A physician practice (“Practice”) is a medical practice comprised of two or more physicians organized to provide patient care services (regardless of its legal form or ownership). Practices are valued for outright purchase or for physician group alignment strategies such as direct employment or a professional services agreement.
Buyers of Practices typically acquire a control position because a minority position limits the buyer’s ability to dictate distributions, set employment terms and compensation, influence operations or leverage buyer attributes post-transaction. Historically, the typical buyer of a physician practice has been the local acute care hospital or health system; however, with healthcare reform and increased consolidation activity, private equity firms, managed care organizations, health plans and large physician organizations are entering the market for opportunities.
A Practice’s payor mix, encounter mix, and patient demographics has defined its reimbursement under the traditional fee-for-service model; however, new trending models (e.g. bundled payments and value-based models) are changing the traditional paradigm by making physicians more financially accountable for the quality and efficacy of their patient service recommendations. These new models are being heavily supported, discussed and implemented throughout the country due to healthcare reform policies and initiatives.
Volume metrics are typically analyzed at the individual provider level. Key risk factors such as age of the physician, maturity of practice, capacity constraints, competition in the market and ratio of owner versus employed providers help establish a credible and risk adjusted growth forecast for the Practice.
The most important expense factor in appropriately assessing the value of a physician practice is post-transaction provider compensation. A comprehensive analysis of post-transaction provider compensation generally includes a review of historical compensation and productivity measures. Benchmarking provider compensation to available survey data can serve as a useful tool to gain insight into the performance of a Practice; however, the most comprehensive method to assess provider compensation is to perform a full FMV analysis. At VMG Health, we have qualified staff that can assist in provider compensation analyses.
Other considerations for Practice valuations include the recognition and analysis of any in-office ancillary service lines (i.e. diagnostic imaging, lab, therapy, etc.). If a Practice incorporates in-office ancillaries, a physician owner’s compensation will likely include earnings from these services. In conjunction with an analysis of provider compensation, a careful analysis of the earnings capacity of any in-office ancillary service lines can help determine whether the Practice can generate excess earnings for a buyer.
VMG has skilled professionals who are able to identify these critical valuation and transaction issues with the single- and multi-specialty physician practice industry.