MEDICAL PRACTICE APPRAISAL
How much is my Texas medical practice worth?
As Texas Medical Practice Valuation Experts, Tinsley Medical Practice Brokers follows different medical practice valuation methodologies depending on whether the physician is selling a medical practice to another physician, assessing value for a divorce proceeding, or if practice partners simply want to go their separate ways.
There are several pathways to follow when putting a value on a medical practice. The FMV (fair market value) approach – what other practices in the area sold for recently – often works great for single-family homes but can be an ineffective wild goose chase when comparing medical practice models. Finding true comparables is often challenging if not impossible.
Another approach is The CFV (cash flow valuation) or income approach, a very important component for business investors. While projecting future cash flow works well for many business models, CFV is of little help to a typical medical practice owner. Medical practices do not retain earnings. Most have little cash left after paying for overhead expenses and physician compensation. Physicians tend to absorb what’s left after expenses as their compensation. Unless a physician earns substantially more than the fair market rate for his or her specialty and the area, that money is physician compensation, not profit. That’s why figuring in goodwill – the ability to make profits – is such a major component in physician practice valuation.
A physician practice is unique and as such, it is important to know the nuances of physician practice when conducting a thorough practice valuation. This includes understanding revenue streams and what they comprise (ex. CPT coding) and unique overhead issues (ex. one-time costs versus non-operating costs). It also includes understanding potential healthcare restrictions on the valuation, such as:
- Physician ownership in an entity involving “Designated Health Services” – “Stark Laws” [3] and allowed exceptions
- Stark[3] definition of fair market value and commercial reasonableness
- Perceived physician inducements to refer patients is provided in the deal structure – Anti-Kickback Statutes (“Fraud and Abuse Laws”)’ and allowed “Safe Harbors”
- IRS Private Inurement
Stark what? What is Stark Law?
Stark law[3], is actually three separate provisions, governing physician self-referral for Medicare and Medicaid patients. The law is named for United States Congressman Pete Stark, who sponsored the initial bill.
Physician self-referral is the practice of a physician referring a patient to a medical facility in which he has a financial interest, be it ownership, investment, or a structured compensation arrangement. Critics of the practice allege an inherent conflict of interest, given the physician’s position to benefit from the referral. They suggest that such arrangements may encourage over-utilization of services, in turn driving up health care costs. In addition, they believe that it would create a captive referral system, which limits competition by other providers. [3]
How to Avoid Unpleasant Surprises
If one isn’t versed in restrictions, many physicians incur unpleasant surprises after the fact when the transaction has all ready been completed. Tinsley Medical Practice Brokers bring a new layer of understanding in the following key business scenarios:
Selling a Texas Medical Practice: To another physician, acquisition by a hospital, or acquisition by other entity
Buying a Texas Medical Practice: Profit is often made on the buy when taking all financial areas into consideration
Retirement/Withdrawal: Buy/sell agreement states buy out value based on FMV (fair market value)
Divorce: To assist in determining value to the marital estate and related inclusion of personal versus enterprise goodwill
Practice Merger: To assist in the distribution of initial equity interests and/or distribution of sales proceeds
New Owner/Partner Buy-In: If buy-in will be based on FMV; services also include structuring the buy-in and any related tax issues
Litigation: Valuation usually needed with regard to physician contract disputes and damage calculations
The Income approach offers the most realistic possibility of arriving at a conclusion that is appropriate for the regulatory environment in the healthcare industry.[1] A knowledgeable appraiser, such as Tinsley Medical Practice Brokers, can incorporate the special circumstances often present for a particular transaction into the valuation model assumptions and select a valuation multiple that is appropriate for the degree of risk in the investment. Market methods pose significant risk. Details of a particular sales transaction in a database or public record are rarely known and without such details, the appraiser cannot properly assess the appropriateness of the sale in comparison. The special restrictions on the use of market data contained in the Stark[3] regulations further complicate the market approach’s use.
Valuation is an increasingly critical component of the various transactions among health care entities and referring providers. The Stark regulations make it clear that even a “proper” valuation “does not establish the ultimate issue of the accuracy of the valuation figure itself.”[2] Certainly, a valuation prepared by someone without the requisite knowledge of the regulatory framework offers even less protection for the parties to a particular transaction. The result of a bad method can be liability under the AKS, False Claims Act, Stark [3], or Administrative Sanctions such as exclusion from the Medicare Program. Attorneys do well to assist their clients in selecting qualified appraisers and certified valuation consultants such as Tinsley Medical Practice Brokers who understand the regulatory parameters of “fair market value” in the medical practice arena.
[1] See, e.g., Medical Practices: A BV RX (peer-reviewed), Journal of Accountancy November 2005, Mark O. Dietrich, CPA/ABV; Zeroing In On The Value Drivers In Healthcare; Shannon Pratt’s Business Valuation Update, January & February, 2006 Don Barbo, CPA/ABV, Carol Carden, CPA/ABV, Mark O. Dietrich, CPA/ABV
[2] 69 Fed. Reg. 16053
[3] www.starklaw.org