Valuing The Business Of A Physician Practice

Driven by uncertainties in the healthcare regulatory environment, declining reimbursement, and a desire by health systems to enhance patient care and reduce costs, the acquisition of physician practices by health systems has occurred at a rapid pace over the last decade. 

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From the physician perspective, alignment with a health system through a physician practice sale can lead to many potential advantages, such as:

Income Stability: As an employee of a health system, physicians can shed the business risk that accompanies being a business owner.

More Time for Patient Care: Physician time formerly spent on corporate planning and other administrative tasks that accompany owning a business are typically alleviated post-acquisition, which allows doctors to focus more of their time on patient care. 

Aid In Succession Planning: As many younger physicians choose to become employees of health systems rather than enter into private practice, existing physician practice owners may struggle to find the necessary next generation of physicians to join their medical practice.  The sale of a medical practice prevents this struggle from occurring. 

While health system acquisitions comprise the majority of physician practice appraisals HealthCare Appraisers encounters, we are also engaged to provide physician practice appraisals for several other types of transactions, including physician to physician medical practice sales, health system divestitures of physician practices, friendly PC arrangements, and joint ventures. 

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The expansive regulatory and case law environment encompassing the healthcare industry requires an FMV appraiser with a thorough understanding of the ever-changing requirements when preparing a physician practice appraisal.  

In many instances, HealthCare Appraisers is engaged in critiquing a physician practice appraisal prepared by a “competitor” or Fair Market Value firm that does not possess the expertise required for the healthcare industry. 

During the majority of these medical practice appraisal reviews, our valuation experts uncover major flaws in the competitor’s business appraisal.  To avoid these FMV pitfalls, HealthCare Appraisers takes a customized approach to each physician practice appraisal. 

Approaches to Value of Physician Practices

There are three generally accepted approaches to valuing a physician practice, which can broadly be defined as follows:

Income Approach: A general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that convert anticipated future economic benefits into a single present amount.

Market Approach: A general way of determining a value indication of a business, business ownership interest, security, or intangible asset using one or more methods that compare the subject to similar businesses, business ownership interests, securities, or intangible assets that have been sold.

Asset (or Cost) Approach: A general way of determining a value indication of a business, business ownership interest, or security using one or more methods based on the value or cost of the assets.

No single valuation approach is appropriate in all situations, and when considering the relevance of each approach, the appraiser must take into account many factors to arrive at a final FMV of the business.  Although one valuation approach may be found to be more appropriate in a particular situation for determining the FMV of the doctor’s practice, advocating a single approach, only to exclude consideration of the others is not consistent with the standards for professional health care practice appraisal. 

While at HealthCare Appraisers we consider all three approaches when valuing physician practices, we have observed different thoughts on this approach outlined in articles and FMV of medical practices completed by many other valuation firms. 

Confusion on this topic is attributable to:

  • Ambiguity in healthcare regulations
  • A narrow viewpoint of Internal Revenue Service texts regarding physician practice appraisals
  • A lack of understanding of financial theory, and misapplication of valuation principles.

At HealthCare Appraisers, our specific focus on medical practices and the healthcare industry, paired with our nearly two decades of operating history has equipped us with the depth and experience of knowledge needed to navigate the complex nuances of physician practice appraisals.  This experience extends past the complex regulatory and case law environment described above, into valuation theory issues surrounding consideration of post-acquisition physician compensation and consideration of the presence of workforce-in-place and other intangible asset value in the absence of positive cash flow.

Speak to A "real" physician Practice Expert

HealthCare Appraisers believes that most physician practice businesses do have value above their tangible assets and that a supportable position will be one that is based on sound logic, informed judgment, and the economic realities of the current marketplace.  This is a position that has been proven by thousands of healthcare business valuations completed HealthCare Appraisers and their FMV experts.  As a top Fair Market Value healthcare consulting firm, we have partnered with some of the most well-regarded health care attorneys, physician practices, health systems, and practice management companies across the country in preparing FMV opinions for physician practices. 

Whether your dental practice is for sale, or you are looking to optometry practice buy-in, the FMV experts at HealthCare Appraisers have unmatched experience handling every type of health care business appraisal.  As you search for a strategic partner, we ask that you consider entrusting the healthcare business valuation professionals at HealthCare Appraisers to provide you with timely and cost effective solutions to your physician practice appraisal needs.

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