At the Becker's Hospital Review 4th Annual Meeting in Chicago on May 10, Kevin Florenz, director of capital asset valuation services at VMG Health, and Colin McDermott, senior manager at VMG Health discussed why physician practices are such a hot commodity now and what steps need to be taken to acquire one properly.
Mr. McDermott said for those who have been in the healthcare industry for a long time, physician practice transactions are déjà vu. From 1993 to 1995, the number of hospital-owned physician practices tripled. However, many of those practices suffered significant operating losses, which led to a mass movement of divestiture in the late 1990s and early 2000s.
Now, practice acquisitions are heating up again due to differing forces, Mr. McDermott said. Physicians are looking to sell due to reimbursement risks, high costs of electronic health records and the increasing costs of operating the practice. Hospitals are looking to buy due to healthcare reform, a lack of call coverage and a "defensive" mindset to be one step ahead of competitors.
From 2000 to 2010, there has been a 32 percent increase in hospital employment of physicians, and roughly 20 percent of physicians today are hospital employees. Mr. McDermott does not see this trend slowing down. "Larry Cash, CFO of [Franklin, Tenn.-based] Community Health Systems said they have acquired 5,700 physicians, and one-third of their growth comes from the physician practice acquisition strategy."
For hospitals looking to buy a physician practice, Mr. Florenz said there are many factors at play, many of which can be complicated. Fair market value of the practice is essential, and there are three common business valuation methods: income approach, cost approach and sales comparison approach. The asset approach considers the cost of replicating a comparable asset; the cost approach focuses on the tangible and intangible assets; and the sales comparison approach estimates the practice value by comparing the value of similar assets in a free market.
An extra point to note with the sale comparison approach is the concept of economic obsolescence, or when a physician practice decreases in value due to external factors.
"If you buy a car and drive it off the lot, the car dealership will not buy it for the same price they just sold to you," Mr. Florenz said. "There is an economic obsolescence."
Mr. McDermott said for those who have been in the healthcare industry for a long time, physician practice transactions are déjà vu. From 1993 to 1995, the number of hospital-owned physician practices tripled. However, many of those practices suffered significant operating losses, which led to a mass movement of divestiture in the late 1990s and early 2000s.
Now, practice acquisitions are heating up again due to differing forces, Mr. McDermott said. Physicians are looking to sell due to reimbursement risks, high costs of electronic health records and the increasing costs of operating the practice. Hospitals are looking to buy due to healthcare reform, a lack of call coverage and a "defensive" mindset to be one step ahead of competitors.
From 2000 to 2010, there has been a 32 percent increase in hospital employment of physicians, and roughly 20 percent of physicians today are hospital employees. Mr. McDermott does not see this trend slowing down. "Larry Cash, CFO of [Franklin, Tenn.-based] Community Health Systems said they have acquired 5,700 physicians, and one-third of their growth comes from the physician practice acquisition strategy."
For hospitals looking to buy a physician practice, Mr. Florenz said there are many factors at play, many of which can be complicated. Fair market value of the practice is essential, and there are three common business valuation methods: income approach, cost approach and sales comparison approach. The asset approach considers the cost of replicating a comparable asset; the cost approach focuses on the tangible and intangible assets; and the sales comparison approach estimates the practice value by comparing the value of similar assets in a free market.
An extra point to note with the sale comparison approach is the concept of economic obsolescence, or when a physician practice decreases in value due to external factors.
"If you buy a car and drive it off the lot, the car dealership will not buy it for the same price they just sold to you," Mr. Florenz said. "There is an economic obsolescence."
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