ADV: Essential Form for Physician-Investors

ADV: Parts I and II Defined

Staff Writers 

An ADV is a form that is kept on file with the Securities & Exchange Commission [SEC]. It contains critical financial information about a Registered Investment Advisor (RIA), and/or an RIA representative.  

A Two-Part Form:  

Part 1: Discloses specific information about an RIA that is important to regulators (name, number of employees, form of the organization, nature of the business, etc.). 

Part 2:  This part acts as a disclosure document for clients of the business entity and includes information such as services provided and fees levied, whether the investment advisor acts as a broker-dealer and transacts securities, and so on. It is also known as the Uniform Application for Investment Advisor Registration.

To request a copy of Form ADV you can usually contact the SEC branch closest to you. Even better yet; be sure to request it before you invest with any “advisor” or firm.

And so, have you ever invested without reviewing this form; and how did it work out for you? Were you even familiar with this important form before reading this post?



The Medical Office Appraisal Process

Understanding Different Methodologies

 By Dr. David Edward Marcinko; MBA, CMP™

By Hope Rachel Hetico; RN, MHA, CMP™

Much needs to be done before a medical practice can be sold for a premium. In fact, the following should be done before the actual practice appraisal process even begins:

· Choose an appraiser who understands the managed health care industry.

· Acquire historic financial information and consolidated financial statements, operating statistics, tax returns, CPT®, utilization and acuity rates.

·Eliminate one-time, non-recurring expenses, adjusted or normalized for excessive or below normal expenses.

·Understand key assumptions used in financial projections. 

Know USPAP Rules

According to Bridget Bourgeois CPA – a former medical practice valuation specialist from the American Appraisers Association – the IRS first issued guidelines in 1995, suggesting that appraisers use the general methods of the Uniform Standards of Professional Appraisal Practices.  USPAP recognizes three approaches to medical practice valuation: the income method, market method and cost method. Very few physicians are aware of them. 

[1] Capitalization Method 

The excess earnings or capitalization method estimates value by dividing normalized historical or current income by an appropriate rate of return for the buyer. This method does not require assumptions.

Discounted Method: 

Discounted cash flow analysis requires assumptions to estimate practice value by discounting future net cash flows to their present worth based on market rates of return required by an investor. Understanding some of the key assumptions produce a meaningful estimate of practice value:

·Projections of future practice revenues, productivity, reimbursement trends and shifts in payer mix.

·Projections of practice cost structures and projected physician compensation.

·After-tax practice cash flows.

·Reinvestments to replace equipment or other assets.

·Residual practice value at the end of the forecast period.

·Discount rate based on the practice specific weighted average cost of capital.

·  Practice efficiencies, operations and competitive market conditions 

The DCF analysis consistently produces higher values than other methods of estimating practice value because there may be supportable reasons to forecast improvements in future practice performance. 

[2] Marketplace Multiples 

Market transaction multiples are ratios developed by correlating actual practice sale prices to key practice performance measurements. Common multiples include comparisons of sale price to revenues, sale price to earnings before interest and taxes (EBIT), sale price to earnings before interest, taxes, and depreciation allowance (EBITDA), gross revenue, net revenue, and the sale price to number of physicians.  Market transaction multiples are typically limited to serving as a benchmark for testing the reasonableness of the other approached. They are not practice specific and are probably best relegated to history. 

[3] Cost Approach 

The cost approach calls for the identification and separate valuation of all the practice assets, including goodwill, depreciated over 15 years. Moreover, the cost approach is more labor intensive than using the business enterprise analysis to estimate practice value; especially for a new practice which typically include the expenses involved in the acquisition of space, office furnishings, equipment, marketing, advertising, staff development; and losses incurred during the start-up period. This estimate of “replacement cost or cost avoidance” value represents an upper limit (or ceiling) of value, and is generally not considered useful in estimating the value of a going concern medical practice. 


If not currently contemplating the sale or merger of your clinic or medial practice; periodic valuation is still a valuable organic growth ingredient in these changing times of healthcare reform. 

Has your practice been appraised within the last three years?
For related info: The Business of Medical Practice [Advanced Profit Maximization Techniques for Savvy Doctors] 
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:

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The Equity Advantaged Medical Practice

Building Medical Practice Value

By Dr. David Edward Marciniko MBA

In the competitive environment an equity-advantaged medical practice is not likely going to come from adding more HMO / ACO patients as a business strategy, or shifting your target market. You do it by making your practice worth buying to someone else.

In other words, a brand identity is the hallmark of increased practice value in the future. But, just what determines practice equity since there is no magic rule of thumb?  

Creating Practice Value 

The following helpful general suggestions are offered by valuation specialist Mark Tibergien CPA, formerly of the accounting firm Moss-Adams LLP, and have been modified below for medical practitioners regardless of degree or specialty designation:

· Maintain good financial records including all consolidated accounting statements for the last three years. Learn what was budgeted, what was spent, and what was at variance. 

· Monitor key specialty financial ratios, such as profitability ratios, creditor ratios and long-term debt management ratios. Continually mine the data for useful information and then implement changes on your own behalf.

· Be profitable and think long term by retaining capital and generating a business return. 

· Eliminate unnecessary practice expenses or non-recurring costs and eliminate any special perks of business ownership.

· Have a buy-sell agreement since it spells out the manner in which a physician can buy into the practice and how the practice will buy out an owner. Typically, buy-sell agreements also cover such topics as appraisal and valuation methods, accounts receivable equalization, excess earnings (profits) distribution, buy in/out time span, interest rate ranges, goodwill rates, tax deductibility of buyout payments and a host of other issues import to the involved principals. Have it reviewed once every one to two years.

· Pay yourself a usual, customary and reasonable salary for your specialty. Otherwise practice [business] goodwill value may be built-up, or depleted. 

· Practice using the correct business form for you. This may be as either as a sole proprietor, general partnership, S corporation, professional corporation, C corporation or limited liability corporation/partnership.

· Build a transferable patient base because if you create systems that revolve around either a few managed care contracts, or even yourself, it is difficult to transfer the business to someone else. Also, if you project yourself as the medical guru for your area, patients will have a hard time accepting a new doctor or organization. By focusing on something larger than yourself, such as group practice, you will begin to develop a business that others can operate easily.

· Use proper management information systems like EMRs without spending too much on your information technology gadgetry. You do not necessarily need to become an early adopter of the newest or untested information technology systems, but do become an adopter of mature products. 

· Have a covenant not to compete, which is an agreement whereby one party commits himself to not practicing for a period of time, within a geographical area, or with members of a defined population. According to healthcare law expert Frederick Wm. LaCava; Ph.D, JD, arguments can arise because of two sets of circumstances: [1] sale of a practice, or [2] as a term of an employment agreement. The law treats the two types quite differently, favoring agreements as part of the sale of a practice, and entertaining challenges to covenants in employment contracts. 

· Understand that practice [business] goodwill is the value attributed to ongoing business name recognition, location, telephone numbers, logos and all those things which would make a potential patient come to one doctor’s office rather than another’s. The IRS recognizes it as an economic as well as a value-added benefit. 

· Unlike practice [business] goodwill, personal goodwill is attributed to a specific doctor; it has little to no value since it “goes to the grave” with its attributor.

· Maintain services, responsiveness and consistency with your patients and referring doctors. This is critical because if you do not build strong relationships with these local players, premium value just isn’t there. A new doctor will not be able to rely on those established relationships going forward.

· Maintain compliance with all appropriate agencies [HIPAA, OSHA, EMTALA, EEOC, etc].

· Identify the right buyer and make sure the buyer has the necessary capital and you are not taking all of the risks in the transaction. You may or may not want to share financial risk with the buyer and you also may want a good personality match, since your life blood probably went into building the practice and you should want it to flourish going forward. 


Develop a forward thinking business and appraisal plan, since all doctors should plan to sell their practices at some point in the future. By understanding how practices are valued, you can create tremendous value for yourself.


Contemporary physicians have a huge opportunity to build equity value into their medical practice. Whether or not this is becomes a reality – by focusing on creating maximum value – you can still design and modify your practice to enhance its value and achieve everything dreamed about when it was first begun, many years ago.


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Selecting Money Managers

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Trust but Verify – Caveat Emptor

By Clifton McIntire; CIMA, CFP® and Lisa McIntire; CIMA, CFP® 

Most physicians and healthcare executives do not manage their own portfolios, or those of their office or medical foundations. Most are more comfortable using outside money managers to make their investment decisions. Just as the general public does not have the facilities, equipment, staff, or training to make medical decisions, physicians generally do not have the time, education, infrastructure or temperament, to make their own investment decisions.

The Style Search 

The search for the right manager(s) begins with creating a “want” list. What kind of a manager do you want? Let’s say you want to find a large cap growth manager. That narrows the field considerably from the start. You are looking for a manger that does research in and understands the field of large growth companies like Microsoft, Walmart, Pfizer, Google, and AOL-Time Warner.   Jim Cowperthwait, Managing Partner of NewBridge Partners, LLC in New York City, is a “growth” manager.  Cowperthwait sums up this philosophy with the statement, “Earnings growth drives stock prices over the long-term. Therefore, we invest our clients’ money in companies whose earnings are expected to grow at 20 percent per year.  Over the long term, this should result in portfolio growth of 15 percent per year.” The other main investment “style” is “value.” 

Value managers buy stocks at a discount to some perceived value.  Generally these stocks pay above market dividend yield, are selling below market price/earnings ratios, and have a low price to cash flow ratio.  Examples of value stocks would be Exxon, Philip Morris, Dupont, and Texas Utilities.  Jim Landau of Berkeley Capital Management in San Francisco, California is a value manager. Landau says, “We look for quality companies with a consistent record of dividend increases and a stock price that is undervalued.” Other styles include the following:

  • Contrarian—invest in stocks that are out of favor or have little market interest
  • Small Cap Growth—small growing companies with high capital appreciation potential
  • Small Cap Value—companies that sell at a discount to some perceived value
  • Market timers
  • Asset Allocators
  • Sector Rotators

Fixed Income Managers 

Managers in the field of fixed income also have a variety of styles. Some are managers of municipal bond portfolios such as John Mousseau of Cumberland Advisors of Vineland, New Jersey.  George Shaffrey of Morgan Keegan & Company of Memphis, Tennessee manages a portfolio of high yielding (average rating “B”) corporate bonds.  Madison Investment Advisors of Madison, Wisconsin offers management of U.S. Government Bonds.  To limit the field even more let us establish some minimum requirements.  To begin with, the performance numbers must be in conformance with AIMR (Association for Investment Management and Research); now CFA Institute, standards.  After that, limit your search to firms with the following characteristics: 

  • Assets under management of at least $1 billion
  • Organization with at least four principals
  • Some independent research
  • Length of time in business  (at least 2 market cycles)
  • Consistent return performance
  • Control of risk well defined
  • Minimum account size within our reach

Software programs are available to screen the world of investment management and come up with a list of potential candidates. CheckFree Investment Services of Research Triangle Park, North Carolina has one of the best. Many others are available. Whether the Bank Trust Department, Private Money Manager or Personal Investment Consultant is being interviewed, here are a few of the questions that should be asked: 

  • Can I get a sample of that report?
  • What kind of performance measurement reporting do I get from you?
  • What due diligence work is done by your organization?
  • What investment/portfolio choices do I have?
  • Who is/are the portfolio manager(s)?
  • How experienced is the portfolio manager?
  • How is he/she compensated?
  • Are you showing me audited performance?
  • How has the performance been? (1, 3, 5 and 7 years)
  • Whose performance is it?  The same portfolio manager as five years ago?
  • Have other key personnel changes been made?
  • Will my account be a separate or commingled account?
  • What are the total costs?  Does that include the following:  ü       [Custody of assets?   Management fee?  Trustee fees?  Transaction fees?  Transaction costs?  Distribution fees?  Termination fees?, etc] 
  • Can I get the costs in writing with a statement that there are no additional costs?


Decision Matrix 

Now decide what’s important to you in a money-manger and weight each matrix or category. Here are four useful qualities to assess each potential money-manager on the same criteria to be as objective as possible.  These areas are organization, philosophy, performance and fit with your overall plan.  Decide how much weight to assign each of these areas and then rank each manager on a scale of 1 (lowest) to 4 (highest) for each manager. 

1. Performance: 

Like some medical P4P initiatives, after installing your manager(s) you must monitor the performance to assure strict and complete conformance with your investment policy statement. You need to compare your returns with standard indexes, your return objectives, consumer price index, and Treasury Bills. It is also important to compare your results with other investment managers with similar investment style. Let’s not forget the very important capital market line analysis, which depicts the risk we experienced for the return we received; or manager expenses and portfolio size.                   

2. Capital Market Line Analysis:

Quarterly in depth analysis of the portfolio is a must. Most institutions require a formal presentation from the consultant quarterly. Your money is certainly as important to you as the fiduciary responsibility is to them. Some consultants let the report always reflect the account from the beginning. The theory is that the more data that we put in, the more accurate the statistics become, but this begins to distort the performance after the fifth year, and data going back to 1940 is not relative to current market environments. Many reports exclude numbers more than five to seven years old. 

3. Expenses:

Expenses can play an important role in performance. You don’t hear much about expense ratios in an up market. If your account was up +28 percent, whether the expense was 3 percent or 1 percent doesn’t seem to make much difference.  But let the market decline and the portfolio with it for a year and we change our perspective. A 10 percent portfolio decline plus charges of 3 percent equals a 13 percent decline.  Now we need a 15 percent increase net of fees just to get even.  Basically you have four cost areas: 

  • Custody—someone must hold the stocks and bonds, collect dividends and interest, prepare tax information for the government, issue monthly statements, and send checks.
  • Commissions—orders must be executed, transfer securities into and out of your account, trades settled.
  • Investment Decisions—the money manager must be paid.
  • Monitoring Performance and Advice—usually an investment management analyst is engaged to provide this service as well as write the investment policy statement and prepare the asset allocation study.

4. Size:

Naturally, size makes a difference. For a stock account with a $200,000 total value, all of the above can be accomplished for annual fees between 2.00 and 3.00 percent.  An account with $1,500,000 in total assets part bonds and part stocks would pay annual fees between 1.25 and 1.75 percent depending on the ratio of stocks and bonds.  These are annual fees and are all-inclusive. Commissions, portfolio management fees, and statements check charges are all included.  One quarter of the annual fee is charged every three months.  Family related accounts are generally grouped for a quantity fee discount. Most all fee structures are negotiable. Some consultants prefer to use mutual funds with smaller accounts.  A charge of 1 percent per year for their service with a stated minimal fee is common practice. This does not include fees deducted from the account by the mutual fund (anywhere from .50 to 2.50 percent) or commissions paid by the fund managers for trade executions.   


Remember, when considering money management, be sure to understand the ultimate fiscal consequences and your own personal liability? Always be sure to use a fiduciary consultant and let the competition for your business begin. 


Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact:


Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners(TM)



Activity-Based-Medical-Cost Accounting and Management

A Non-Traditional Accounting System

[Dr. David Marcinko MBA and Staff Writers]CPA

Sooner or later you will want to ascertain and then demonstrate the cost effectiveness of your medical care. By using the process of Activity Based Cost (ABC) management, you will be able to do so.  But, if you’re using a traditional accounting system, you won’t know a thing about your activity costs. Here’s how. 

Traditional Cost Accounting Methods 

In a traditional medical practice cost accounting system, costs are assigned to different procedures and services based on volume.  In others words, office costs are spread over the entire office’s product line and you may not know the true profitability of any single medical activity. So, if the office is doing more “procedures” than general medicine, for example, more indirect office overhead costs will be allocated to the procedural portion of the practice. 

ABC management, on the other hand, determines the actual costs of the resources that each service consumes. Because general medicine requires more human resources than “technical procedures,” ABC management will assign more costs to the general medical portion of the practice. 

Accordingly, most physicians, office managers, and their accountants are surprised that a prior notion of office profitability is different than previously thought. ABC management is just more accurate in measuring medical service profitability than traditional accounting methods. 

Medical Activity Cost Drivers 

Examples of medical activities that are office cost drivers include such items as monitoring vital signs, taking radiographic images, removing dressings or casts, performing laboratory tests or veni-punctures, surgical set-ups or operative procedures; etc.  

However, in the office setting, the most economically important activities are listed as specific CPT codes for each medical specialty.  The most important end result of ABC management is the shift of general overhead costs to low volume services from high volume services. These effects are not symmetrical as there is a bigger dollar effect on the per-unit costs of the low volume service.  

ABC Managerial Accounting Improvements 

ABC management improves office managerial cost accounting systems in three ways: 

  1. It increases the number of cost pools used to accumulate general overhead office costs. Rather than accumulate overhead costs in a single office-wide pool, costs are accumulated by activity, service or procedure.
  2. It changes the base used to assign general overhead costs to services or patients. Rather than assigning costs on the basis of a measure of volume (employee or doctor hours), costs are assigned on the basis of medical services or activities that generated those costs.
  3. It changes the nature of many overhead costs in that those formerly considered indirect, are now traced to specific activities or services. The office service mix may then be adjusted accordingly, for additional profit.   


In order to perform an ABC analysis for your medical office, calculate the cost of delivering a single unit of medical or surgical activity using only the work component of the resource based relative value scale (RBRVS).

Do this by adding up your office’s average variable expenses for the prior 1-3 years.  Now, count the number of work resource based relative value units (RBRVUs) delivered for each CPT code for the same time period, using the latest edition of the Federal Register to obtain the latest list of RVUs by CPT code. Then divide total variable expenses by the total number of work RVUs in order to arrive at the marginal cost of a single unit of service for the time period being evaluated.

For example, if your office had variable expenses of $480,000, and produced 80,000 work RVUs last year, it cost $6, on top of the office’s fixed expenses, to deliver one unit of work product. So, if an HMO plan offers to reimburse you at a rate of $11 per member, per month, and you can expect to reasonably deliver on average of one RVU pm/pm, you’ll earn enough on the contract to cover your marginal costs and some of your fixed and direct expenses. 



Remember, this method assumes that you have the excess operating capacity and time slots, available and unused, to see the additional patients of the new plan without adding extra overhead expenses to service the contract.

If not, or if you plan for capitation to become a major portion of your practice, you might want the capitated contract(s) to cover all your office expenses, so be sure to include both the fixed and other direct costs to your variable cost calculations. ABC determines the actual costs of resources rendered for each activity and represents a real measure of practice profitability. Office service mix can then be changed to either maximize revenues or better suit your practice personality.

A Caveat

Suppose however, that a medical service is competitively priced but still shows that the CPT code is unprofitable. For example, the costs of special requests can adversely affect office profits. Yet, special patient requests are one of the biggest reasons that a CPT code or procedure isn’t profitable.

In this case, look closely at activity costs and determine which ones are being performed inefficiently. Improving the efficiency of those kinds of medical services, or referring them out or abandoning them all together, will increase office profitability.



Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.


Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact:


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Managed Care Cost Reduction Strategies

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A Methodology Review

By Staff Writers

There are many methods that payers use to control healthcare costs – from the perspective of the practicing physician – as some are reviewed below:

Cost Control Types:

Utilization Review [UR] refers to all the ways a managed care organization or HMO attempts to assure contracted physicians use available resources in the most cost-effective ways, either through prospective, concurrent or retrospective means.

Pre-Certification [PC] is a form of prospective review, while discharge planning and case management are a form of on-site and remote case management, respectively.

All are examined in light of medical guidelines and medical standards.  

Guidelines are interventions or treatments where the outcome of therapy is considered certain, or occurs more than 80 percent of the time. Guidelines are used for the more mundane, ordinary or usual medical problems.  

Standards are interventions or treatments where the outcome of care is considered uncertain, and a favorable outcome occurs less than 20 percent of the time.

Concurrent Case Management [CCM] was specifically developed as a response to soaring medical costs since it is been estimated that one percent of the American population is responsible for 30 percent of all medical costs, and five percent is responsible for half of all costs. Some claim that case managers save between $3-7 for every dollar spent and can reduce an HMO plan’s overall costs, by one to four percent.  

Retrospective Utilization Review [RUR] consists of peer and patterns review to purge physician outliers from the system through a form of economic credentialing.

Claims Review [CR] scrutinizes medical claims for improprieties, overcharges, surcharges or mistakes. For example, individual instances of the following medical services and billing practices are not “prima facie” evidence of over utilization. Reviewed in a larger context however, they may be indicative of an abusive pattern or trend that has developed or may be evolving, like these: 

  • Bill Fragmentation: Concurrent billing for services on separate forms, or at different times, or for services considered an integral portion of the primary service or procedure (“split fee billing”).
  • Claimant Billing: Claimant payment for services normally disallowed, reduced or denied.
  • Common Referral: Excessive patient referral among similar providers, for unnecessary diagnostic tests.
  • Cross Billing: Bill submissions to different payers which would normally be reduced.
  • Double Billing: Duplicate bill submission to enhance payment.
  • Missed Modifiers: Excluding code modifiers to upgrade payment.
  • Non-Disclosure: Referral in the face of financial interest.
  • Non-Rendered Services: Billing for services not rendered or required at the level required.
  • Over-Billing: Exorbitant billing beyond UCR to third party payers.
  • Over-Itemization: Claims submission for services normally considered an integral part of the primary service (“fragmentation” or “unbundling”).
  • Over-Prescribing: Prescription of services in excess of those not considered medically necessary.
  • Over-Utilization: Performance of medically unnecessary services.
  • Substandard Care: Care or services not meeting acceptable or professional national standards.
  • Unnecessary Follow-up: Prolonged care without medical need.
  • Upcoding: Billing for services at a level greater than provided.

When faced with the above, further physician review and/or discussion with the provider/plan may be required for the amelioration of any disputes.  

What has been your experience with the dispute resolution process – friend or foe?

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Enticing HMOs for Practice Acceptance

Take Care … Your Wishes

Staff Writers   


When, and if, you decide to be included in an HMO network, keep in mind the following considerations just as the HMO itself considers whether or not to include your practice in their network: 


· Is there a local need for your practice?

· Is your practice respected in the medical community?

· Is it profitable enough so that HMOs feel sure in your future survival?

· Do you pursue a strategic plan that affords a seamless union should you decide to sell or merge at a later date.

· Do you have the HR, capital and IT service to synergize with the plan?

· Are you familiar with basic business, managerial and financial principals; including an understanding of horizontal and vertical integration, cost principals and cost-volume-profit analysis?

· Are you willing to treat all conditions and patient types in your specialty?

· Is your office readily accessible with barrier free design (OSHA)?

· Is your office HIPAA, EMTALA, EMR, etc compliant?

· Do you have the appropriate emergency resuscitation equipment?

· If a part time office, is it open at least 20 hours / week?

· Do you offer 24/7 on-call coverage?


Remember, you can always appeal a declination, or renegotiate a contract after expiration.

So, what is you experience in the matter?

For related info: The Business of Medical Practice [Advanced Profit Maximization Techniques for Savvy Doctors] 

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