With medical practices getting lots of pressure to sell out to larger entities—especially hospitals—it's a good time to stop and look at how much your practice might be worth if you put it on the market. This week we had the chance to ask some questions about how medical practices are valued of Sarah Montijo, MHA, practice consultant with the Halley Consulting Group.
Here's what she had to say.
HEALTHCARE DIVE: What factors do you evaluate when you initially consider making an offer to a medical practice?
SARAH MONTIJO: I would argue hospitals and health systems should be striving to only acquire practices with high patient satisfaction. If the public community ratings indicate the practice does not provide high clinical or service quality, the organization will really need to assess if the practice is a good fit with their organization, because a negative image of the practice could translate to a negative image of the health system once employed.
Many organizations will assess the payor mix of a practice when considering an acquisition during the due diligence phase. We always recommend that the hospital or health system complete a pro forma to project how the practice would perform financially once under the umbrella of the organization, so payor mix will come into play here. From a purchase price perspective, depending on the type of valuation, (asset approach, market based approach or income based approach), payor mix may be a factor in the purchase price, particularly with the income based approach.
It is important to note that hospitals and health systems should be consistent in the method they choose. If one acquisition is income based, one is market based and one is asset based, it could lead to scrutiny from the government.
Is there a formula for evaluating a practice's worth on a value per doctor basis? (In other words, is it necessarily the case that a 20-doctor practice is worth more than a 10-doctor practice?) Do you evaluate each doctor's worth case by case?
MONTIJO: Some valuation firms will include workforce in place in the asset approach. Thus the number of physicians will impact the physician workforce price. Physician specialty and how long they plan to continue practicing once acquired could also impact the price. If the physician plans to retire in 6 months, the physician workforce value will be decreased. Also, keep in mind that a higher number of physicians in the practice will likely drive a higher asset value—they'll have more equipment, furniture and the like.
How do you evaluate the value of advanced practice nurses and other non-doctor clinicians in the practice?
MONTIJO: If the purchasing organization has decided on the asset approach and have decided to pay for workforce in place, than the value of the workforce is based on what it costs to recruit and train the same type of staff in the market. It is more difficult to recruit an advanced practice nurse than say a biller, so the "value" of that APN is higher.
What assets are the most attractive when considering an acquisition? Healthy "days in A/R" numbers? Ownership of property such as the medical office where the practice does business?
MONTIJO: This really depends on the strategy. The building (location, look of building, scope of services offered in the building (imaging, lab, and others) may be the driving factor for the acquisition. The size of the practice, meaning number of physicians and advanced practitioners may be the reason for the acquisition. The breadth of services the practice offers in its portfolio may key motivator for the acquisition—do they have multiple practice sites in areas we would like to be in, with a variety of specialists and services offered to meet the needs of the community.
We always recommend that organizations do not purchase the practice's A/R—that the practice continue to collect that on their own after the transition date. In addition, it has been my experience that hospitals and health systems do not purchase the physical space from the practice, but rather lease it from the practice with a term that is coterminous with the employment agreements.
Do you evaluate the practice's goodwill and other intangibles?
MONTIJO: While paying a practice for its goodwill was a very common thing in the past, those days are behind us. Stark and anti-kickback regulations make it very difficult to pay for the intangible assets of a practice.
What factors are likely to lower the offer?
MONTIJO: Many hospitals and health systems will engage a valuation firm to value the practice. The firm will conduct the valuation using one of the methods outlined above. Again, it is important for the organization to be consistent in their methodology, rather than having all three methods analyzed and picking the highest value each time. Depending on the method they chose, different things will impact the value, but not the offer. Once the valuation firm has issued their report, most organizations I have worked with make the offer at the value given in the report.
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