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What is the Medical Practice Goodwill Conundrum?

By Dr. David Edward Marcinko; MBA, CMP™

By Hope Rachel Hetico; RN, MHA, CMP™ 

 In the context of long-term compensation for a lifetime of work, mature medical practitioners of all types often erroneously focus on the intangible of “goodwill” upon retirement; especially relative to medical practice worth.    

Definition

Goodwill is defined as “The ability of a business to generate income in excess of a normal rate on assets due to superior managerial skills, market position, new product technology, etc.  In the purchase of a business, goodwill represents the difference between the purchase price and the value of the net assets.” 

Yet, there are two types of goodwill, with one far more compensable than the other.  

Physician Goodwill  

Personal goodwill results from the charisma and reputation of a specific doctor. Its attributes accrue solely to the individual, are not transferable and can’t be sold. They have no economic value. Nevertheless, young uninformed physicians may over-compensate retiring doctors for this non-existent “asset.” 

Business Goodwill

Medical practice entity goodwill, on the other hand, may be transferred and is defined as the unidentified residual attributes that contribute to the propensity of patients and managed care contracts (and their revenue streams) to return in the future (Schilbach v. Commissioner, T.C. Memo 1991-556).  

However, one must appreciate the: (i) impact of a changing environment; (ii) practice transfer activity in a local market which can augment or blunt goodwill value; and the (iii) determination of whether patients or HMOs return because of goodwill or are mandated by contractual obligations.

A good medical practice is not necessarily a good business, and retiring group practice doctors can no longer extract excess compensation for this intangible asset.

Moreover, astute younger physicians should not over-pay for it, either.

So, what is your economic experience in the matter; as an emerging, mature or retiring physician?

Speaker: If you need a moderator or a speaker for an upcoming event, Dr. David Edward Marcinko; MBA is available for speaking engagements. Contact him at: MarcinkoAdvisors@msn.com  

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Filed under: Practice Worth |