Transaction Advisory Services for Physicians

There are over 197,000 physician practices and over 443,437 physicians in the United States, according to Vertical IQ. Each practice typically has 14 employees. California, Texas, and Florida have the most physician practices in the United States, while Alaska, North Dakota, and Vermont have the least. According to the American Medical Association (AMA), 46.7 percent of physicians work in private practices, while 4.5 percent work in practices owned by private equity (PE) groups. 31.3 percent of physicians work in practices owned by hospitals and health systems. If you are among the percent of privately owned practices, transaction advisory services may be important for you.

As a nationally recognized leader in valuation services, Pinnacle Healthcare Consulting (“Pinnacle”) can provide independent physician practices with transaction advisory services, including the valuation of physician practices, determining physician compensation, financial health assessments (sometimes referred to as Quality of Earnings), and sensitivity/scenario analyses. These services are essential for physicians navigating the complex landscape of healthcare transactions, ensuring informed decision-making and financial stability.

1. Valuation of a Physician Practice

Valuing a physician practice is important for transactions such as sales, mergers, acquisitions, and partnerships, enabling physicians to negotiate from a position of strength and knowledge. The process involves multiple steps that require a deep understanding of both the healthcare industry and financial principles. Pinnacle employs the following approach to provide a comprehensive valuation:

1. Financial Analysis: Examining historical financial statements to determine profitability, revenue streams, and expense patterns.
2. Market Analysis: Analyzing the local healthcare market, including patient demographics, competition, and growth potential.
3. Operational Assessment: Assessing the efficiency and effectiveness of the practice’s operations, including visit volume, case volume, and payor mix.
4. Intangible Assets Evaluation: Considering the value of intangible assets such as patient relationships, brand reputation, trade name, and proprietary methodologies.

2. How Much a Physician Can Be Paid Post Transaction

Determining fair and competitive compensation for physicians is important for attracting and retaining top talent while ensuring compliance with regulatory standards. Pinnacle establishes appropriate compensation levels by considering:

1. Benchmarking: Comparing compensation against industry benchmarks and standards, using data from national and regional surveys.
2. Productivity Analysis: Evaluating physician productivity metrics such as patient volume, relative value units and clinical outcomes.
3. Market Conditions: Taking into account the specific market conditions and competitive landscape of the healthcare sector in the physician’s region.
4. Regulatory Compliance: Ensuring compensation structures comply with federal and state regulations, including Stark Law and Anti-Kickback Statute.

An inverse relationship exists between future physician partner compensation and the current value of the practice. If future physician compensation is expected to be greater than historical compensation, the value of a practice is lower; and if future physician compensation is expected to be lower than historical compensation, the value of the practice is higher.

3. Financial Health Assessment

Financial health assessments are a critical component in assessing the financial health and sustainability of a physician practice. By taking the following steps, Pinnacle helps physicians and PE investors understand the earning power of a practice and identify any underlying financial issues that may affect future performance:

1. Revenue Analysis: Identifying sources and stability of revenue, distinguishing between recurring and non-recurring income and assisting with payor contracting.
2. Expense Analysis: Scrutinizing operating expenses to uncover any anomalies, inefficiencies, or one-time costs.
3. Earnings Sustainability: Evaluating the sustainability of earnings by examining trends, margins, and potential risks.
4. Cash Flow Assessment: Analyzing cash flow statements to ensure the practice’s liquidity and financial flexibility.

Here’s how PE investors can utilize these assessments:

1. Investment Evaluation: PE investors gain a clear understanding of financial health and sustainability, assessing the quality and reliability of earnings to determine investment viability.
2. Risk Mitigation: QoE analysis uncovers financial risks and operational inefficiencies, enabling proactive issue resolution and reducing post-acquisition problems.
3. Valuation Accuracy: QoE analysis ensures valuations are based on sustainable earnings, leading to accurate valuations and fair purchase prices, facilitating the securing of acquisition financing from lenders and investors.
4. Post-Acquisition Strategy: Insights from QoE analysis inform strategies for enhancing profitability and efficiency through targeted improvements.

4. Scenario Analysis

Scenario analyses are essential for physicians planning and securing financing for future growth, such as hiring additional advanced practice providers or opening new locations. Pinnacle creates detailed pro forma financial statements that project future performance based on realistic assumptions and strategic goals. This process involves:

1. Historical Data Review: Analyzing historical financial performance to establish a baseline for projections.
2. Assumption Development: Collaborating with physicians and practice management to develop reasonable assumptions about future revenue, expenses, market conditions, and strategic initiatives.
3. Scenario Analysis: Creating multiple scenarios to account for different potential outcomes, providing a comprehensive view of possible futures.
4. Strategic Planning: Aligning pro forma projections with the practice’s strategic plan, ensuring that financial forecasts support long-term goals

Conclusion

By integrating various valuation and compensation approaches, assessing financial health, and conducting scenario analyses, Pinnacle follows a holistic approach in providing transaction advisory services that equips both physicians and investors with strategic insights for navigating transactions and negotiations effectively.

If you have questions about valuing a physician practice, please contact Jim Connors at JConnors@AskPHC.com or Jana Sizemore at JSizemore@AskPHC.com.