Valuing a Medical Practice for Physician-Hospital Integration
Part of the difficulty in calculating the economic impact of these deal structures is the post-sale employment period and physician compensation. The key aspect in viewing these situations is to look at return on equity rather than return on labor of the selling doctor. This can fundamentally change the way a medical practice is valued to different potential buyers. Under an income approach to ascertain what a medical practice is worth, the profitability and how it is measured (earnings, cashflow, etc) is of great importance. Many of the hospital integration deals we have observed do not consider the financial profits of the practice and their present value as would be calculated in a discounted cashflow method.
Appraisal is essential for a Physican-Hospital Integration
When a doctor obtains an appraisal it is important for them to understand whether the valuation will be used to value the practice based on the constraints of the proposed transaction, or whether a fair market value assessment to a third party buyer will be made to use as a comparative tool. In some instances, physician sellers have discovered that they could potentially obtain far more in a sale to a fair market value buyer (e.g. another physician, medical group) than to enter into an integration with a hospital or health system. A proper medical practice appraisal can be used as an applied tool to evaluate the available options, other potential options, and their economic impact to the selling doctor.