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Understanding Basic Business and Economic Concepts

[By Dr. David E. Marcinko; MBA, CMP™]

There a several interesting managerial concepts that all physicians should know in order to maximize medical practice value or business entity transfer worth. 

For example, when having a medical practice appraised, be sure to include the Discounted Cash Flow [DCF] method of valuation to estimate practice value. This method consistently produces higher values than some others, but recall USPAP edicts.  

Now, consider these three other operational concepts listed below: 

1. Practice Revenue: 

Can the practice and local market support adding additional providers such as physicians or mid-level providers? Providers usually take two to three years to ramp up their practice before they begin to significantly contribute to the bottom line.  Generally, adding a mid-level provider will produce a greater impact on value, as their compensation levels are lower than physicians.

Also be sure to consider:

· What future provider productivity is expected?

· Does the practice plan to offer new services?

· Is the current practice fee schedule at market rates?

· Is there an opportunity for fee increases?

· Is there an opportunity to improve payer mix? 

2. Practice Costs:

Perform the following cost reduction strategies to the extent possible:

· Eliminate any unnecessary practice expenses and identify unusual, non-recurring costs.

·Eliminate any physician-related costs not likely to be paid by a potential buyer.

· Eliminate any special perks of business ownership.

· Adjust for any over-inflated salaries of relatives and eliminate unnecessary salaries. 

3. Physician Compensation – An Inverse Relationship to Value: 

Although physician compensation must be based on market rates, fair market value is a range and not a discrete number or dollar amount. And, practice value correlates directly with the net cash flows available after all practice expenses including physician compensation, are considered.

· As a consequence – the higher physician compensation – the lower practice value.

· And conversely, lower doctor compensation produces a higher practice value.  

For example, as little as a $10,000 swing in salary can have significant impact to value, and as physician compensation rises, practice value falls. 

Assessment

Were you previously aware of the above, or the important inverse value relationship between practice value and salary; please comment and opine? 

Conclusion

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