Hospitals and health systems nationwide embarked on a significant buying spree of physician practices over the last few years.
Overall, hospitals acquired more than 30,000 practices between 2012 and 2015 alone, indicating the number of hospital-owned physician practices increased by 86 percent. As of mid-2015, the latest data available, one in four practices was hospital-owned.
Behind those 30,000-plus acquisitions are thousands of valuations, a key part of the process that is required by law. During an acquisition, the valuation component can make or break a deal. It is critical to have a compliant business valuation that follows the many rules and regulations surrounding transactions. Here, a team of experts from Principle Valuation, a member of Prism Healthcare Partners, based in Chicago, shares 14 key things to know about physician practice valuations. Based on their experience conducting hundreds of physician valuations, the group's insights include an overview of the process, common issues that can complicate or prolong a valuation and trends in how valuations have changed in the past 5 years.
An overview of physician practice valuations
1. Regardless of the form of the transaction or the assets purchased, under the Stark and Anti-Kickback Statutes, the hospital or health system cannot pay an amount in excess of Fair Market Value for the assets.
2. Health systems typically purchase practices outright, assuming 100 percent ownership of the practice, although they can purchase some other level of equity ownership. In most cases, along with purchase of the practice, a future compensation or employment arrangement with the physician/owner is negotiated as part of the final transaction.
3. Specific assets considered when valuing a practice include real estate, furniture and equipment, medical records and workforce. Occasionally, a tradename will also be valued, but this would only occur if the practice's name was going to continue to be used after the acquisition. While there tends to be desire for physicians to sell their accounts receivable, most hospitals shy away from this, as historical aging and collection policies tend to be inconsistent, creating a high risk of collection.
4. A purchaser should decide which assets they will acquire from the practice, assess the overall future compensation of the physicians, commission a valuation to determine the allowable Fair Market Value of the practice and negotiate with the physicians to meet at or below the Fair Market terms. The purchaser should retain valuation experts and legal counsel to verify the transaction complies with Stark and Anti-Kickback statutes.
Understanding the valuation process
5. The practice group's specialty has a significant impact on the valuation, and it must be analyzed with like specialties. Other valuation considerations include the age of the practice, age of the physicians and clients.
6. The valuation process involves assessing operations and the outlook for the practice's future. An appraiser reviews the historical financial statements and makes adjustments for any items that are nonrecurring or non-business related. Valuation experts then prepare a forecast of operations based on information provided by management and the appraiser's knowledge of the industry. This forecast, generally speaking, is agreed upon by both the buyer and seller as being a fair earnings expectation for the practice over the foreseeable future.
7. Gathering data and getting both parties to agree on earning expectations tend to be the most time consuming parts of the process. This is especially true of profitable practices that may have value in excess of what physical assets may suggest. Further, few physician practices maintain extra financial staff to gather the necessary information, and it takes time to gather the data from the practice.
8. The valuation expert usually provides an Information Request List at the time of the proposal, but this important piece of the process can also be time consuming. It is likely not new for the health system, but more than likely new to the physician or group. The more health systems communicate clearly and directly with the physician or group, the better the chances of a successful deal.
9. The process of valuing medical records considers whether they are electronic, paper-based or some hybrid of the two. Appraisers generally value medical records on a cost-to-recreate approach, including the average time and materials needed to maintain a record.
Potential complications and recent valuation trends
10. No matter what the specialty, market value varies and should be considered as a range as opposed to a specific point.
11. Location, and specialty by location, matter significantly. Costs in rural areas are generally less than urban areas. But organizations often need to entice physicians to work in a rural setting, which can ultimately drive their costs to be equal, or even more, than those in an urban area.
12. If the doctor or group has various investments within the practice, such as owning real estate or holding minority positions in other businesses like an ambulatory surgery center or imaging center, it can complicate the valuation. Service line carve-outs of ancillary businesses from the practice can also add complexity and time to the valuation.
13. In the past five years, asset purchases have been on the rise.
14. Physicians increasingly want to partner with hospitals to receive the hospital's better insurance reimbursement rates and have more access to various carriers, reduce or streamline the burdensome business management of the practice that independent practitioners face and have an employment contract with an established entity.
Valuation is a required component of any physician practice acquisition. To ensure a smooth and compliant transaction, make sure you partner with an appropriate valuation firm that brings ample industry knowledge and experience with the many rules and regulations, along with a track record of success.