From a distance, healthcare deals look like any other merger and acquisition (M&A). You pull financials, normalize EBITDA, review trends, and model returns. But the moment you step into skilled nursing, long-term care, or the ancillary businesses around them, the numbers start behaving in ways that don’t match traditional M&A logic.
The financial statements may balance out. The EBITDA may look reasonable. The projections may have a clean narrative. But beneath that surface, healthcare earnings are shaped by reimbursement formulas, regulatory constraints, cross-entity allocations, and operator assumptions that often do not survive the first year after closing.
This is why a Quality of Earnings (QoE) in this industry is not about confirming numbers. It’s about rebuilding the economics of the business from the ground up—and separating operator optimism from operational reality.
Two Very Different Worlds: Asset-Based Facilities and Ancillary Businesses
Healthcare M&A can be divided into two distinct categories, and each behaves differently:
- Asset-based operating businesses— skilled nursing facilities (SNFs), assisted living facilities (ALFs), and long-term care communities (LTCs). Asset-based transactions look like quasi-real-estate deals: buyers focus on beds, physical plant, local demand, and the potentialto run the building better than the seller.
- Ancillary businesses— pharmacy, DME (durable medical equipment), transportation, therapy, physician groups, staffing agencies, food services. Each ancillary has its own business model, compliance rules, and QoE profile.
Most deals blend these two worlds. That’s where the complexity begins, because no two make acquisitions, generate earnings, or carry risk the same way.
The Core Problem: Operators Don’t Do Diligence—They Do Underwriting
What happens in practice is simple: operators often price these deals based on future value— what they believe they can turn the facility into— not what it actually is today.
Everyone in the space recognizes the usual assumptions: “we’ll bring up census,” “we’ll reduce nursing costs,” “we’ll cut agency reliance,” “Medicaid rates are going up,” “we’ll improve Stars,” “we’ll clean up A/R and Medicaid pending,” “we’ll fix payer mix,” or “we’ll fill the specialty beds.”
Some of these statements may be true; others may be completely unrealistic given market constraints, regulatory barriers, and financing limits.
A QoE has one job: to test whether any of it is actually possible.
The Feasibility Question: Can the Turnaround You’re Pricing Actually Work?
Most nursing facilities are sold on potential, not performance.
QoE forces the buyer to confront feasibility: has census ever been higher in the last five years? Are nearby competitors running higher occupancy, or is the region simply oversupplied? Is the hospital referral pattern supportive, or has it shifted permanently? What does it cost —in capital expenditure, marketing, and payroll—to make the building competitive? How long can operations be sustained at the current rate structure before cash runs out? How realistic is a rate increase from the state, and how long will it take? Will specialty units fill, or are they vacant because the clinical base isn’t there?
Operators often talk about “bringing a building back.” QoE models whether the math of that comeback works—or whether it requires capital the buyer doesn’t have.
Why Earnings in Healthcare Rarely Match the P&L
This is the part of healthcare deals that outsiders underestimate: the reported EBITDA almost never represents economic reality. And operators often inherit someone else’s accrual-based optimism. Here are a few reasons why:
1. Reimbursement distorts revenue.
Medicare PDPM rates hinge on coding accuracy, functional scoring, and NTA capture, while Medicaid CMI resets often trail the building’s true acuity by months. Medicare Advantage payments may cover only 40–80% of PDPM rates, yet they’re usually lumped into overall “Medicare revenue.” Supplemental payments—UPL, directed payments, QIPP, and state incentives—can boost EBITDA on paper, but they can disappear the moment ownership changes hands.
2. Cash ≠ accrual in this industry.
Medicaid pending can create A/R balances that will never convert, while MAC recoupments and ADR/TPE audits can reverse revenue six or twelve months later.
Managed care underpayments accumulate quietly, and in many facilities, accrual profitability is a mirage built on receivables that are structurally uncollectible.
3. Data systems don’t align.
The EHR says one thing. The billing system says another. The general ledger says something else entirely. QoE has to rebuild revenue from the sequence of census → MDS → billed → collected, not from financial statements.
4. Capital expenditure neglect hides future cash needs.
Underinvested roofs, HVAC, call systems, flooring, med rooms—these become immediate post-acquisition capital drains that were never reflected in “trailing EBITDA.” A nursing home can look profitable simply because its owner deferred maintenance for too long.
Untangling the Intercompany Web:
Healthcare structures are typically built around a PropCo, an OpCo, a management company, and one or more ancillary entities. This creates a web of distortions that QoE has to unwind:
- Rent may be artificially high or low depending on how the seller wants the OpCo to appear
- Management fees may represent true service costs, or simply be vehicles for withdrawing profit
- Management companies often run at a loss because they absorb expenses that should sit in the facilities
- Ancillary entities may generate the real margin, but only because of ownership structures or referral patterns that may not survive the deal
- Intercompany loans can hide which facilities are subsidizing others
- Shared bank accounts or third-party collection accounts can obscure cash flow entirely.
A facility can show clean EBITDA while its management company quietly bleeds cash to keep it alive. The QoE’s job is to restack these flows so that buyers can see the facility’s true stand-alone economics.
The Portfolio Trap: When 5 Bad Buildings Ruin 10 Good Ones
Many acquisitions come packaged, with 10, 15, even 20 buildings at a time. What routinely happens is predictable: a handful of buildings run well, a few operate at breakeven, and several lose money every month. Meanwhile, the seller’s structure often hides the fact that the “good” buildings are propping up the “bad,” masking the true performance of the portfolio.
A QoE has to untangle that reality by identifying which facilities are sustainable on their own, which ones require heavy capital expenditure or regulatory remediation, and how much cash drain a buyer should expect in Year 1.
Without a consolidated QoE, portfolio deals can slide toward receivership.
The Ancillary Profit Strategy: Real Margin, Real Exposure
Often, buyers don’t acquire SNFs for the SNFs’ profit—they acquire them for the ancillaries they feed: pharmacy, DME, laboratory, therapy, transportation, and billing entities.
Those entities can produce a strong margin, but only if referral relationships are intact, ownership rules allow control, fee structures are compliant, and operational dependency survives the change of ownership.
QoE must distinguish between durable ancillary economics and arrangements that collapse under regulatory scrutiny.
When Diligence Fails, the Outcomes Are Not Theoretical
This industry has seen strong operators fail not because they lacked experience, but because they bought buildings based on assumptions that simply weren’t economically possible.
The pattern is common: optimistic underwriting, no true diligence, earnings that never materialized, cash burn accelerating faster than expected, deferred tax payments, regulatory issues piling up, and facilities ultimately sinking into insolvency.
QoE is not about pessimism. It’s about preventing buyers from inheriting a disaster.
The Bottom Line: QoE Is How You Separate Real Opportunity from Risky Optimism
Healthcare M&A isn’t complicated because accountants want it to be. It’s complicated because reimbursement systems distort the numbers, cash doesn’t follow accrual logic, entity structures obscure true profitability, portfolio dynamics hide weak facilities, and operators often price deals based on future rather than present reality.
A healthcare-specific Quality of Earnings rebuilds the truth, so buyers know exactly what they’re acquiring—and operators know exactly what they’re selling. In this sector, that clarity isn’t optional. It’s the difference between a successful acquisition and a very expensive mistake.
This material has been prepared for informational purposes only, and is not intended to provide or be relied upon for legal or tax advice. If you have any specific legal or tax questions regarding this content or related issues, please consult with your professional legal or tax advisor.
