Management, Appointment Reminder System, and Forward Booking.
Bottom line optimization is usually achieved through: Vendor Management, Procurement Optimization and inventory Management, Labor and COGs (Cost of Goods Sold), and Control.
Margin expansion tactics:
In the absence of a well-defined Value Creation Plan (VCP), the organization is not focused on creating value beyond Arbitrage. The hospital’s opportunity to create additional value that will be acquired by the Business Development Team will not align with the VCP and the downstream impact will diminish margin expansion opportunities. Margin expansion is the most difficult part at the hospital level and if the VCP is not incorporated into Strategic Filter and not guiding the quarterly and annual planning, the enterprise will lack the discipline of executing on the goals set out by the board and most likely will follow multiple “Shiny Objects”.