Understanding the Valuation of Your Practice

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The first step in any integration decision is the strategic vision. Why are we doing this? How are all parties—physicians, the hospital/health system and patients—going to be better off with us together than apart? If you can’t answer these questions in a way that makes you want to keep moving forward, just stop. Integrations are tough enough. Attempting them in strategic darkness is just reckless.

Assuming that all parties are on board with the same vision, one of the first financial steps is to get the practice valued: How much are we worth?  

First, the relationship between hospitals and physicians includes patient referrals. Because of this, Stark, Fraud and Abuse, Anti-Kickback and a host of other federal laws and state mandates have come into play. This makes selling a physician practice very different from an ordinary business or real estate and great care must be taken to abide by all the rules. Both parties are at risk if the transaction is challenged, and both should be equally diligent in keeping it compliant.  

Valuations aren’t cheap and they require a lot of data and time to complete—not just for the valuation firm, but for the group as well. Costs can range from $10,000 to $30,000, depending on the size of the group and its complexity. Often the hospital partner is willing to cover this cost, but with its significant price tag, the hospital may want to pick the firm and be in control of the process. There may be legitimate reasons why a practice would be uncomfortable with this. If you can’t negotiate past this, offering to pay half should get you an equal seat at the table. It will be a significant short-term distraction for your staff (or you, depending on the size of your practice), and may require additional expenses from outside accounting.

One component of the valuation that often gets short-changed by physician practices is the narrative. Take advantage of the opportunity to tell the story beyond the dollars and cents and tax returns. Cardiology practices typically have sophisticated infrastructures with sophisticated staff running them. There is value in this. Further, if you have outreach locations with market reach that extends beyond the front door of the practice, here too lies value. Perhaps you have a proven track record of getting physicians to adhere to consistent processes and pathways. The value here is growing exponentially.  

Not all of these will translate directly into dollars on the ultimate purchase price for your group. However, there are other critical aspects of an integration transaction, such as governance, co-management responsibilities and potentially incentive payments. Spend time getting the value proposition of your practice down on paper. Once completed, make sure all the physicians read it. You want everyone singing from the same hymn book.   

5 Ways to Avoid Giving Away Value

Even under the best of conditions, integration requires the purchase of the practice, which necessitates negotiation. Both parties have a fiduciary obligation to their respective parties and will act on its behalf—even as they try to find a win/win. Given this, there are some practical things physicians can do to avoid hurting their leverage.

Agree on your negotiation platform and educate all physicians on it using a “Talking Points” document with simple bullet items on the group’s position and why. Only include the critical items. By having a common platform, the group presents a strong, united front.

Delegate negotiation to a select few. Limit the number empowered to talk. Avoid hallway conversations (a favorite of hospital CEOs), where physicians are showing too much of their potential hand.   

Stay together. The whole of a physician group is worth more than its individual parts. Deal with these internal issues outside the transaction, preferably well before and don’t use integration as the cure. Rifts in the group can be exploited and almost always lead to lower value of the whole. Also, make sure your non-partner physicians are well represented in the process. Non-partners tend to be younger doctors, so the decision will impact them for a long time. Additionally, employment agreements with associates are rarely assignable, which warrants careful attention.   

Be reasonable. At their heart, integration transactions are negotiations, with both sides obligated to their respective sides. However, you also are trying to find terms and conditions that make the deal happen and become partners in the process, so consider the other side of your requests. For example, clinical staffing is important to physicians; competent people make or break physician efficiency. It is therefore appropriate to want control over this area. However, having authority with no accountability to budgets would be untenable. Establishing this balance alongside the request demonstrates a reasonable partner and increases the chances of favorable terms overall.  

Give yourself ample time for the process. The decision to sell a group is probably the single biggest business decision a physician will ever make, deserving appropriate time and consideration. Artificial deadlines can create unnecessary haste that can lead to bad decisions. Conversely, protracted negotiations can lead to negotiation fatigue. Treat the process like a marathon, not a sprint.

Sauer is vice president of consulting for MedAxiom Consulting. He served as CEO of The Lutheran Medical Group in Fort Wayne, Ind., for 14 years.