Financial transactions between hospitals and physicians -- whether the hourly rate or salary paid to a physician for his time, the bonus potential or the amount of money paid to acquire a physician’s practice -- must meet the regulatory standard of fair market value. Although the regulations are extensive and technical in defining fair market value, the valuation process is both an art and a science.
Valuation firms and valuation firms
Those of us working in healthcare understand that our industry is not like many others. Physician organizations are even more distinct, characterized as having balance sheets with negative equity, cash versus accrual accounting and contractual allowances that would curl the hair of a CFO who is outside healthcare. There are valuation firms with extensive experience in the healthcare regulatory environment and who understand physician entities. And there are those who don’t. Because of these peculiarities, when a physician practice has the opportunity to participate in the selection of a valuation firm, it should. Choose wisely or be prepared to TEACH.
Details, details and more details
The goal of the valuation process is to understand, at a detail level, the operations, standards and management of the entity, in order to establish a monetary value of the practice or of the physician. Every practice and organization has business functions that are weaker than others; the valuation process will reveal the weak spots in your practice. Issues such as how cash receipts are collected, what policies and practices are in place providing accounting controls, how does the practice administer its compliance plan, does the practice adhere to its own policies, and what are the billing and coding practices compared to other like organizations are what the valuation process seeks to answer.
I have been part of negotiations where the entire transaction was re-cast due to the practice’s lack of internal management as discovered in the valuation process. The time to clean up messy practices, dust off the compliance plan, ensure its documented execution, and spot check controls is BEFORE the valuation process begins.
Consider the question being asked
Invariably, the valuation firm will send a long list of questions for the practice to answer. The questions will range from simple data requests where the practice is required to provide financial information and physician productivity data to more complex market data – such as market share, competitors and other similar information. On its face, these data seem routine. However, if you read the questions carefully, you will see that the valuation process attempts to value the company including its intangible assets. For example, “What is the approximate market share of your practice?” Another is, “Provide the resumes of key non-physician administration.” Whether the practice is sophisticated, has professional management, is metrics-driven and manages risk well are the questions behind the questions.
It is likely that the valuation firm will organize a site visit to “kick the tires.” This is the practice’s opportunity to showcase itself – not only as to the physical assets, but as to the kind of organization that it is. The value of the practice is more than the cumulative value of its physical assets. The practice history and tradition, leadership both within the practice and the hospitals that it serves, the practice’s attention to strategy, financial performance and physician succession planning collectively create the value of the organization. Presenting the organization to the valuation firm, which highlights the characteristics that make the physician practice outstanding, will assist the valuation firm in assessing the organization’s total value.
In short, the valuation process should not be delegated to the numbers team and forgotten. Instead, it requires the practice’s active participation in best presenting the organization to maximize its value.
Suzette Jaskie is president of MedAxiom Consulting and the executive vice president of MedAxiom. She was CEO of West Michigan Heart and Wisconsin Heart and Vascular in Milwaukee prior to her current position. She also previously served as the executive director of the Frederick Meijer Heart and Vascular Institute, for Spectrum Health System in Grand Rapids, Mich., which governs and manages the cardiovascular service line for the regional health system.
She is a former president of Medical Group Management Association’s cardiovascular assembly and is currently serving on the American College of Cardiology’s Practice Management Council. She is a faculty member of the American College of Cardiology Advanced Leadership Institute and a former board member of the Cardiovascular Advocacy Alliance.
She has rich experience in strategic planning and program development and has been a speaker at numerous conferences on varied topics such as physician compensation, strategic planning, product line and program development, performance management, operations efficiency, as well as governance and leadership.