SPARROW EATON
1. Target Overview & Investment Thesis
SPARROW EATON is a 25-bed suburban community hospital in EATON, MI with $76.1M in net patient revenue and a 11.5% operating margin. The hospital serves a payer mix of 25.7% Medicare, 2.3% Medicaid, and 72.1% commercial.
Thesis: Turnaround. Our ML models identify $5.6M in annual EBITDA improvement potential from RCM optimization across 5 levers, lifting margin from 11.5% to 18.8% (+736bps).
| Net Revenue HCRIS | $76.1M |
| Current EBITDA COMPUTED | $8.7M |
| Operating Margin COMPUTED | 11.5% |
| Occupancy HCRIS | 34.9% |
| Revenue / Bed COMPUTED | $3.0M |
| Net-to-Gross HCRIS | 47.6% |
| Distress Probability ML | 50.1% |
2. Market Context & Competitive Position
MI has 163 Medicare-certified hospitals with a median operating margin of -5.2%. The target's margin of 11.5% places it above the state median. Among 72 size-comparable peers (12-50 beds), the median margin is -3.5%. The target performs in line with or above peers.
3. RCM Performance Analysis — Comparable Hospitals
Comps selected by bed count (12-50), prioritizing same-state peers. 72 hospitals in the comp set.
| Hospital | State | Beds | Revenue | Margin |
|---|---|---|---|---|
| SPARROW EATON (Target) | MI | 25 | $76.1M | 11.5% |
| TRINITY HEALTH LIVINGSTON | MI | 42 | $200.4M | 15.2% |
| MYMICHIGAN MEDICAL CENTER ALMA | MI | 49 | $142.2M | -5.9% |
| SPECTRUM HEALTH UNITED MEMORIA | MI | 45 | $129.4M | 9.7% |
| DICKINSON COUNTY HEALTHCARE SY | MI | 49 | $126.3M | -4.7% |
| MUNSON HEALTHCARE CADILLAC HOS | MI | 49 | $122.7M | 1.0% |
| MCLAREN CENTRAL MICHIGAN | MI | 49 | $118.9M | -35.3% |
| SPECTRUM HEALTH GERBER | MI | 25 | $116.2M | 16.0% |
| SPECTRUM HEALTH LUDINGTON | MI | 45 | $110.1M | 5.3% |
4. Predicted Improvement Opportunities
Improvement targets set at P75 of comparable peers with 60% gap closure assumption. Coefficients calibrated to published research bands. Total EBITDA uplift: $5.6M (736bps margin improvement).
| Lever | Current | Target | EBITDA Impact | Margin | Ramp |
|---|---|---|---|---|---|
| Net Collection Rate | 93.5% | 97.0% | $1.6M | +210bp | 18mo |
| Cost to Collect | 4.5% | 2.5% | $1.5M | +200bp | 12mo |
| Denial Rate Reduction | 12.0% | 6.5% | $1.5M | +198bp | 12mo |
| A/R Days Reduction | 5200.0% | 3800.0% | $926K | +122bp | 9mo |
| Clean Claim Rate | 88.0% | 96.0% | $49K | +6bp | 6mo |
5. EBITDA Bridge
| Current EBITDA | $8.7M |
| + RCM Uplift | +$5.6M |
| Pro Forma EBITDA | $14.3M |
| Current Margin | 11.5% |
| Pro Forma Margin | 18.8% |
| WC Released (1x) | $2.9M |
6. Returns Analysis — Scenario Matrix
5-year hold, 5.5x leverage, 3% organic growth, 10%/yr debt paydown. Base case uses 100% of predicted RCM uplift. Bull case: 130% uplift at lower entry. Bear case: 50% uplift at higher entry.
| Scenario | Entry | Exit | Equity In | Equity Out | MOIC | IRR |
|---|---|---|---|---|---|---|
| Base Case | 10.0x | 10.0x | $13.4M | $113.6M | 8.46x | 53.3% |
| Base (11x exit) | 10.0x | 11.0x | $13.4M | $129.3M | 9.63x | 57.3% |
| Bull Case | 9.0x | 11.0x | $12.1M | $152.1M | 12.59x | 66.0% |
| Bull (12x exit) | 9.0x | 12.0x | $12.1M | $169.5M | 14.03x | 69.6% |
| Bear Case | 11.0x | 10.0x | $14.8M | $81.2M | 5.50x | 40.6% |
| Bear (11x exit) | 11.0x | 11.0x | $14.8M | $94.1M | 6.37x | 44.8% |
7. Key Risks & Mitigants
| Severity | Risk Factor | Mitigant |
|---|---|---|
| Medium | Low occupancy | At 34.9%, fixed costs are spread over fewer patient days. Mitigant: volume growth is an additional upside lever not modeled in base case |
| High | Elevated distress probability | Model estimates 50.1% probability of financial distress. Mitigant: distressed entry pricing (7-9x) compensates for risk |
8. Data Sources & Methodology Appendix
Data Sources
- CMS HCRIS Cost Reports (Medicare-certified hospitals)
- CMS Medicare Utilization (DRG-level volumes)
- CMS Chronic Conditions (county-level disease prevalence)
- HCRIS multi-year trend data (financial time series)
Comparable Selection
- 72 hospitals with 12-50 beds
- Same-state prioritization (n=73)
- Comp margins: P25=-11.8% / P50=-3.5% / P75=7.5%
Bridge Methodology
- Targets: P75 of comparable peers (60% gap closure)
- Denial: avoidable share = 35% of delta × NPR
- AR: bad debt coefficient = $0.65 per day per $1K NPR
- NCR: 60% coefficient on collection rate improvement
- CDI: 0.75% of Medicare revenue per 0.01 CMI point
Returns Assumptions
- Leverage: 5.5x entry (84.6% debt / 15.4% equity)
- Organic growth: 3% annual EBITDA growth
- Debt paydown: 10% of principal per year
- Hold period: 5 years
Generated by SeekingChartis on April 26, 2026. All predictions use public data only. Confidence intervals calibrated via split conformal prediction (90% coverage target). This memo is for informational purposes and does not constitute investment advice.