Traditionally, medical practices were valued much the same as other businesses, based upon the accounts receivable, their patient/customer base and their hard assets (equipment, fixtures, lease, staff value, any beneficial contracts). However, with the HMOs and Third Party payers, as well as now the possibility of ACOs (Accountable Care Organizations), changes in government receivables, and other new developments, practices must rely on less traditional means of valuation in order to obtain a higher value.
There is no traditional customer base in a sense, since the customers follow the HMO. As such, the traditional sense of accounts receivable needs to be looked at in a different way. The number and quality of provider contracts, remaining in good standing with third party payors and government payor programs (medicare/medicaid), and maintaining a good audit record affect the value of the practice in the same way a traditional accounts receivable valuation used to – they directly affect a practice’s ability to generate accounts receivable. In order to maximize the value of these factors, any sale, assignment or transfer, needs to be structured in a way that ensures the transfer of these assets. Certain compliance activities, structures, agreements and documentation can assist in maintaining good standing as well as increase billing efficiency, which adds to the value of the practice.
Location, when viewed in a traditional sense, relates to the ability to draw a patient base from those in that area. With managed care contracts, additional attention must be paid to the types of insurance generally carried by people living or working in that area, since patients who might otherwise find your office easily accessible, would not consider being treated there if the practice does not take their insurance.
Even certain assets such as equipment, employment contracts and restrictive covenants that protect the patient base of the practice need to be properly transferred and readily transferable to any new purchaser in order to add to the value of the practice.
Any sale of a practice needs to be structured in such a way as to maintain these assets, since if provider contracts, equipment, and other assets cannot be properly transferred, the value of the practice is lower. Many of the problems with transferring these assets can be avoided with proper legal structuring that balances the ability to transfer the assets to a buyer and any potential liabilities going forward.
What is the value of your practice?