Medical Practice Valuation

Posted on January 10, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

More on USPAP and the IRS 

Dr. David E. Marcinko; MBA, CMP™

Hope R. Hetico; RN, MHA, CMP™

Medical practice valuation is essentially a future prophesy and must be based on facts available at the required date of appraisal.

-Modified from: IRS Revenue Ruling 59-60

Some physicians may rightfully agree with the above statement, while others may not. Nevertheless, closely held businesses like medical practices, clinics, and surgery and wound care centers produce economic benefits for their owners.

Unfortunately, the value of these entities cannot always be directly observed by activity in thinly traded private markets. 

Introduction

And so, medical practice valuation professionals use USPAP principles to estimate practice value by applying valuation theory.  The value of financial assets, whether traded or not is generally based upon the following:

§ The level of expected distributable future cash flows

§ The timing of those expected distributable cash flows

§ The uncertainty in receiving expected future cash flows 

Assessment

Valuing a medical practice may also require consideration of many other factors that influence value.

For example, a thorough valuation analysis might include a study of the economics of the health care industry, reimbursement trends, competitive market conditions, historical earnings trends, as well as management experience and an on-site visit.

What is USPAP? 

The Uniform Standards of Professional Appraisal Practice (USPAP) is generally accepted standards for professional appraisal practice in North America. USPAP contains standards for all types of appraisal services. Standards are included for real estate, personal property, business and mass appraisal, too. 

Conclusion

These factors, when collectively considered, may influence the future prospects of your medical practice and, ultimately its estimate of value as an on-going-concern. 

And so, what is your experience with the above USPAP and IRS regulations, and/or are they new to you? 

NOTE: For comprehensive institutional information on this topic, please subscribe to our premium, 1,200 pages, 2-volume quarterly print subscription guide: Healthcare Organizations [Financial Management Strategies] http://www.stpub.com/pubs/ho.htm OR www.HealthcareFinancials.com 

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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Medicare Spending Increases [New Study]

Posted on January 10, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

A New CMS Report

Staff Writers 

The Centers for Medicare and Medicaid Services recently reported that expenditures increased at the fastest rate in 25 years, fueled by its new Part D drug benefit. 

The CMS study found that health spending totaled $2.1 trillion in 2006 – or 16 percent of gross domestic product – up 6.7 percent from 2005, which experienced a growth rate of 6.5 percent. The rise came despite a slower pace of growth in public spending on most major health services, such as physicians and hospitals (Parts A and B), and only a slightly faster rate in spending growth for private payers. 

Spending on prescription drugs rose 8.5 percent after six consecutive years of slow growth, while spending on Medicare’s managed care plans increased 48 percent in 2006, almost 2½ times the 2005 pace, reflecting a 25 percent increase in enrollments and increased payments to insurers. 

Any comments on this WSJ first-read?

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ETF Portfolio Diversification and Cost Reductions

Posted on January 10, 2008 by Dr. David Edward Marcinko MBA MEd CMP™

A Multi-Dimensional Investment Product

By JD Steinhilber

 Certified Medical Planner  

Most physicians and their financial advisors and/or Certified Medical Planners™ [CMP™] believe that effective diversification is most readily achieved by combining poorly correlated asset classes within an investment portfolio.

And, when combined with low costs, a winning combination may be achieved for most any physician-investor’s wealth achievement and management goals.

Diversification Impact

One of the most basic examples of proper diversification is two poorly correlated assets like stocks and bonds. Over time, the returns of these two asset classes have a very low level of correlation. Over shorter time periods, the degree of correlation between stocks and bonds can vary widely.

From January 1999 to November 2002, for example, stocks and bonds had a negative, or inverse, correlation. Real Estate Investment Trusts [REITS] and international stocks are examples of other asset classes that tend to be poorly correlated with US stocks. And, volatility is expected to increase beyond 2008.

Because exchange-traded funds replicate the performance of entire asset classes, which themselves are diversified among numerous securities, it is possible to construct well-diversified, high-performing portfolios with only 5-10 ETFs. Accordingly, ETFs provide a highly efficient means of diversification.

Reduction of “Style Drift”

Mutual funds also facilitate diversification, but actively managed mutual funds are susceptible to “style drift” and their portfolio holdings at any particular time are unknown. This presents a challenge to diversification efforts.

In contrast, ETFs offer asset class purity, meaning their holdings are totally transparent, disclosed daily and not subject to style drift. Actively managed mutual funds are also more expensive and less tax-efficient than ETFs.

Cost Impact

Exchange-traded funds have some of the lowest expense ratios of any registered investment product. In fact, ETFs have a cost advantage, on average, in excess of 100 basis points relative to actively managed mutual funds. This can have a significant impact on a portfolio’s performance over time.

For example, assume that investor A and investor B each invest $10,000 and earn the same gross annualized return over a 20 year time frame. After expenses, assume that investor A earns a net return of 10% and investor B earns a net return of 9%. After 20 years, investor A would have $67,275, while investor B would have $56,044, representing a difference of $11,231.

Trading Cautions

It is important to point out that physician-investors have to pay commissions when they buy or sell ETFs.As a result, the cost advantages of ETFs relative to mutual funds diminish the more actively an ETF portfolio is traded. ETFs are therefore not appropriate vehicles for active traders; they are more suitable for investors.

Of course, physicians and all investors tend to be more conscious of investment costs when portfolio returns are low or negative.Given that costs are among the few controllable variables in a portfolio’s returns, investors and advisors should always be evaluating portfolio costs relative to the benefits received.

Assessment: 

Exchange-traded funds may provide an opportunity to enhance net returns by reducing investment expenses and increasing returns through improved diversification.

Conclusion

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