What's Your Practice Worth Today?

Kenneth J. Terry, MA


September 04, 2009

In This Article

Hospital and Physician Buyers

That hospitals have a growing interest in acquiring practices is the major factor in the market today. The extent of this buying binge -- which reminds some observers of the hospital feeding frenzy of the '90s -- is dramatic. Between 2002 and 2008, the percentage of Medical Group Management Association member practices that were hospital-owned shot up from 24% to nearly 50%, while the percentage of physicians working for hospitals increased from 25% to 37%. Medical Group Management Association members don't include solo or 2-doctor practices, but there's no reason to think that those practices are being sold more slowly than larger groups.

Simons believes that eventually most physicians will work for hospitals. In the meantime, he says, there are some good opportunities for entrepreneurial physicians who want to own practices. And physicians who want to sell their practices may also be able to get a decent price, depending on their specialty, location, and other circumstances.

Because of federal regulations, hospitals cannot pay more than fair market value for practices, and they cannot compensate employed doctors at a higher-than-fair market rate. Paying doctors above that level in expectation of referrals would violate the Stark and antikickback rules, and not-for-profit hospitals embarking on that practice would also violate the private inurement rules of the Internal Revenue Service.

Nevertheless, hospitals often pay more for a practice than another doctor would. This is partly because they can -- as long as they stay within the bounds of fair market value. Also, they may perceive that it is less risky to buy an existing practice with a revenue stream than to recruit a doctor from outside the area and help him or her start a new practice, Simons notes.

Most hospitals also have a strategic goal in buying practices. That objective may be related to referrals, procedures, competition, physician "alignment," or something else.

"The fear of losing referrals and the joy of gaining them still drives hospital decisions," notes La Penna.

On the flip side, practice owners are having a harder time selling partnerships. Fewer young physicians are interested in acquiring a partnership, which entails additional responsibilities and often a hefty buy-in. Also, the differential between associates' and partners' incomes has shrunk in recent years, and it's hard for an owner to ask for much of a buy-in if he's making only slightly more than his physician employees.

The discussions about partnerships are usually quite informal, notes La Penna. "The two doctors never agree that the associate will pay $160,000 and write it down. The senior doc will say, 'You can get a job for $110,000, I'm going to pay you $90,000, with no bonus for 2 years, and then I'm going to give you 25% of the practice.' Nobody valued the practice."

A bigger group that wants to buy a small practice may not hire an appraiser, either, La Penna says. But it generally has a structured approach to purchasing practices and might pay a modest amount for what is known as "goodwill" (see the discussion of practice value components, below). On the other hand, the group might pay the practice owners out over 3-5 years. Hospitals, which typically do formal valuations, "are paying higher, and they're paying now," he says.


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