What's Your Practice Worth Today?

Kenneth J. Terry, MA

Disclosures

September 04, 2009

In This Article

What's Included in Goodwill?

The classic components of practice value are hard assets (equipment and fixtures), cash, accounts receivable, and goodwill. Medical buildings and other real estate holdings are not usually included in a practice sale.

Increasingly, physicians and hospitals are also excluding accounts receivable. Physicians can get more out of accounts receivable by working it down themselves, notes Messinger. Many hospitals don't want to deal with such accounts, partly because of liability concerns, Simon comments.

Goodwill is often regarded as the sum of all the intangible assets of a practice, including its reputation and its excess earning power. But many appraisers define goodwill as the practice's "residual value" after calculating the worth of identified tangible and intangible assets. Intangibles may include the physician workforce, staff, location, telephone number, patient charts, and other such definable features as an investment in an electronic health record.

What, then, is goodwill? From the viewpoint that a practice can be worth more than the sum of its parts, goodwill is the premium a buyer will pay for the practice because of its value compared with other practices in the same specialty or its strategic importance. For instance, the practice might include a surgeon with a national or a statewide reputation, or it might be the top pediatric or ob/gyn practice in town.

When Simons and his colleagues valuate practices for hospitals, however, they focus only on identifiable assets to avoid any implication that the hospitals are paying more than fair-market value.

"In markets where there's not a lot of competition, hospitals will generally buy the tangible assets and won't pay anything for the intangibles or goodwill," he says. "In competitive markets, we're trying to keep the value limited to tangible and intangible assets and not have them go off and develop calculations that are pie in the sky."

While La Penna says hospitals pay for goodwill only in exceptional cases, Messinger sees them paying "nominal goodwill" amounts in most purchases. Primary care physicians frequently receive signing bonuses, and hospitals may extend themselves in other ways. For example, Messinger recalls an orthopaedic group that borrowed money to buy a magnetic resonance imaging machine. When the doctors were negotiating to sell their practice to a hospital, they pointed out that the hospital wasn't offering enough to pay off the money borrowed for the machine.

"So the hospital said, 'We'll extinguish the debt,' which was a couple of hundred thousand dollars. It was absolutely goodwill, within the fair market value of the practice, so the hospital felt comfortable about it, and it made the transaction possible. But it was really a nominal value for goodwill."

Another major variable in practice valuation, which can affect the value placed on goodwill, is the compensation package that the physicians negotiate. Because of regulatory requirements, purchase price and compensation are considered together in arriving at fair market value.

So if physicians receive less for their practices, they may be paid more as employed physicians, notes Robert Wade, a healthcare fraud and abuse attorney in South Bend, Indiana. Messinger agrees. "Rather than load up the hospital's balance sheet with goodwill, what they do is pay tiny bonuses and add more to compensation to make the transaction feasible."

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