Practice valuation ot revenue-specific
Practice valuation ot revenue-specific
The value of a physician practice acquired by a hospital, medical group or physician practice management company is influenced more by the revenue generated by the practice than by the practice’s specialty, according to a study of 460 physician practice acquisition made by The Center for Healthcare Performance Studies in Columbus, Ohio.
"Firms acquiring physician practices may believe that the primary measure of performance is revenue per physician. Experience has shown that these firms have a greater ability to control expenses with their systems management control and thus can manipulate expenses more easily than revenues," says William O. Cleverley, PhD, CPA, co-author of the Center’s publication The 1997 Physician Practice Acquisition Resource Book.
Other conclusions found by the study include:
• Physician practices acquired by hospitals are more likely to be unprofitable than those acquired by medical groups or physician practice management companies. Possible reasons for this finding include that hospitals pay higher salaries to employed physicians than other firms, or that hospital management believes there are substantial opportunities to turn the practice around by either raising practice revenues or decreasing practice costs.
• Using a discounted cash flow method of valuation increases the valuation multiple.
• A sizable percentage of the total purchase price paid for physician practices was related to tangible assets.
• Compensation levels for employed physicians in acquired practices appear to be market based.
• Very few purchasers included any price contingency related to future practice performance.
• Cash was the predominant form of payment for purchasing physician practices.
• Although a limited use of equity was observed in the 460 practice acquisitions studied, its use raised purchase prices significantly.
• Hospitals pay physicians higher salaries than other purchasers.
• Payer mix is a critical factor in the determination of practice profitability.
For a copy of the study, contact the Center for Healthcare Industry Performance Studies at (614) 457-1777.
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