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Medical Practice Sales, Appraisal and Financing

Medical Practice Sales, Appraisal and Financing

Why not hire an associate doctor?

Growing a medical group typically involves hiring employed doctors as associates and offering the potential of a practice buy-in after a vesting period.  While seemingly more practical and less risky, this strategy can have pitfalls for the group practice.  The most common effect is a dilution of patients per provider and a drop in productivity resulting in lower margins.  New associates usually do not bring their own base of patients with them.  Hiring a new associate in conjunction with buying the practice of a retiring doctor can have a "one-two punch" effect on revenue and productivity. 

Medical groups need to grow marketshare

Reducing the time to make a new physician employee productive is critical in this market.  Medical groups are increasingly in need of growth strategies to remain competitive with larger entities.   Acquiring smaller physician practices can instantly increase patient volume and drive revenue in a shorter period of time.  Established physicians are able to bring a book of business to the acquiring entity while cutting costs by eliminating duplicated expenses.  Depending on the transition objective of the retiring physician, they can also be retained for part-time and fill-in coverage.  There is also the added benefit of capturing specialty and ancillary service referrals which would normally go to other providers, groups, and hospitals.  The revenue impact can be multiplied as a result, particularly for multi-specialty groups.

How do I integrate the selling doctor’s practice?

Lots of patience.  Patience will pay off for the practice manager and physician owners.  An independent physician may have grown accustomed to running their own practice for many decades.  Integrating their practice into the group does not come without difficulty, but the nimble nature of a group practice is usually a much better fit than a hospital integration.  Providing the selling doctor with some degree of autonomy while making sure their patients are fully integrated is crucial.  Also important is the deal structure, transaction timing, and medical practice appraisal.

What is the investment cost?

Practice valuation and selling price come to mind when considering buying a medical practice.  The reality is that hospitals are paying a pittance for most practices, which makes even a decent offer a much better alternative to the selling doctor.  This allows the group practice to become a competitive force and buy practices at a reasonable valuation, yet not set up the acquisition for failure like a hospital might by low-balling the purchase.  Selling doctors often come to resent the hospital integration because of low valuations and the inflexibility of post-sale physician employment.  The goodwill established by a fair deal can go a long way.  Beyond the initial investment, there will be the cost to pay the selling physician to continue working (if they remain), but this can be arranged on a production-based payment schedule.  Added to the greater efficiencies which can be realized in the acquisition (staff, billing, systems, rent), the group practice can turn a profit more rapidly.  If an acquisition is done in conjunction with hiring an associate doctor, this integration process can happen even faster.

Patient retention when buying a practice

The realization and preservation of value within a healthcare practice largely depends on patient retention.  Patient retention is dependent on internal factors such as the transition of ownership, providers, management, and maintenance of production levels.  It also hinges on external factors such as maintenance of payor contracts, restrictive covenants, and referring sources.  The challenges involved in patient retention may also be affected by the balance of personal goodwill versus enterprise goodwill within the practice.  Most smaller practices exhibit a larger proportion of personal goodwill than other closely held businesses.  The degree to which value is rooted in personal goodwill depends on how the practice is branded, how patients are scheduled to particular providers, and the continuity of patient care.  Regardless of the circumstances occurring among potential parties in a transaction, potential transfer of value or interest in a practice relies on a proper transition plan and handover period.

Written by Transition Consultants

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