Valuing Medical Practices
Medical Practice Acquisition has gone through interesting changes over the years. A few decades ago, hospital and health systems were known to pay exorbitant sums for medical practices under the auspices that the physicians would bring enormous revenue to the hospital. It was, literally, buying admissions and procedures. Medicare frowned on that, and in governmental terms, moved quickly to squash the practice. Just one more “F” added to the growing definition of fraud and abuse in Medicare parlance.
The next iteration of practice acquisition then saw the pendulum swing so far in the other direction, it nearly flew off its’ axis. Now, we see the usual and customary of practice acquisition as being the value of the furniture and movable fixtures and equipment in the medical office – that’s depreciated value, by the way. So, today, a busy solo IM practice with 2,000 patients and perhaps 100 admissions annually, and thereby generating perhaps $600,000 or $700,000 annually, might have a value $30,000 to $60,000.
Many hospitals have begun to look at practice acquisition in fire-sale terms. After all, how can you go wrong buying practices if you’re buying several hundred thousand dollars in cash flow and EBIDTA for literally pennies on the dollar. Well, you might be surprised. Practice acquisition is not just the financial transaction. In the competitive marketplace, practice acquisition goes to brand definition and brand differentiation. How and why may one practice enhance your brand while another may cause it harm? What are your definitions of brand enhancement? Most physicians with a reasonably successful practice are liked by their patients, but does that mean their patient management reputation will actually help your brand?
Sitting around the board room table arguing about a physician’s demeanor, patient reputation or bedside manner can be a frustrating experience. And, it is mostly a no-win experience. However, there are ways to create a more objective measure practice fit with your hospital/health system brand. Markoff Modelling, with roots in financial Cost Effectiveness Analysis, can provide both a quantitative and a qualitative measure to any medical practice. This approach can give an organization greater control over the various factors that lead to a consistently positive, and managed, brand image predicated on definable factors enumerated by organizational leaders. And, with practice acquisition, regardless of price, aren’t you most interested in how that acquired practice will enhance the image and reputation of your organization?