Assessing Intangible Value in a Physician Practice Acquisition

Due in large part to concerns over healthcare reform an declining reimbursement rates, physicians are increasingly looking for opportunities to sell their practices to hospitals and work as employees. Similarly, hospital systems are interested in acquiring key practices to solidify or expand their provider networks. These transactions are clearly subject to the regulatory restrictions of commercial reasonableness and Fair Market Value (“FMV”) imposed by the Stark Law and the Anti-Kickback statute (“AKS”), as well as the Internal Revenue Code Section 501(c)(3) regulations if the hospital is a not-for-profit entity.

Many practices have very low or sometimes negative projected post-transaction earnings after adjusting for the physician’s anticipated post-transaction compensation. Accordingly, an Income Approach valuation methodology, such as the Discounted Cash Flow (“DCF”) method, will generally result in zero or a very low value for the practice. In such cases, the Coast Approach will be utilized instead. However, the problem arises when the Coast Approach results in substantial values being attributed to intangible assets, such as physician workforce, that are not supported by an appropriate level of net cash flow needed to provide an economic return to the hypothetical buyer.

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