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Medical Practice Sales, Appraisal and Financing

Medical Practice Sales, Appraisal and Financing

It is no secret that the acquisition of medical practices is a big players game. Hospitals and large physicians groups have increased as solo and small practices have started to shrink. The consulting firm Accenture predicts that only 33% of phyisicans remain independent this year, versus 43% in 2009 and 57% in 2000.

Though the solo and small practice market is getting smaller, there has been a rise in medium-sized groups with six to 50 physicians. In 1997 only 13% of practices were medium-sized. That number jumped to almost 18% by 2005.

And then there's the issue of affordability. The prices of medical practices are wide spread, with most practices selling between 1 times to 4 times their annual net earnings, and 20% to 80% of their annual gross collections, according to Medical Practice Brokers. If you are in the market for an internal medicine practice, on average they sell for about 35% of their annual collections.
Though it is hard to count exactly how many smaller practices are merging or buying each other, it is clear that the opportunity could be a lucrative one.

"There's no one size fits all approach to buying a practice," says Kenneth T. Hertz, FACMPE, principal with the MGMA Healthcare Consulting Group in Alexandria, Louisiana. "I've seen practices buy charts for $1 or $2 per chart from another practice, or if a doctor wants to retire, he can sell everything for $25,000. It's such a volatile market, so purchases must be based on strategic decisions."

Hot markets and specialties

Majdi says California, Florida, and New York continue to be major markets to purchase a medical practice. "Some are concerned about the Affordable Care Act (ACA) and other health reform. But there are going to be more beneficiaries in the system, which means more money," he says, adding that the lack of primary care providers in larger areas have made them the most sought after practices. Other specialties that are seeing a lot of attention include pain management and optometry, Majdi says.

"In California, there is a lot of money in pediatrics and primary care. Five or six years ago, we couldn't give away a pediatrics practice, but now we have sold nine in the past 18 months."

With the current shift in healthcare toward managed care for chronic illnesses, with Patient-Centered Medical Homes and Accountable Care Organizations being closely monitored models, primary care practices are being becoming hot properties.
"The primary care market will be important because of the strategies in keeping patients at a lower level of care to bend the healthcare cost curve. This makes primary care a critical piece of the future," says Hertz.

The value of a practice

There is a lot more to consider when it comes to putting a value on a medical practice beside money. "The decision is not just financial, but should be based on the strategic value to you and your organization," Hertz says.

Practice owners need a solid checklist and a thoughtful and thorough approach to evaluating a medical practice. When trying to quantify a practice's value, make sure you look at:

The growth rate of new patients
Reimbursements and fee schedules for private payer and Medicare contracts
The physicians' reputations in the practice and the community
How long have other employees been with the practice
Debt, accounts payable and receivable, collections, and the revenue cycle
Tangibles like furniture, fixtures, and equipment
The age and usability of technology, including computer software and electronic health records (EHRs)

Be clear on what you are trying to gain, and that makes valuing a little easier. "Do you want to gain market share or patients? Do you want to solidify your place in the market or mark your presence next to a competitor?" Hertz says.

If you are looking to combine two practices, evaluating how they will be compatible is essential. Both practices might have different work philosophies and strategic goals, and this is important to predict how they will operate together in the future. Make sure buyers and sellers agree on how physician and staff payment and bonuses will operate, what operating hours will be and which technology systems will be used.

"One practice may have a vision of being profitable, balancing work and personal time, while taking on all patients. Another group might only want to take 10 patients a day and work three days a week. They may not be compatible," Hertz says.

A diamond in the rough?

Trying to determine the value of a practice may lead to discovering an undervalued or underperforming practice that may be available at a price that's hard to pass up. "Understand why it is underperforming and what needs to be done to turn it around. That depends on the situation," says David Greene, president of Medical Practice Brokers, located in Colorado Spring, Colorado.

There are some elements of a practice that cannot be easily fixed, such as older equipment and furniture, hard to use EHRs and other technology, bad location and a lot of competition, Greene says. "However, if the practice is underperforming because of excess expense in a couple of areas, a competent practice manager can turn a practice around by changing staff or by improving collections," he says.

The underperforming practice should still fit into your overall goals. On top of the challenges involved with buying a practice, trying to fix a broken one is added pressure. "Anytime a practice is going to merge with another, you have to make sure the entities are compatible. If there have been no new patients in the past five years, that's a problem," Hertz says.

Different ways to purchase

Determining whether you want to buy a practice's assets, or the entire corporation is the first thing to decide when negotiating. "Most buyers of a medical practice want to buy the assets, not the stock. If you buy the selected assets you don't assume the liabilities—the debts associated with the practice," says Ronald Finkelstein, ABV, CPA, principal-in-charge and leader of the Healthcare Services Group of Morrison, Brown, Argiz & Farra, in Fort Lauderdale, Florida.

Small-practice owners often have less capital to buy out a practice all at once. There are many types of buying models including an outright sell, bank financing, or paying the seller in installments based on the cash flow of the practice, called an earn out. Though rare, some buyer negotiations may involve paying "good will," or additional money based on the perceived value of the practice over the tangible assets.

Physicians can also buy a practice with "sweat equity," according to Finkelstein, by working for a physician who is looking to retire and transition his business to another physician. "The buying doctor will be able to retain as many patients as possible by learning the practice and gaining the trust of patients and the community," he says, adding that with this type of transition plan, the buying doctor can negotiate payment over 6 to 24 months while the retiring doctor leaves the practice.

Antitrust issues for small practices

Even small practice owners who are looking to buy another small practice must consider antitrust issues. Consequently, the smaller the practice and community, the more at-risk practices may be for violating antitrust laws.

"Doctors with small practices might think that antitrust laws don't apply to them, but anytime there used to be two businesses and now there are one, there is a loss of competition," says Steve Cernak, of counsel at Schiff Hardin in Ann Arbor, Michigan.

Government agencies are looking closer at healthcare businesses to deter antitrust violations because of the rising costs and public attention attached to the industry. Though it is rare for a small practice to be audited by the Federal Trade Commission, the U.S. Justice Department, or their own state for violating antitrust laws, a violation could be costly. Officials can block medical practices from merging or break them apart, which could cost thousands of dollars in legal fees.

Cernak says that in rural communities where healthcare services may already be scarce, there is a risk of raising antitrust flags because a merger might eliminate services. "Even if there is some concern about loss of competition, there could be issues. Think about how big the market is—that's the denominator. Then what place in the market is your business and another business is the numerator," Cernak says.

He also stresses the importance of being able to quantify the value of the merger for patients, so that if there is an audit, a practice owner can show how it benefits the community. "You have to be clear on what are the benefits for the patient. If there are cost savings, will it be passed on to the patients? Will it be an easier commute?" Cernak says.

 

Written by Transition Consultants

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