A local expert has a simple message for physicians looking to sell their practices: Look before you leap.
Don Barbo, a Deloitte Financial Advisory Services director, specializes in valuation of physician practices. He had practice management experience before becoming a valuation specialist in 1998.
The number of hospital-owned physician practices reached 55 percent in 2009, up from 50 percent in 2008 and 30 percent five years ago, according to the Medical Group Management Association. The pace of acquisition has not abated.
Most often, hospitals call Barbo to place a value on potential acquisition targets. However, physicians occasionally call him for advice when a suitor approaches them or an employed physician wants to buy into a practice.
After a hospital reaches out to him, he in turn meets with the physician practice. He often has to manage expectations.
“Sometimes there can be a mismatch of expectations compared to the results of the appraisal,” he said.
Barbo said a practice’s valuation takes into account historical and future expectations for revenue, expenses and physician compensation. It also includes tangible and non-tangible assets, such as good will and depreciation.
He said there is no rule of thumb for what a practice is worth, such as a multiple of annual practice revenue or profits. Practices often pay out all of the annual earnings as compensation, so there often are no profits—and that likely will be reflected in the buyer’s offer. If the physician is being kept as an employee, future compensation will also baked into the pricing model. A physician cannot expect to be paid twice—for future compensation and what essentially are non-existent profits, he said.
Physician practices are benchmarked against their peers in terms of financial performance. If a physician is working 70-80 hours a week to keep the practice afloat, “it’s probably temporary and not sustainable,” Barbo said.
Physicians potentially could be paid more after the acquisition, he noted. The hospital or large practice may have a higher percentage of commercially insured patients. Patient volume also may increase or the larger organization may have negotiated a more lucrative fee schedule.
Barbo said physicians need to evaluate themselves and their circumstances before selling. Among the considerations:
- Will the buyer make me more efficient? Healthcare systems can provide needed information technology. They can also ease the administrative burden that plagues most small practices.
- What do I know about the buyer? What is the value proposition for you? What is the buyer’s strategy? Are they prepared to buy you, or are they simply in a hurry to acquire practices? Is it a physician-centric enterprise with physician leaders?
- Are you prepared to be owned? Doctors often resist oversight. Physicians generally are fiercely independent. They also may be practicing with former rivals.
- What would this mean for my future? Physicians need to weigh their situations against what the future holds in terms of health reform. For many, Barbo said, that means reimbursement pressure, increasing expenses and deteriorating compensation. “This is not a blip,” he said.
Barbo reaffirmed that there has been an increase in practice-acquisition activity. He drew distinctions between the golden age of practice acquisition during the 1990s and the current climate. Twenty years ago, hospitals often bought practices at a premium, found they were unprofitable, and allowed physicians to re-establish their practices. That is unlikely to be an option for doctors this time around.
“The difference between the 1990s and now is that I see fear in the doctors’ eyes,” Barbo said. “They are truly worried about their future. There is more of a compulsion to sell. That also is causing an increase in transaction activity.
“If you peel the onion, the (acquisition) driver is reimbursement, and that trend is flat or negative. Doctors (in the 1990s) could say: ‘Let’s take a flyer (on selling the practice). If it doesn’t work out, I’ll let my contract expire.’ I don’t think that will be an option for them. If you are struggling now with reimbursement, that is not going to turn around. Payment will be based quality and access rather than fee-for-service,” he said.
Barbo also said health systems are much more sophisticated at creating their offers. They generally are lower than the 1990s and are less likely to place a high value on good well and other intangible assets.
Steve Jacob is editor of D Healthcare Daily and author of the new book Health Care in 2020: Where Uncertain Reform, Bad Habits, Too Few Doctors and Skyrocketing Costs Are Taking Us. He can be reached at firstname.lastname@example.org.