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    Dr. Marcinko is originally from Loyola University MD, Temple University in Philadelphia and the Milton S. Hershey Medical Center in PA; as well as Oglethorpe University and Emory University in Georgia, the Atlanta Hospital & Medical Center; Kellogg-Keller Graduate School of Business and Management in Chicago, and the Aachen City University Hospital, Koln-Germany. He became one of the most innovative global thought leaders in medical business entrepreneurship today by leveraging and adding value with strategies to grow revenues and EBITDA while reducing non-essential expenditures and improving dated operational in-efficiencies.

    Professor David Marcinko was a board certified surgical fellow, hospital medical staff President, public and population health advocate, and Chief Executive & Education Officer with more than 425 published papers; 5,150 op-ed pieces and over 135+ domestic / international presentations to his credit; including the top ten [10] biggest drug, DME and pharmaceutical companies and financial services firms in the nation. He is also a best-selling Amazon author with 30 published academic text books in four languages [National Institute of Health, Library of Congress and Library of Medicine].

    Dr. David E. Marcinko is past Editor-in-Chief of the prestigious “Journal of Health Care Finance”, and a former Certified Financial Planner® who was named “Health Economist of the Year” in 2010. He is a Federal and State court approved expert witness featured in hundreds of peer reviewed medical, business, economics trade journals and publications [AMA, ADA, APMA, AAOS, Physicians Practice, Investment Advisor, Physician’s Money Digest and MD News] etc.

    Later, Dr. Marcinko was a vital and recruited BOD  member of several innovative companies like Physicians Nexus, First Global Financial Advisors and the Physician Services Group Inc; as well as mentor and coach for Deloitte-Touche and other start-up firms in Silicon Valley, CA.

    As a state licensed life, P&C and health insurance agent; and dual SEC registered investment advisor and representative, Marcinko was Founding Dean of the fiduciary and niche focused CERTIFIED MEDICAL PLANNER® chartered professional designation education program; as well as Chief Editor of the three print format HEALTH DICTIONARY SERIES® and online Wiki Project.

    Dr. David E. Marcinko’s professional memberships included: ASHE, AHIMA, ACHE, ACME, ACPE, MGMA, FMMA, FPA and HIMSS. He was a MSFT Beta tester, Google Scholar, “H” Index favorite and one of LinkedIn’s “Top Cited Voices”.

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Understanding the Art of Selling Your Medical Practice

Part Two of Medical Practice Valuation

By Dr. David Edward Marcinko, MBA, CMP

By Prof. Hope Rachel Hetico, RN, MHA, CMP

www.CertifiedMedicalPlanner.org

In Part 1, we discussed how to establish fair market value (FMV) for a medical practice in the article, “Establish Your Practice’s Fair Market Value.” This time, we’ll review important terms and conditions for the sale transaction.

Valuation Types

Unfortunately, as a general rule, medical practice worth is presently deteriorating. A good medical practice is no longer a good business necessarily, and selling doctors can no longer automatically expect to extract a premium sale price. Nevertheless, appraising your medical practice on a periodic basis can play a key role in obtaining maximum value for it.

Competent practice valuation specialists typically charge a retainer to cover out-of-pocket expenses. Fees should not be based on a percentage of practice value, and may take 30-45 days to complete. Flat fees should be the norm because a sliding scale or percentage fee may be biased toward over-valuation in a declining marketplace. Fees range from $7,500-$50,000 for the small to large medical practice or clinic.

Expect to pay a retainer and sign a formal, professional engagement letter. Seek an unbiased and independent viewpoint. Buyer and sellers should each have their own independent appraisal done, using similar statistics, accounting measures, and economic assumptions.

At the Institute of Medical Business Advisors, Inc www.MedicalBusinessAdvisors.com we use three engagement levels that vary in intensity, purpose, and cost:

1. A comprehensive valuation provides an unambiguous value range. It is supported by most all procedures that valuators deem relevant, with mandatory onsite review. This gold standard is suitable for contentious situations. A written “opinion of value” is applicable for litigation support activities like depositions and trial. It is also useful for external reporting to bankers, investors, the public, Internal Revenue Service (IRS), etc.

2. A limited valuation lacks additional suggested Uniform Standards of Professional Appraisal Practice (USPAP) procedures. It is considered to be an “agreed upon engagement,” when the client is the only user. For example, it may be used when updating a buy/sell agreement, or when putting together a practice buy-in for a valued associate. This limited valuation would not be for external purposes, so no onsite visit is necessary and a formal opinion of value is not rendered.

3. An ad-hoc valuation is a low level engagement that provides a gross non-specific approximation of value based on limited parameters or concerns involved parties. Neither a written report nor an opinion of value is rendered. It is often used periodically as an internal organic growth/decline gauge.

Structure Sales Transactions

When the practice price has been determined and agreed on, the actual sales deal can be structured in a couple of ways:

(1) Stock Purchase v. Asset Purchase

In an asset transaction, the buyer will receive a tax amortization benefit associated with the intangible value of the business. This tax amortization represents a non-cash expense benefiting the buyer. In this case, the present value of those future tax benefits is added to the business enterprise value.

(2) Corporate Transactions

Typical private deals in the past involved some multiple (ratio) of earning before income taxes (EBIT)—usually a combination of cash, restricted stock, notes receivable, and possibly assumption of liabilities. For some physician hospital organizations, and public deals, the receipt of common stock can increase the practice price by as much as 40-50 percent (to accept the corresponding business risk, in lieu of cash).

Complete the Deal

The deal structure will vary depending on whether the likely buyer is a private practitioner, health system or a corporate partner. Some key issues to consider in the “art of the deal” include:

  • Working capital (in or out?): Including working capital in the transaction will increase the sale price.
  • Stock vs. asset transaction: Structuring the deal as an asset purchase will increase practice value due to the tax amortization benefits received by the buyer for intangible assets of the practice.
  • Common stock premium: The total sale price can be significantly higher than a cash equivalent price for accepting the risk and relative illiquidity of common stock as part of the payment.
  • Physician compensation: If your goal is to maximize practice value, take home a lower salary to increase practice sale price. The reverse is also true.

Understand Private Deal Structure

Assuming a practice sale is a private transaction, deal negotiations are based on the following pricing methodologies:

Seller financing: Many transactions involve an earn-out arrangement where the buyer puts money down and pays the balance under a formula based on future revenues, or gives the seller a promissory note under similar terms. Seller financing decreases a buyer’s risks (the longer the terms, the lower the risk). Longer terms demand premiums, while shorter terms demand discounts. Premiums that buyers pay for a typical seller-financed practice are usually more than what you would expect from a simple time value of money calculation, as a result of buyer risk reduction from paying over time, rather than up front with a bank loan or all cash. Remember to obtain a life insurance policy on the buyer.

Down payment: The greater the down payment for acquisition of a medical practice, the greater the risk is to the buyer. Consequently, sellers who will take less money up front can command a higher than average price for their practice, while sellers who want more down usually receive less in the end.

Taxation: Tax consequences can have a major impact on the price of a medical practice. For instance, a seller who obtains the majority of the sales price as capital gains can often afford to sell for a much lower price and still pocket as much or more than if the sales price were paid as ordinary income. Value attributed to the seller’s patient list, medical records, name brand, good will, and files qualifies for capital gains treatment. Value paid for the selling doctor’s continuing assistance after the sale and value attributed to a non-compete agreement are taxed at ordinary income. A buyer willing to allocate more for items with capital gains treatment, or a seller willing to take more in ordinary income, can frequently negotiate a better price. This is the essence of economically prudent practice transition planning.

Sidestep Common Buyer Blunders

Here are 10 blunders to avoid, as a buyer:

1. Believing the selling doctor’s attestations. Always verify data through an independent appraisal.

2. Wanting to change the culture of the practice. Be careful: Patients may not adjust quickly to change.

3. Using all available cash without keeping a reserve for potential contingencies.

4. Creating a conflict with the seller by recognizing a weakness and continually focusing on it for a bargain price.

5. Failing to realize that managed care plan contracts can be lost quickly or may not be always transferable.

6. Suffering from analysis paralysis. Money cannot be made by continually checking out a medical practice, only by actually running one.

7. Not appreciating the uniqueness of each practice, and using inaccurate “rules of thumb” from the golden age of medicine.

8. Not realizing that practice worth and goodwill value have plummeted lately and continue to decline in most parts of the country.

9. Not understanding that practice brokers may play both sides of the buy/sell equation for profit. Brokers usually are not obligated to disclose conflicts of interest, are not fiduciaries, and do not provide testimony as a court-approved expert witness.

10. Not hiring an appraisal professional who will testify in court, if need be, using the IRS-approved USPAP methods of valuation. Always assume that the appraisal will be contested (many times, it is).

After pricing and contracting due diligence has been performed, the next step in the medical practice sale process—as Donald Trump might say—is just good, old-fashioned negotiation.

Electronic Downloads

Part I: Part I

Part II: Part II

Additional Reading:

Cimasi, R.J., A.P. Sharamitaro, T.A. Zigrang, L.A.Haynes. Valuation of Hospitals in a Changing Reimbursement and Regulatory Environment. Edited by David E. Marcinko. Healthcare Organizations: Financial Management Strategies. Specialty Technical Publishers, 2008.

Marcinko, D.E. “Getting it Right: How much is a plastic surgery practice really worth?” Plastic Surgery Practice, August 2006.

Marcinko, D.E., H.R. Hetico. The Business of Medical Practice (3rd ed). Springer Publishing,New York,N.Y., 2011.

Marcinko, D.E. and H.R. Hetico. Risk Management and Insurance Planning for Physicians and Advisors. Jones and Bartlett Publishers, Sudbury, Mass., 2007.

Marcinko, D.E. and H.R. Hetico. Financial Planning for Physicians and Advisors. Jones and Bartlett Publishers, Sudbury, Mass., 2007.

Marcinko, D.E. and H.R. Hetico. Dictionary of Health Insurance and Managed Care. Springer Publishers, New York, N.Y., 2007.

Marcinko, D.E. and H.R. Hetico. Dictionary of Health Economics and Finance. Springer Publishers,New York,N.Y., 2007.

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How to Compare Cost-of-Living Benefits?

On Career Advancements and New Jobs

By Rick Kahler MSFS CFP®

As a doctor, nurse or allied healthcare professional; suppose you’re ready to take your career up a step, and you’re exploring opportunities in various parts of the country. You may easily be misled by the money script that a higher salary equates to a higher standard of living; however this is not necessarily always true.

What can you do to expand and reframe this money script?

Here are a few things to consider:

1. If the salary isn’t published, ask the money question right up front. Many candidates leave the inquiry into salary and benefits until the last step when both they and the potential employer have invested time and perhaps money into the interview process. Asking earlier avoids this wasted time, as well as allowing you to do your research on the front end and avoid potentially passing up other opportunities.

2. Get a clear picture of the lifestyle the salary will buy.  One of the best ways to do this is at bestplaces.net, which offers a cost-of-living calculator to compare the relative locations and salaries you are considering. For example, if you compare Rapid City, SD, and Redwood City, CA, you will find the latter costs 259% more than the former. That means you need to multiply the Rapid City salary by 3.59 to find the equivalent salary in Redwood City.

The “City Compare” tab also allows you to compare specific categories. For example, health care is 10% more in Rapid City than Redwood City, while housing in Redwood City costs over eight times as much. You can also compare factors like crime rate, climate, air quality, and tax rates. Pay particular attention to taxes; needing to pay both state and city income taxes, for example, could make a significant difference in your cost of living.

3. Investigate surrounding areas that have a lower cost of living. A 45-minute to one-hour commute each way from La Honda to Redwood City would result in a 37% decrease in the cost of living. A salary of $140,000 would buy a lifestyle in La Honda equivalent to that provided by $222,222 in Redwood City.

4. Examine your own beliefs about various areas. Look beyond salary amounts to your perceptions and assumptions about factors such as amenities, city-vs-rural living, lifestyles, status, etc. Then investigate the realities of those factors—both their value to you and the probability that you could take advantage of them. If a city offers professional sports, theatre productions, and concerts, for example, could you realistically afford the time and money to attend regularly? Would available public transportation fit your lifestyle and work schedule?

5. Consider your short-term and long-term family circumstances. Is a big-city lifestyle what you want as a young adult but not for raising a family? Would a given location fit your spouse’s needs as well as your own? Are your kids toddlers or about to leave home? Do you have aging parents that might need help?

6. If you choose a job in an area with a high cost of living, consider ways to reduce your budget. Thesimpledollar.com has 40 great tips on how to save money on monthly expenses.

Assessment

Finally, put all your research together and do your best to imagine year-round daily living in various locations. Envision yourself in the different routines and possibilities, whether they might include a daily two-hour commute, a city apartment, or a home in the woods with your own snow blower. Look beyond the financial cost of living to the emotional benefits and costs of living in various places. The most important lifestyle factor is finding the place where you will feel most at home.

***

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Dr. Dave Marcinko enjoys personal coaching and public speaking and gives as many talks each year as possible, at a variety of medical society and financial services conferences around the country and world.

These have included lectures and visiting professorships at major academic centers, keynote lectures for hospitals, economic seminars and health systems, keynote lectures at city and statewide financial coalitions, and annual keynote lectures for a variety of internal yearly meetings.

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Dr. Marcinko Interviewed on the Physician Credit Crunch

Financial Experts Share Tips on Obtaining Loans to Start or Expand a Medical Practice

By Michael Gibbons

Editor: ADVANCE Newsmagazines

Maybe you’re a young dermatologist or plastic surgeon who dreams of starting your own practice. Or maybe you’re an established professional but want to expand your palette of anti-aging services. Either way, you’ve probably made an unpleasant discovery: Banks are leery about lending today. Global recessions with seemingly no end in sight tend to give loan officers sticky fingers.HO-JFMS-CD-ROM

Dermatologists and Plastic Surgeons

We have it on good authority that dermatologists and plastic surgeons as a group are less affected by this problem than physicians in some other branches of medicine. Still, there’s no better time than now to absorb some sound advice on how to approach banks for loans—whether you’re a fresh-faced newcomer to the fresh-face business or a wrinkled veteran at eliminating wrinkles.

Start Small

There’s no soft-soaping it: Starting a healthy aging practice is much harder than expanding an existing practice, even in the flushest of times.

“For young dermatologists starting out, I recommend you start small,” advises Jerome Potozkin, MD, who offers facial rejuvenation, liposuction, body contouring and dermatological care through his practice in Walnut Creek, CA. “You can always expand. Keep your overhead low. Know what your credit score is and do everything you can to improve it. Pay your bills on time.”

Lasers aren’t cheap. Besides the initial acquisition costs, a service contract can cost $7,000 to $12,000 a year, according to Dr. Potozkin. “Don’t feel you have to buy every new laser under the sun,” he says. “In fact, renting rather than purchasing is an option many companies offer. When your volume is low you can rent and schedule laser days—although the pitfall there is you don’t have lasers available whenever patients come in.”

Also, young dermatologists “will probably have an easier time getting a loan if they go to a relatively underserved area, as opposed to an area that has a large number of dermatologists per capita,” says Dr. Potozkin, who began practicing 10 years ago. “There are two schools of thought on this: Go where you want to live to start a practice or go to where there’s a need and be instantly successful. I chose the former. It took me longer to get started but I’m very happy where I am.”

Patience, Prudence and Passiondem2

Be patient, prudent, passionate—and start with a spare office and as little debt as possible, advises Dr. David E. Marcinko MBA, a financial advisor and Certified Medical Planner™. Marcinko, a health economist,  is CEO of the Institute of Medical Business Advisors Inc., a national physician and medical practice consulting firm based in Norcross, GA www.MedicalBusinessAdvisors.com

“Patients are looking for passion from you, not lavish trappings,” Dr. Marcinko says. “When a banker or a loan officer sees $175,000 or more of debt they are loath to give a loan—and it’s hard to blame them. Purchase a home after you become a private practitioner. You need to be as close to debt-free as you can be.

Exit Strategy

“Another thing bankers want to know is, ‘If we give you a loan and you start a practice and it fails, how will we be paid back?’ They want an exit strategy.”

The good news is dermatology “remains a very lucrative specialty, and in most parts of the country they are in a shortage position, particularly with the aging population,” says Sandra McGraw, JD, MBA, principal and CEO of the Health Care Group, a financial and legal consulting firm based in Plymouth Meeting, PA., that advises the American Academy of Dermatology, among other groups.

“I would start with a realistic business plan for why you think this practice can succeed, in the specific location,” McGraw says. “How many patients do you expect to see? How will they know you are there and available? Remember that banks lend to all kinds of people, so keep your numbers realistic. Overestimating expenses is as bad as underestimating them. Then determine how you want the money—usually a fixed loan for a period of time and then a line of credit as you get your practice going and sometimes need the cash flow.”biz-book

Expanding a Practice

Established dermatologists should have an easier time getting loans to expand their practices. They have, one hopes, a track record of success and assets to put up as collateral.

Mid-career physicians “have cash flow, physician assets and equity to some degree in a house and personal assets,” Dr. Marcinko observes. “Banks can attach loans to personal assets and savings accounts. Ninety-nine percent of times you must sign a personal asset guarantee. Mid-lifers have assets young ones don’t, so mid-lifers aren’t quite the risk. They have businesses that have value and cash flow. Banks like cash flow.”

However, even veterans must do some homework before approaching a bank. “You still want to establish why you want the money and how the expansion will increase your income,” McGraw says.

Another tip: If the bank has loans out with reputable vendors, you might ask the loan officer to recommend them to you as potential contractors. “Sometimes keeping it local and supporting others with loans at the bank can be helpful,” she says.

Assessment

Dr. Marcinko adds, “Bankers today want you to come in with a well-reasoned, well-thought-out and well-written business plan. Give bankers a 30-second elevator speech on why you are different. It’s really important to ask yourself, ‘What can I offer the community as a doctor in my specialty that nobody else can?’ If you bill yourself as the first dermatologist to do laser surgery, that’s a perceived advantage. You purchased the equipment and learned to use it. But anyone can do that. If you can come up with something that nobody else has or can do, that’s how you’re successful in anything.”

Link: Dr. Marcinko Interview

Link: https://healthcarefinancials.files.wordpress.com/2009/08/dr-marcinko-interview.pdf

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More on Medical Practice Business Costs

Unknown and Under-Appreciated by Many

By Rick Kahler CFP®

I recently talked with an administrator of a private medical practice about some of the financial challenges she faces in dealing with the medical system, insurers, and patients.

Some of the insights she gave me into the realities that private physicians face in providing medical care were rather disturbing.

***

Here are a few of them.

Let’s start with the insurers who account for the bulk of their revenue. Many payments for procedures from insurance companies (including Medicare) are below the cost of providing the service. This forces physicians to make up the difference on other procedures or find other sources of income to sustain the profitability of the practice.

Conversely, in markets that have just one hospital, the insurance companies have no leverage. If the insurers won’t pay what the hospitals demand, the hospitals can threaten to drop out of the network, leaving the insurers with nowhere to send their insureds in those markets. The insurers end up agreeing to pay the hospitals more.

Charges for services provided in-house at the hospital can end up being substantially higher than those same services done by outside providers.

Example:

She gave me an example of a lab test that cost $1,500 to $2,000 at the hospital lab but $35 to $80 at an independent lab. Patients do have the option to direct the hospital to use an independent lab. But, how many people know that and will have the presence of mind to make the request? While it makes financial sense to price-shop if you have a high deductible HSA plan, there isn’t much incentive if your plan has low deductibles.

Collections

Another challenge is collecting from patients. She says a surprising percentage of Americans maintain checking accounts with no money or keep checks from accounts which have long been closed. While writing bad checks is a crime, those who game the system know they can probably get by with writing a low-dollar check because the cost of pursuing justice is much more than the check is worth.

Most companies would never do business with such a person again. Healthcare professionals tend to have a bias toward giving everyone services, so these same people do return requesting care. She said she and her physician employer have had huge internal arguments about this. Her position is that these people take advantage of the physician in a premeditated fashion and don’t deserve to be extended services. The physician argues that everyone, even deadbeats, deserves healthcare. Since the practice doesn’t provide life-and-death services, she was able to get the physician to agree that if someone has an outstanding bill they need to settle it upfront, in cash, before any new services are provided.

Then there are those who use credit cards and then fraudulently dispute the charges. Some providers let this go because of the difficulty of proving that the charge is legitimate. It requires photographs of customers during the transaction, copies of driver’s licenses, customers’ signatures on the paperwork, and notarized statements from the provider verifying that this was the person who received services and presented the credit card.

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SSNs

A final interesting point concerned patients’ Social Security numbers. She said the only time these are ever needed is when an outstanding bill is sent for collection. Otherwise, they are never accessed or used.

Assessment

Finally, she was quick to add that only a small fraction of their patients premeditate stealing from them. She also stressed that not all insurance companies or hospitals behave unethically, and some do wonderful, humane acts of kindness. Nevertheless, the lack of integrity that does occur on both sides is infuriating and adds to the cost of health services.

Conclusion

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HISTORIC PURPOSE OF MEDICAL RECORDS and S.E.S.

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An iMBA Inc., Review

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[By Dr. David Edward Marcinko CMP® MBA]

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As little as a hundred years ago, detailed medical records were likely to have been compiled by medical researchers such as Charcot and Hughlings-Jackson. The medical record was an aide memoire for detecting changes in patients’ conditions over time, solely for the benefit of the physician in treating the patient.

As health care became more institutionalized, medical records became a communications device among health care providers.  Doctors made progress notes and gave orders.  Nurses carried them out and kept a record of patient responses.  A centralized record, theoretically, allowed all to know what each was doing.  The ideal was that if the doctor were unable to care for the patient, another physician could stand in his or her shoes and assume the patient’s care.

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Enter Third Parties 

Then pressures from third party payers occurred. As insurance and then government programs became larger players in the compensation game, they wanted to know if the care they were paying for was being delivered efficiently.

  • Why were these tests ordered?
  • Why weren’t these studies done?
  • Why had the patient remained hospitalized after his temperature had returned to normal for so many hours and no pain medications had been required?
  • Why couldn’t this pre-operative work be done on an outpatient basis?

Though the real push behind these questions was the desire to save money, utilization review also directly contributed to better patient care. A patient who was being given inefficient care was getting substandard care as well. Utilization review was mainly retrospective; denial of compensation was rarely imposed, and suasion by peers was the main effector of change.  Though “economic credentialing” was shouted about, it rarely showed itself in public.

PP-ACA

Even health reform which openly admitted economic incentives as one of its motivators preferred to find some other reason for deciding not to reimburse, or admit Dr. Jones to its narrow panel of ACA, or other “skinny” network providers, or not renewing Dr. Smith’s contract an HMO. The medical record remained essentially a record of patient care which was good or not, efficient or not.  If the record wasn’t complete, the doctor could always supplement it with an affidavit, use information from somewhere else, or provide explanations.

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 train station

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Socio Economic Status

Today, the concept known as Socio Economic Status [S.E.S.] is conceptualized as the social standing, or class of an individual or group. It is often measured as a combination of education, income and occupation. Examinations of socioeconomic status often reveal inequities in access to medical resources, plus issues related to privilege, power and control. SES is increasingly being considered as another payment component [CPT® codes] to medical providers, as reflected in the paper medical record, EMR and elsewhere. 

Assessment

Have you encountered any Socio Economic Status initiative in your clinic, hospital or other medical institution?

Conclusion

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Typical Topics 

  • Financial Planning
  • Retirement Planning
  • Overhead Assessments
  • Income Distribution Models
  • Academic Funding Analyses
  • Insurance Planning
  • Risk Management
  • Practice Assessments
  • New Venture Business Plans
  • Hospital Based Contract Assessments
  • Practice Income Turnarounds
  • Estate Planning
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  • Compensation Plans
  • Cost Accounting Implementation
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  • Payer Rate Evaluations
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  • Strategic Planning Models
  • HIT System Evaluations
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  • New Practice Development
  • Medical Service Line Extensions
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  • Health PR and Medical Practice Crisis Management
  • Investment Management-product evaluation/selection/competitive analysis
    -investment research
    -asset allocation and risk management* Research (products, pensions, planning, risk)
    * Financial Planning (IPS process, solutions, segmentation)
    * New Product Development (pension, longevity insurance, risk management)
    * Management Consulting (effectiveness/efficiency assessment of the investment management process)* Advocacy (regulatory, pensions, new products)
    * Financial Education/Coaching (corporate, groups)

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How Much Do You Earn Dr. Dad … or Dr. Mom?

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Your Children and Your Money

Rick Kahler MS CFPBy Rick Kahler http://www.KahlerFinancial.com

As a doctor – Do your kids know how much money you make? If not, and they asked, would you feel comfortable telling them?

My hunch is that the most common answer to both these questions is “No.” Talking about money is such a strong taboo that it often keeps us from sharing information about our earnings and net worth even with members of our immediate families.

Yet being honest with children about what we earn and how we spend it is a perfect opportunity to teach them important life lessons about money.

Here are a few suggestions to foster those conversations:

  1. Take advantage of teachable moments. As with many other big questions, like where babies come from or whether cats go to heaven (personally, I doubt it, but that may say more about my prejudices than my theology), the ideal time to answer money questions is when the kids ask.
  2. Provide context for numbers. To a child who gets an allowance of five bucks a week, either $10,000 or $100,000 a year can seem huge. One way to put those numbers into context is with comparisons: “I earn about the same amount as your teachers do,” or, “Most doctors probably earn about twice as much as our family does.”
  3. Talk about expenses as well as income. This is huge. It’s another important way of providing context. Plus it helps open kids’ eyes to the realities of earning and spending. When my kids, at about age 10 and 14, first asked about my income, they were impressed with how high the number was. Then we looked at the family expenses: house payment, health insurance, food, college savings, and everything else. They were even more impressed. Seeing what things cost and where the money goes is a good start to educating kids about spending, saving, and creating healthy money habits.
  4. Share appropriately for kids’ ages and understanding. Seven-year-olds and 13-year-olds aren’t ready for the same information. Don’t underestimate your kids’ comprehension, however; if you encourage them to ask questions and are willing to explain and clarify, they may understand more than you expect.
  5. Tell the truth. If you have financial difficulties that stem from your own money mistakes or other bad choices, being honest with your kids can be a powerful teaching opportunity. If you don’t earn a lot but are managing to take care of the family, that’s something to be proud of. If your kids may inherit substantial amounts, it’s wise to start teaching them early how to deal with wealth. Whether you have a net worth in the millions or are barely getting by from month to month, clean honesty about the family finances is a good policy.
  6. Remember that you’re the adult. Over-sharing about financial challenges can frighten your kids. It’s more useful to be matter-of-fact about problems and focus on what you’re doing to solve them.
  7. Keep in mind that when parents don’t talk about money, kids will make up their own stories. Typically this will be either that you earn and have more than you do, or that the family is on the brink of bankruptcy and homelessness.
  8. Look at your own shame and secrecy about money. If parents never talk about money, kids may never ask money questions. Either the topic is simply not on their radar, or they have internalized the unspoken message that it is off limits. In either case, parents can change the family culture by becoming more open about their finances. Those teachable moments for kids begin to happen when money is no longer a secret.

***

Doctor salary

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Conclusion

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: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

[PHYSICIAN FOCUSED FINANCIAL PLANNING AND RISK MANAGEMENT COMPANION TEXTBOOK SET]

  Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™ Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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CRAFTING A BUSINESS PLAN AND STARTING A MEDICAL PRACTICE

[Understanding Business Models, the Entrepreneurial Spirit and Obtaining Capital]

Dr. DEM

By Dr. David Edward Marcinko MBA CMP™

Medical Office Business Plan

We have been involved in the highly competitive private, and/or “for-profit”, education sector for two decades. Yet, are also familiar with the larger public university and sustainable ecosystem.

Solo Medical Practice NOT Dead!

For example, we’ve participated in start-up business competitions, and refereed PhD / MBA Capstone presentations at Georgia State University, Emory University and the Georgia Institute of Technology; including at Triangle Technology Park, NC; and the Whitman School of Business in Syracuse, NY.

Funding was achieved for emerging initiatives deemed most efficient and profitable; like solo and small group medical practices and clinics.

Executive Service Line [ESL] education

Also known as Executive Service Line [ESL] education, this business model refers to academic programs for business leaders and adults that are generally non-credit and non-degree-granting, but may lead to professional certifications.

Estimates by Business Week magazine suggest that executive education in the United States is a $900 million annual business with approximately 80 percent provided by university schools. Beside the educational benefits, monetary dividends are reaped as open enrollment eases matriculation access. Similar programs at the Wharton School, Darden, Harvard and the Goizueta Business School at Emory University charge premium rates for the implied institutional moniker.

Assessment

And, an imperative is that electronic technology be used to expand the universe of targeted adult-learners. This is for aspiring professionals and executives, or those already in the workforce. The tuition gathering universe is thus expanded beyond the School. We have developed and launched several such successful programs that were merged or sold to private investors, colleges and hedge funds

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Valuing the Private Practice Physician’s Quintessential Alternative Financial Investment

Dr. DEM

By Dr. David Edward Marcinko MBA CMP

As we know, the investment industry and Modern Portfolio Theory [MPT] strives to make optimal ‘allocations’ into different ‘asset classes’; according to some defined risk tolerance level or efficient frontier.

Equities, fixed income, property, private equity, emerging markets and so, are all ‘asset classes’, into which physician investors and mutual fund or portfolio managers will make an allocation of their total funds under management. It is quite proper for them to do this as they seek to balance the risk and potential returns for their own; ME, Inc., or other clients’ money.

And, by creating a “new” asset class, this concept opens the door to significant capital flows; advisory and management fees. Hence; the unrelenting innovation of Wall Street, and its’ commission driven and fee-seeking mavens, is unending.

The Social Security Example:

This concept may be illustrated using Social Security as an example.

Wall Street opines, if you’re not counting on Social Security benefits as a part of an overall asset allocation strategy, you may be missing out on bigger gains in a retirement portfolio. Those of this ilk say that retirement investors should consider the value of their Social Security as a portion of their fixed-income investments …. Others believe it may be too risky.

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Empty Retired Doctor's Lounge

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The Portfolio Shift

Generally, adopting this strategy would mean shifting a big portion of investible assets out of bonds and into stocks and into the hands of money managers, stock brokers and wealth managers for a fee; of course. This is akin to those financial advisors who rightly or wrongly goaded clients to not pay off a home mortgage and instead reposition the free cash flow into a rising; and then falling; market. Of course, there are detractors, as well as proponents of this emerging financial planning philosophy.

For example, Jack Bogle, founder of the Vanguard Group, often cites his penchant for basing one’s asset allocation on age. (If you’re 40 years old, you have 40% of your investments in fixed income and 60% in equities. By the time you’re 60, you’ve got 60% in fixed income, 40% in equities).

Now, let’s again consider Social Security, citing a physician with $300,000 in an investment portfolio, and capitalizing the stream of future payments. If the $300,000 is all in equity funds, even equity-index funds, and $300,000 in Social Security, you are already at 50/50″ fixed income versus equities.

The next step is a conversation as this the nexus of where Social Security meets risk management. So, how will the doctor feel when market goes up and down? Some may believe the concept, but not enjoy the inevitable more fluctuating self-directed 401-k, or 403-b plan. One must be comfortable with taking on a larger stock position.

Sources:

  • Andrea Coombes; MarketWatch, September, 2013.

Others experts, like Paul Merriman, opine that Social Security is not an asset class and the idea is fundamentally flawed and should not be a part of anyone’s portfolio.

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Physician SGR Critics and the Doctor Fix

***

Why?

As classically defined, a portfolio is composed of financial assets. A financial asset is something that can be sold. Social Security cannot be bought and sold. Because of that, it has a market value of zero.

Therefore, since a medical practice can be bought or sold, the definitional decision is left up to the informed reader, modern physician or financially enlightened financial advisor; or Certified Medical Planner.

Source:

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More on the Doctor Salary “WARS” – er! ah! … CONUNDRUM!

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Compensation Trend Data Sources

cropped-dem

By Dr. David Edward Marcinko MBA

[Editor-in-Chief] www.BusinessofMedicalPractice.com

Related chapters: Chapter 27: Salary Compensation and Chapter 29: Concierge Medicine and Chapter 30: Practice Value-Worth

 

***

PERSONAL PREAMBLE

***

Physician compensation is a contentious issue and often much fodder for public scrutiny. Throw modern pay for performance [P4P], and related metrics, into the mix and few situations produce the same level of emotion as doctors fighting over wages, salary and other forms of reimbursement.

This situation often springs from a failure of both sides to understand mutual compensation terms-of-art when the remuneration deal was first negotiated. This physician salary and compensation information is thus offered as a reference point for further investigations.

Introduction 

More than a decade ago, Fortune magazine carried the headline “When Six Figured Incomes Aren’t Enough. Now Doctors Want a Union.” To the man in the street, it was just a matter of the rich getting richer. The sentiment was quantified in the March 31, 2005 issue of Physician’s Money Digest when Greg Kelly and I reported that a 47-y.o. doctor with 184,000 dollars in annual income would need about 5.5 million dollars for retirement at age.

Of course, physicians were not complaining back then under the traditional fee-for-service system; the imbroglio only began when managed care adversely impacted income and the stock market crashed in 2008.

Today, the situation is vastly different as medical professionals struggle to maintain adequate income levels. Rightly or wrongly, the public has little sympathy for affluent doctors following healthcare reform. While a few specialties flourish, others, such as primary care, barely move.

In the words of colleague Atul Gawande, MD, a surgeon and author from Brigham and Women’s Hospital in Boston, “Doctors quickly learn that how much they make has little to do with how good they are. It largely depends on how they handle the business side of practice.”  And so, it is critical to understand contemporary thoughts on physician compensation and related trends.

Compensation Trend Data Sources

A growing number of surveys measure physician compensation, encompassing a varying depth of analysis. Physician compensation data, divided by specialty and subspecialty, is central to a range of consulting activities including practice assessments and valuations of medical entities. It may be used as a benchmarking tool, allowing the physician executive or consultant to compare a practitioner’s earnings with national and local averages.

The Medical Group Management Association’s (MGMA’s) annual Physician Compensation and Production Correlations Survey is a particularly well-known source of this data in the valuation community. Other information sources include Merritt Hawkins and Associates; and the annual the Health Care Group’s, [www.theHealthCareGroup.com] Goodwill Registry.

###

Portfolio analysis

www.CertifiedMedicalPlanner.org

Assessment

However, all sources are fluid and should be taken with a grain of statistical skepticism, and users are urged to seek out as much data as possible and assess all available information in order to determine a compensation amount that may be reasonably expected for a comparable specialty situation. And, realize that net income is defined as salary after practice expenses but before payment of personal income taxes.

Conclusion

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INSURANCE: Risk Management and Insurance Strategies for Physicians and Advisors

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Transitioning and Appraising a Podiatry [Medical] Practice

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A Round Table Fair Market Valuation Discussion of One

By Dr. David Edward Marcinko MBA CMP™

[Former – American Society of Health Economists (ASHE) member]

[Editor-in-Chief]

www.CertifiedMedicalPlanner.org

Recently, I was asked to participate in a roundtable of expert’s discussion on the worth or fair market value [FMV] of a typical podiatric [medical] practice on an “ongoing concern” basis.

Of course, this is the type of engagement we often perform at the www.MedicalBusinessAdvisors.com And, I have written about this topic informally on this blog, and more formally in our white-papers and books: www.BusinessofMedicalPractice.com

So, I was pleased to add my experienced opinion to the discussion sponsored by a trade industry magazine upon the invitation of Editor Dr. Barry H. Block JD.

LINK: Podiatry Mgmt Round Table

Assessment

Due to copyright issues, I posted only my comments to the questions posed to all participants. Nevertheless, they are very representative of most medical practices with the exception of the noted podiatric-specific differences.

Invitation: Letterhead.iMBA_Inc.

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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: MarcinkoAdvisors@msn.com

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Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

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About the Institute of Medical Business Advisors, Inc

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Championing the Financial Success of

Doctors and their Consulting Advisors

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

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About iMBA Inc Expertise in Healthcare Valuation

iMBA Inc., and the ME-P Team

By Ann Miller RN MHA

MarcinkoAdvisors@msn.com

Ph: 770-448-0769

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The www.MedicalBusinessAdvisors.com is focused solely on appraising medical practices, surgery centers [ASCs], podiatry, optometry and allied healthcare businesses.

Working with our affiliated partners, like the ME-P and others, we are also available for behemoth multi-specialty medical practices, major clinics, hospitals, related healthcare organizations and networks, and PHOs, etc.

We are backed by the expertise of dedicated appraisers and valuation analysts who are trained by the foremost organizations in our industry www.CertifiedMedicalPlanner.org

Practice owners, attorneys and accountants retain us for projects including, but not limited to the following:.

There are a Myriad of Reasons for Obtaining a Medical Practice Valuation and Appraisal Engagement

  • Outright selling-buying
  • Partnership and Associate buy-in / buy-out
  • Mergers and Acquisitions
  • Organic growth tracking
  • Hospital integrations
  • Private and public reporting
  • Financing and Venture Capital
  • Estate and tax planning

Our Capability

We have the ability to provide extensive analysis of value components in healthcare practices and provide appraisals based on business, economic, and market conditions. This involves detailed examination of financials and clinical data in the context of numerous factors including medical specialty, physician supply and demand, payer mix, regulatory environment, regional dynamics, and risk premium.

Assessment

Our methods and approaches adhere to accepted standards of healthcare practice appraisal and utilize direct market data to reach justifiable conclusions.  These are documented in a comprehensive report which is tailored to meet the need of the specific engagement.

BLUNDERS TO AVOID: Medical Practice Valuation Blunders[1]

SAMPLE ENGAGEMENTS: See partial engagement list below.

Conclusion

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.

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Doctor Salary v. Others [Present Value of Career Wealth]

Specialists v. GPs v. MBAs v. PAs v. College Graduates

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Researchers at Duke University modeled the earning potential of cardiologists and primary care physicians between the ages of 22 and 65, taking into account medical school debt, earning potential and the age at which doctors begin earning an income.

According to John Goodman, they then conducted similar analyses for the average b-school, physician assistant and college graduate.

Assessment

Conclusion

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.

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Thinking About Selling or Transitioning Your Medical Practice?

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The www.MedicalBusinessAdvisors.com practice valuation and transition team can help you appraise your medical practice, develop a new associate/partner transition plan, and even help transition your patients.

A Profitable Transition

You can also choose how to “wind-down” or transition out of practice gracefully and economically, as you work with only select patients, on-board a new associate/partner, or sell your practice outright.

 

Your Practice Business Equity

Either way, we can help you unlock the hard-earned equity in your medical practice and ensure that your patients – and life’s work – are taken care of with a fair market valuation. Purchasing and reviewing our books and white-papers is a great way to start. Otherwise – call us today?

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There comes a time in (almost) every entrepreneur’s life when the question of whether to sell his/her business inevitably arises.

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Assessment

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Conclusion

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Establishing Your Medical Practice’s Fair Market Value

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Part One of Medical Practice Valuation

By Dr. David Edward Marcinko, MBA, CMP

By Professor Hope Rachel Hetico, RN, MHA, CMP

www.CertifiedMedicalPlanner.org

In recent years, the physician practice market has experienced a noticeable increase in practice merging and acquisitions. Medical practices are being acquired by health systems in anticipation of Accountable Care Organization (ACO) delivery models.

For physicians, the decision to buy, sell, or merge a medical practice is more complicated than ever, and determining a medical practice’s worth is crucial to this process. Over the next two months, we’ll review the why, when, and how of the contemporary medical practice valuation.

Value Isn’t an Absolute Number

A medical practice’s tangible and intangible assets can be grouped into two broad categories:

  • Physical assets: Examples are real estate, medical records, leaseholds, medical equipment and furnishings, and accounts receivable (A/R).
  • Non-physical assets: These include goodwill, restrictive covenants, buy/sell agreements, managed care contracts, and an assembled workforce.

Estimates of value differ markedly, depending on the purpose of the appraisal, the acumen of the appraiser, etc. To help determine the value, some important questions to consider are:

  • What is the value of the practice for purchase or sale?
  • What is the value of a practice for merger?
  • What is the value of practice assets for joint venture with a corporate partner?
  • What is the value to establish buy-in or buy-out arrangements for partners?
  • What is the value of practice assets for purchase or sale, apart from ongoing operations?

To answer these questions, physicians (buyers and sellers) must understand how practices are valuated—beginning with the following informal, and then more formal, definitions:

Informal Terms of Valuation

  • The “asking price” is often arbitrary and difficult to substantiate, and typically is reduced 25-50 percent after negotiations.
  • The “creative price” is derived by way of creative financing. For example, the practice may provide the down payment.
  • The “emotional price” may involve either a motivated buyer or seller, who pays an under- or overinflated price for the practice.
  • The “friendly price” is reserved for associates, partners, or other colleagues.
  • The “realistic price” is one that both buyer and seller believe is fair.

Formal Terms of Valuation

  • Most appraisers use “fair market value” (FMV) as the standard to derive a reasonable value for a practice. FMV means an arm’s length transaction between an unpressured, informed buyer and an unpressured, informed seller.
  • The “business enterprise value” of a practice equals a combination of all assets (tangible and intangible), and the working capital, of a continuing business.
  • The value of “owner’s equity” equals the combined values of all practice assets (tangible and intangible), less all practice liabilities (booked and contingent).
  • The “working capital value” equals the excess of current assets (cash, A/R, supplies, inventory, prepaid expenses, etc.) over current liabilities (accounts payable, accrued liabilities, etc.).

Realizing that there is no absolute sales price is the essence of FMV. When determining valuation, look for a price range with a reasonable floor and ceiling.

Understand The Lingo

If you are a practice buyer or seller, make sure you understand terms and appraisal definitions.

That’s a lesson George Farmer, a primary care physician inFlorida, learned the hard way. He asked his accountant to appraise his business. When he was ready to sell, his attorney (who also happens to be his brother-in-law) drew up the sales contract. Farmer was pleased that the practice sold quickly for its full asking price.

What he didn’t know (but would discover) is that accounting or “book” value—the figure his accountant gave him—is far different than the FMV that he could have received.

Was the CPA wrong? Not really. Was the doctor incorrect? No. But each was operating under a different set of terms and definitions, without knowledge of each other’s perspectives.

How to Begin Valuation

The following steps should occur before the practice appraisal process begins:

  • Retain an appraiser (for each side) who understands the changing health care industry.
  • Aggregate historic practice business information and consolidated financial statements, operating statistics, payer mix, CPT® utilization, acuity rates, etc.
  • Eliminate one-time, non-recurring expenses, adjusted or normalized for excessive or below normal expenses.
  • Understand key assumptions used in financial projections.

To determine value, appraisers should follow the American Society of Appraisers’ Principles of Appraisal Practice and Code of Ethics. The IRS issued guidelines in 1995 further suggesting that appraisers use the general methods of the Uniform Standards of Professional Appraisal Practices (USPAP), which recognize three approaches to medical practice valuation.

1. Income Methods

There are two methods to value a practice by income:

(a) 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.

(b) Discounted Method: Discounted Cash Flow (DCF): 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 the key assumptions produces a meaningful estimate of practice value. These assumptions may include:

  • projections of future practice revenue, 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 revenue, 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 approaches. They are becoming less common and less useful.

3. Cost Approach

The cost approach calls for identification and separate valuation of all the practice assets, including goodwill, depreciated over 15 years.

The cost approach is more labor intensive than using the enterprise analysis to estimate practice value; especially for a new practice, which typically includes the expenses to acquire space, office furnishings, equipment, marketing, advertising, staff development, and losses incurred during the startup period. This estimate of “replacement cost or cost avoidance” value represents an upper limit (or ceiling) of value, and generally is not considered useful in estimating the value of an established medical practice.

Net Income Statement Adjustments

When analyzing a set of financial statements to determine practice value, adjustments (normalizations) generally are needed to produce a clearer picture of likely future income and distributable cash flow. It also allows more of an “apples to apples” line item comparison. This normalization process usually consists of making three main adjustments to a medical practice’s net income (profit and loss) statement.

1. Non-Recurring Items: Estimates of future distributable cash flow should exclude non-recurring items. Proceeds from the settlement of litigation, one-time gains/losses from the selling of assets or equipment, and large write-offs that are not expected to reoccur, each represent potential nonrecurring items. The impact of nonrecurring events should be removed from the practice’s financial statements to produce a clearer picture of likely future income and cash flow.

2. Perquisites: The buyer of a medical practice may plan to spend more or less than the current doctor-owner for physician executive compensation, travel and entertainment expenses, and other perquisites of current management. When determining future distributable cash flow, income adjustments to the current level of expenditures should be made for these items.

3. Non-cash Expenses: Depreciation expense, amortization expense, and bad debt expense are all non-cash items which impact reported profitability. When determining distributable cash flow, you must analyze the link between non-cash expenses and expected cash expenditures.

The annual depreciation expense is a proxy for likely capital expenditures over time. When capital expenditures and depreciation are not similar over time, an adjustment to expected cash flow is necessary.

Some practices reduce income through the use of bad debt expense rather than direct write-offs. Bad debt expense is a non-cash expense that represents an estimate of the dollar volume of write-offs that are likely to occur during a year. If bad debt expense is understated, practice profitability will be overstated.

Balance Sheet Adjustments

Adjustments also can be made to a practice’s balance sheet to remove non-operating assets and liabilities, and to restate asset and liability value at market rates (rather than cost rates).

Assets and liabilities that are unrelated to the core practice being valued should be added to or subtracted from the value, depending on whether they are acquired by the buyer. Examples include the asset value less outstanding debt of a vacant parcel of land, and marketable securities that are not needed to operate the practice. Other non-operating assets, such as the cash surrender value of officer life insurance, generally are liquidated by the seller and are not part of the business transaction.

Assessment

With a basic understanding of practice valuation and the steps involved, buyers and sellers will be better prepared for next steps. So, next time in Part 2, we will discuss the art of the deal, and how to structure the practice sale.

Conclusion

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: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

AdditionalReading:

Cimasi, Robert James: Valuation of Hospital in a Changing Reimbursement and Regulatory Environment. In,Marcinko,DE(Editor): Healthcare Organizations (Financial Management Strategies). Institute of Medical Business Advisors Inc.,Atlanta,Ga., 2011

Marcinko,DE: “Getting it Right,” How Much is a Plastic Surgery Practice Really worth? Plastic Surgery Products, August 2006.

Marcinko,DEand Hetico, HR: The Business of Medical Practice (third edition). Springer Publishing,New York,N.Y., 2011.

Marcinko,DEand Hetico; HR: Risk Management and Insurance Planning for Physicians and Advisors, Jones andBartlettPublishers,Sudbury,Mass., 2007.

Marcinko,DEand Hetico; HR: Financial Planning for Physicians and Advisors, Jones andBartlettPublishers,Sudbury,Mass., 2007.

Marcinko,DEand Hetico, HR: Dictionary of Health Insurance and Managed Care, Springer Publishing,New York,N.Y., 2007.

Marcinko,DEand Hetico, HR: Dictionary of Health Economics and Finance, Springer Publishing,New York,N.Y., 2007.

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Risk Management, Liability Insurance, and Asset Protection Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™8Comprehensive Financial Planning Strategies for Doctors and Advisors: Best Practices from Leading Consultants and Certified Medical Planners™

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About the Mobile Health Market

Sensor-Based Mobile Apps Show How M-Health Business Models Could Work

By Markus Pohl

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Making money with mobile healthcare applications takes much more effort than most developers expected. M-Health apps normally do not get into the app stores’ top ranking lists and thus do not receive high download numbers.

m-Health Applications Business Models

But, there are working business models for the mHealth applications. Within the mobile health app category revenue won’t be generated through app stores. More and more mHealth app publishers have understood that they have to adapt their business model accordingly. Turning away from the “normal” pay-per-download models to practices like charging for medical service (call a doc) or sensor based models.

Sensor Based Models

Sensor based business models seem to have particularly caught the attention of mHealth app publishers over the last 6 months. The idea behind this model is not to sell an app but to use the app to promote the sales of a sensor. Revenue will be generated outside the app store.

Trend Examples: 

Here are some examples to highlight this trend.

  • Health and Wellness Monitoring tools combine fitness-related equipment to track pulse, calories, running speed, heart rate, or use sensor-devices to monitor weight control, fetus observation and eye testing. Target groups for these products are fitness and health-conscious users aged mainly between 35 and 45 years.
  • Chronic Condition Monitoring tools monitor health conditions like heart disease, hypertension, diabetes, asthma and obesity. They generate revenue from selling a sensor-device with a free application. Target groups are healthcare providers, medical personnel and chronically ill people between 30 and 50 years.
  • Diagnosis Tools are mainly targeted at professionals, who increasingly demand more portable and easy-to-use devices for easier communication with patients and peers.
  • Educational and Motivational Tools monitor habit patterns (e.g. sleep monitoring via app/device) or serve as useful didactic instruments for science education (e.g. portable microscopes).

Traditional health care service providers and especially medical device manufacturers should be aware of these trends and start to connect to the smartphone world.

To find a detailed overview of mHealth business models – please see the Mobile Health Market Report 2010-2015. Or, take a look at more mobile healthcare research from research2guidance.

Assessment

Outside app store revenue will drive the market. Sensor-based business models prove how to actually make money with mobile applications.

Conclusion

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Understanding CPT® Code Payment Components

Determinations More Complex than Most Believe

By Staff Reporters

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Currently, there are more than 10,000 physician services designated by the current procedural terminology (CPT®) or healthcare common procedure coding system (HCPCS) codes.  Each reflects the three major cost drivers of a particular procedure:

  • Physician work effort or the relative value unit (RVUw) of medical providers’ work efforts, pre-service, intra-service and post-service time.

Patients may exhibit anxiety when examined orduring procedures resulting in the need for additional timeand effort by the physician to respond to and prepare for the examination or procedure. This uniformly adds moretime and stress to the pre-service and intra-service period as doctors respond to constantly changing behavior, questionsand level of cooperation in varying specialties.  Follow-up communicationwith employers, family, friends and concerned others requires increased post-service times.

  • Practice expenses (RVUpe), including non-physician costs but excluding medical malpractice coverage premiums.

The practice expense component of the resource-based relative value scale (RBRVS) includes clinicalstaff time, medical supplies, and medical equipment.  Often, the costsof supplies and equipment are not proportional to practicesize.  Major factorsaffecting practice expense are the volume of telephone, cell, or Internet management services, and the case management and administrative work required. For example, high patient turnover requires more examination rooms to maintain physician efficiency. High volume requires moreclerical staff to deal with larger patient-flow volume and resulting phone calls, difficultiesdressing and undressing patients, and is marked by increasedcomplexity and time in collecting laboratory specimens.  Thesefactors must be accounted for in any resource-based practiceexpense study and in the resulting practice expense calculationsfor medical services; and

  • Malpractice (RVUm) representing the cost of liability insurance.

The RBRVS system assigns RVUs to cover the malpractice expensesincurred by physicians. These malpractice RVUs, originally calculatedfor office-based physicians, may systematically undervaluethe practice liability costs for some specialties. The prolonged statutes of limitation on some legalactions may result in increased malpracticerisk exposure for physicians providing such services [i.e., pediatricians]. The differences in exposure may not be calculated in theRBRVS system, and were not included in initial studies.  Specialty specific survey data for malpractice expenseshould be used for this component when assigning final RVU valuations.  Without specialty-specific CPT® codes, however, there was no wayto do this objectively.

Conclusion

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A Brief History of the ME-P

Enhancing Health 2.0 Connectivity for Physicians and their Financial Advisors

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The Medical Executive-Post [ME-P] was launched in 2006, and was a resounding success. We first went online in October 2006 with an overwhelmingly positive response. Readers and subscribers alike reported finding it a credible source of information with more than half saying the information was far new to them. Our parent company remains: www.MedicalBusinessAdvisors.com

Our Research

In additional, our internal research revealed:

  • 85% of those surveyed considered practice-related, non-clinical information very important to them.
  • 82% heavily favored solutions and essays to specific needs versus general editorial content.
  • 77% found practice management information integrated with financial planning content very unique.
  • 68% felt a journal or newspaper presentation as increasingly irrelevant.

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On Medical Practice [Business] Succession Planning

A Process of Financial Steps

By Dr. David Edward Marcinko, MBA CMP™

[Editor-in-Chief]

http://www.CertifiedMedicalPlanner.org

Succession planning is a dynamic process requiring current ownership and management to plan the medical practice or company’s future, and then implement the resulting plan. As a financial planner and advisor myself, I see many doctors and clients approach business [practice] succession planning initially through retirement planning. Once they understand the issues and realities of the tax laws, they are much more amenable to working out a viable succession plan. Many doctors and other clients have not clearly articulated their goals, but have many pieces of the plan that need to be organized and analyzed by the financial planner to meet their objectives, including both personal and financial issues.

A Step-Wise Process

The steps necessary for successful succession planning are as follows:

• Gathering and analyzing data and personal information

• Contacting the doctor [client’s] other advisors

• Valuing the medical practice or business

• Projecting estate and transfer taxes

• Presenting liquidity needs

• Gathering additional corporate information

• Identifying dispositive and financial goals

• Analyzing the needs and desires of nonfamily key employees

• Identifying potential ownership, physician-executive and/or management successors

• Making recommendations, modifying goals, and providing methodologies

• Assisting the doctor-client in implementation

Gathering and Analyzing Data and Personal Information

The first step in data collection is talking to the doctor or client, and explaining the process of gathering data. Most successful financial planners use a questionnaire to be sure to address all important information. The planner should gain an understanding of the interrelationships between the practice, family and the business and address each of these areas as separate parts of the same equation. Finding out how the practice or business operates and why it operates that way can help the planner determine whether change is necessary and how to go about implementing it. Other important elements to address include the environment in which the practice [business] operates, potential flaws in the current structure and operations, appropriate levels of key-person life insurance coverage, investment asset diversification, prior estate planning efforts, and existing legal contracts that may need modification.

A Timely Process

It may take some time, from weeks to months, for the client to gather the required information. The planner should be encouraging and should periodically check on the doctor-client’s progress. If it appears that the client may not be motivated to complete the questionnaires independently, the planner should schedule an appointment to help the doctor-client finish. The client may create obstacles because he or she does not want to talk about death or relinquish control of the practice or business. These are delicate topics, and the financial planner cannot force the client to face them. Still, the consequences of not carrying out personal financial and estate planning can be explained.

Understanding the Practice or Business

To be most helpful to the doctor-client, the financial planner must understand the client’s medical practice or business. Reviewing the history of the company, getting acquainted with its current operations, and becoming familiar with the industry is important. By reviewing financial statements, income tax returns, business plans, and all pertinent legal documents, the planner will be able to identify key areas to focus on during the engagement. Understanding the patient or customer base of the business is also important. For example, exploring the impact of the principal’s death on the patient [customer] base helps the financial planner understand what changes could occur in the business after the physician-owner’s death.

Fair Market Valuation

Next, the planner must translate the balance sheet to current fair market values and analyze the debt, capital structure, and cash flows. A review of accounts receivable, inventory, and any fixed assets should be included to determine whether there is sufficient collateral for a leveraged buy-out or other estate planning technique for succession planning. Also, the cash flow should be reviewed to see if new fixed payments such as debt repayments or dividend distributions could be made.

Contacting the Doctor-Client’s Other Advisors

After gathering the documents, it’s a good idea for the planner to contact the client’s attorney, accountant or tax advisor, bank or trust officer, insurance advisor, investment advisor, stockbroker, and other business advisors. As many key advisers as possible should be contacted early in the engagement to create a spirit of cooperation. A planner will benefit by creating team harmony and establishing himself or herself as the team leader. Additionally, a planner could be engaged by these professionals in the future, and a planner is a valuable source of referrals.

Valuing the Medical practice of Business

The next step in the succession planning process is computing the value of the practice or business. It may surprise the planner to hear what the doctor or client perceives as the value of the [practice] business at the beginning of the engagement. Likewise, the client may be surprised to hear what value could be placed on the business for estate tax purposes. The goal in valuation is determining the price at which the business would change hands between a willing buyer and a willing seller, assuming:

• The buyer is not under any compulsion to buy.

• The seller is not under any compulsion to sell.

• Both parties have reasonable knowledge of the relevant facts.

Revenue Ruling 59-60 (1959-1, CB 237

The IRS issued Revenue Ruling 59-60 (1959-1, CB 237), which lists several factors to be used in valuing a business:

• Nature and history of the practice or business

• Economic outlook and condition of the healthcare industry

• Book value and financial condition of the practice or business

• Earning capacity of the practice or business

• Dividend-paying capacity of the practice or business

• Value of any goodwill or other intangibles

• Value of similar stocks traded on open markets

• Degree of control represented by the size of the block of stock interest

Highest and Best Use

The IRS computes a value based on the “highest and best use” of the practice or business. This means that the business will be valued by the IRS at the highest possible value that can be reasonably justified. Valuation methods include the asset approach, income approaches, and market approach.

• Asset approach:  This is primarily used for a business that is worth more if it is sold in pieces rather than as a whole. The tangible asset value is added to the intangible goodwill value.

• Income approaches:  A business as a going concern has value in its ability to produce profits in the future. These profits represent a return on the investment. The value of the business is a function of expected profits and desired rate of return.

— Discounted future earnings method:  Projected future earnings are discounted to present value.

— Discounted cash flow method:  Cash that the owner can withdraw from the business is discounted to present value.

— Capitalization of earnings method: Expected earnings are divided by the capitalization rate.

— Capitalization of excess earnings method.  Expected earnings that are not needed in the business are divided by the capitalization rate.

• Market approach: A business is worth what similar businesses sell for. Referred to as the comparable method of business valuation, this method should be used only when the comparable business is truly comparable.

Each of these primary methods has numerous variations that may provide a more desirable or justifiable value.

Assessment

When reviewing potentially taxable estates, the planner should analyze the opportunity to use favorable valuation discounts for loss of a key employee, lack of marketability, or possibly a minority discount for lack of control. Alternatively, planning recommendations can be made to avoid exposure to valuation premiums for control. The physician-owner may avail himself or herself of many of these discounts by reducing holdings to less than 50% prior to death.

Conclusion

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A Physician Query on “Used” eMR Billing System Value?

Understanding Residual Worth

“Ask an Advisor”

Submitted by an Anonymous, MD

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Greetings!

I am in a three man Neurology practice. Five years ago we invested in an all inclusive EMR / billing system with A4 Health Systems and Allscripts. The system cost close to $60,000 and has been constantly upgraded (for “free”). There are also yearly “maintenance” fees of about $7,000. Each physician also had to get a license at a cost of $7,000 each. A license now per physician is $13,000!  

Buy-Out Value

I am going to be leaving the practice in one year and would like to know how I go about getting the EMR appraised for my buy-out. I am not about to turn this very valuable system over to my partners as a “going away gift”. The system has been upgraded several times a year and the practice obviously could not run without it (i.e.: it is a tangible asset and has continued value in use). 

Assessment

PCs, printers, etc. may have depreciated in value but the system has not especially since it has been upgraded on a regular basis. Can you refer me to someone who is familiar with appraising EMR systems?

Conclusion

And so, your thoughts and comments on this ME-P are appreciated. How do you appraise a “used or second-hand” eMR system? Does it have any residual value at all! 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.

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Understanding Medical Practice Stock Sale vs. Assets Sale

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Insights for Physician-Focused Financial Advisors

By Dr. Charles F. Fenton III, FACFAS, JD

www.BusinessofMedicalPractice.com

In most cases, healthcare knowledgeable financial advisors [FAs] recommend that the physician buyer of a medical practice solely purchase the assets of the practice and not the stock of the practice itself http://www.CertifiedMedicalPlanner.org

A Risk Reduction Strategy

Why? By purchasing selected assets, the buyer is ensured that he will not become responsible for the known or unknown liabilities of the corporation; thus a risk reduction strategy. In prior days, avoiding purchasing the stock of the corporation was a wise recommendation www.MedicalBusinessAdvisors.com

Enter the Managed Care Era

However, with the advent of managed care, the purchase of the stock of the corporation can provide the new practitioner with certain competitive advantages.

For example, it may take a new practitioner three to nine months to get onto enough managed care panels to make the practice profitable. Purchase of the stock of the corporation ensures the new practitioner of acquiring the Federal tax identification number of the corporate entity.

Assessment

Since most managed care corporations identify providers by the Federal tax identification number, purchase of the stock of the corporation should allow the new practitioner to be enrolled on managed care panels in a shorter period of time. Instead of applying anew to the managed care entity, the new practitioner merely needs to be listed as a new member of a provider already on the managed care panel.

Conclusion

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Defining the Standard of Medical Practice Business Value

Understanding Terms and Definitions

Dr. David E. Marcinko; MBA, CMP™

[Editor-in-Chief]

The term “value” in and of itself is too broad to be useful in the business appraisal of a medical practice, ASC or clinic, etc.  It must be given a context. As a medical practice appraiser, the industry generally refers to four standards of value. 

Fair Market Value

This is the most common context given to the term value. Fair Market Value [FMV] is defined by the IRS through Revenue Ruling 59-60 as:

“the amount at which property would exchange hands between a willing buyer and a willing seller when the former is not under compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of the relevant facts.”

It is generally agreed that fair market value is based upon a hypothetical arm’s length transaction before direct consideration of taxes to be paid as a result the transaction.  That does not imply that taxes are not part of the relevant fact set that a willing doctor-buyer considers when determining the value.  Fair Market Value is the standard of value that is used in valuations for estate tax and generally for valuations related to divorce.

Investment Value        

Investment Value focuses on value to a specific buyer rather than value to a hypothetical buyer. For example, let us examine an owner of a medical office who is considering the acquisition of a competitor practice that operates in the same geographic market.  The doctor owner might calculate value based upon the knowledge that the combination of the two entities will create economies of scale and less competition. This would result in greater profitability per dollar of revenue.  Therefore, such a buyer, all else equal, may assess a greater value to the practice than a buyer who would expect to operate the office in its current free standing situation, without the expected cost saving and corresponding expectation of increased cash flow.

Intrinsic Value

Intrinsic Value is similar to investment value however the practice is typically viewed in a stand-alone mode as a going concern.  That is, value is based upon the expected cash flows of the firm based upon its current operating configuration.  However, changes in operating policy such as changing its financial structure can have an impact on its intrinsic value. 

Going Concern Value vs. Liquidation Value

A medical business cannot be worth less than its liquidation value. Thus, liquidation value sets a floor for value. Liquidation value assumes that a practice’s operations cease and assets are sold either piecemeal or in groups and obligations are satisfied. Liquidation value is generally based on an “orderly liquidation” process where assets are sold in manner to realize the greatest possible value for them. 

In contrast, a “forced liquidation” process is where practice assets are sold as quickly as possible often through an auction. Going Concern Value views a firm as a holistic combination of tangible and intangible assets in which the sum is often greater than its parts. This synergistic view of the practice is typically what is being valued.     

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Conclusion

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Determining the Required Rate of Investment Return

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Financial Fundamentals of Medical Practice Sales

Dr. David Edward Marcinko; MBA, CMP™

[Editor-in-Chief]

A physician investor’s required rate of return, for the sale of a medical practice, takes into account that monies received sooner have a greater value than those received later. And, the greater the risk in receiving future cash flows the lower their current value. Moreover, one must always keep in mind returns that can be earned on alternative investments.  A required rate of return takes all these factors into account.

The Process

The process of selecting an appropriate required rate of return begins with an assumption that all investors will require, at a minimum, the riskless rate of return offered by government securities. Government securities with a maturity similar to that of the duration of the investment in a private [practice] company are selected, and normally; and a duration of ten to twenty years is used. Because of the minimal default risk associated with government securities, the rate is referred to as the risk free rate. THINK: Freddie Mac and Fannie Mae.

Physician Investors

Investors typically require returns greater than the risk free rate. The additional return (in excess of the risk free rate) is called the risk premium.  Risk premiums are generally calculated through an analysis of historically realized rates of return segmented by varying levels of risk, and medical practice specialty, etc. This analysis illustrates that higher historical rates of return occur in situations of higher risk. For example, securities issued by the U.S. government have lower rates of return than securities issued by large corporations. Returns on the equity of large corporations are greater than those of debt securities issued by the same firms. Thus, historical rates of return are generally used as a proxy for future required rates of return; despite the market implosion of 2008-10.

Healthcare Business Valuation

When valuing a medical practice, clinic or healthcare business entity, one must compare the risk of the expected cash flows of the entity being valued to the risk of the cash flows of like [private] publicly traded securities and to determine an appropriate required rate of return based on that assessment.

Cash Flows

It is generally assumed that the expected cash flows from an investment in a closely held healthcare business are at least as risky as those of large publicly traded firms. The combination of the large firm equity risk premium and the risk-less rate of return provide an indication of the required rate of return for the buyer or seller. Beyond that, additional risk premiums related to entity size, proportion of debt and health industry conditions exist; and many other possible company specific risk factors may be appropriate.

Assessment

When valuing a small business like a medical practice, we appraisers generally employ required rates of return 10 percent to 30 percent beyond the current long-term risk free rate for the risky and fragmented healthcare industrial complex.

In summary, the required rate of return used to value a closely held medical business represents the return a physician investor demands to invest funds now with the expectation of the uncertain cash flows associated with ownership of a private company.

Conclusion

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Understanding the Premise of Appraisal Value and Investment Time Horizon

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Key Issues in Healthcare Entity Valuation and Appraisal

By Robert James Cimasi; MHA, ASA, AVA, CBA, CMP™

cimasiwww.HealthCapital.com

The Premise of Value under which any healthcare entity fair market valuation is conducted is an assumption further defining the Standard of Value to be used.

The Premise of Value defines the hypothetical terms of the sale and answers the question, “Value under what further defining circumstances?”  Two general concepts relate to the consideration and selection of the Premise of Value, i.e., “value in use” and “value in exchange.”

Value in Use

Value in use is that premise of value that assumes that the assets will continue to be used as part of an ongoing business enterprise, producing profits as a benefit of ownership.

For example, in valuing the assets of a surgical hospital, the valuator must determine whether it is appropriate to value simply the tangible assets, or if it is appropriate to consider the enterprise as a going concern and incorporate the potential value of intangible assets. Orderly liquidation value involves assuming that the equipment is sold, perhaps separately, over a reasonable period of time. Forced liquidation assumes that the equipment is sold as quickly as possible to the first bidder.

Value in Exchange

Value in exchange is often referred to as “liquidation value.”  Liquidation value describes a sale of the assets of a business enterprise under conditions other than its continued operation as a going concern.

The liquidation can be on the basis of an orderly disposition of the assets where more extensive marketing efforts are made and sufficient time is permitted to achieve the best price for all assets, or on the basis of forced liquidation where assets are sold immediately and without concern for obtaining the best price.

hospital

Liquidation

Of course, costs of liquidation should be considered in the value estimate when using this premise of value.  Shortening the investment time horizon may have a deleterious effect on the valuation of the subject entity as it presents a restriction on the available pool of buyers and investors and the level of physician ownership, as required under the standard of Fair Market Value.

Assessment

Do the dual issues of value premise and time horizon still seem logical in modernity; why or why not? How comfortable are you that a reasonable FMV can be determined for any healthcare entity after passage of  The Patient Protection and Affordable Care Act in March of 2010? Please comment and opine. 

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Conclusion

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Documentation for a Medical Practice FMV Appraisal

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Office Operations and Processes also Important

By Dr. David Edward Marcinko; MBA, CMP™

[Editor-in-Chief]

To successfully complete a medical practice financial analysis and fair-market valuation [FMV] engagement, the following is a description of the documents that are typically required.

According to Robert James Cimasi MHA, AVA, CMP™ of Health Capital Consultants LLC, most of this information is analogous to that required for the valuation of other types of healthcare service sector entities.

A. Important Documents

  • Historical Financial Statements

Important for identifying key variables and trends for analysis. The consultant should obtain year-end financial statements for a sufficient, relevant period to allow reliable analysis, e.g., the most recent three-five years. If, however, significant changes such as technological upgrades, product shifts, or environmental changes have occurred or the five-year period is not long enough, or too short, to assess the entity’s performance during changes in its business cycle or economic conditions, a longer or shorter period may be needed.

  • Tax Returns

Obtain tax returns to understand the entity’s tax position and to obtain additional accurate financial data. The returns provide a summary of tax policies and elections that affect tax expense and net income.

  • Forecasts and Proformas

Prospective financial information (e.g., forecasts, proformas, and budgets) should be requested to provide an indication of the entity’s opinion of its earnings potential as well as its historical ability to meet projections. This data may be especially useful if the consultant must produce a proforma or valuation of future earnings or cash flows.

  • Legal Documents

The consultant should review all significant legal documents to obtain an understanding of the ownership interests and relationships and to determine if contractual arrangements affect the entity’s operations and overall value. Some of the documents to be reviewed include:

Articles of Incorporation, stockholder, or partnership agreements. These agreements indicate ownership interests and the owners’ rights and obligations. Also, any stock option agreements should be considered. This will help the consultant determine or verify the type of interests involved.

Stock books. Review of these can help the consultant ascertain the relative size of various ownership interests and identify transactions in the entity’s stock.

Existing buy-sell agreements. These may provide an indication of the value of the entity or an ownership interest in it. Such agreements, however, are often structured based on factors other than the entity’s fair market value.

Purchase and sale agreements involving prior transactions of the entity’s stock. These provide indications of the entity’s value and any offers or letters of intent to sell or purchase stock should be carefully reviewed under IRS Revenue Ruling 59-60, which includes “Sales of the stock and the size of the block of stock to be valued” in a list of factors that, “although not all-inclusive are fundamental and require careful analysis in each case.” IRS Ruling 59-60 further requires:

   Sales of stock of a closely held corporation should be carefully investigated to determine whether they represent transactions at arm’s length. Forced or distress sales do not ordinarily reflect fair market value nor do isolated sales in small amounts necessarily control as the measure of value. This is especially true in the valuation of a controlling interest in a corporation. Since, in the case of closely-held stocks, no prevailing market prices are available, there is no basis for making an adjustment for blockage. It follows, therefore, that such stocks should be valued upon a consideration of all the evidence affecting the fair market value. The size of the block of stock itself is a relevant factor to be considered. Although it is true that a minority interest in an unlisted corporation’s stock is more difficult to sell than a similar block of listed stock, it is equally true that control of a corporation, either actual or in effect, representing as it does an added element of value, may justify a higher value for a specific block of stock.

Managed care and other service contracts. Types and numbers of managed care contracts should be reviewed, including whether they are with healthcare maintenance organizations (HMOs), preferred provider organizations (PPOs), or point-of-service (POS) contracts; whether they are on a discounted fee-for-service basis and if so, the size of the discount; whether they include a withhold percentage to only be paid based on quality criteria; or whether they are a flat fee per enrollee (“capitated”). Special terms such as the non-transferability of the contract to a new owner must be noted, e.g., managed care contracts often require that the provider be included on a panel of credentialed providers in order to contract to provide services.

Key doctor and managers’ employment contracts. Such agreements can reveal excess compensation above fair market value or “golden parachute” provisions in the event the business is sold.

Loan and lease agreements. These agreements may contain restrictive covenants, special demand clauses, or working capital requirements that affect the value of the entity. The length and terms of lease agreements is also important.

Documents relating to current, pending, or threatened litigation. These may indicate major contingent liabilities that may affect an entity’s value.

Patent/trademark documents. These documents may indicate the existence of valuable intangible assets. The absence of these documents could indicate the absence of a value consideration claimed by the client.

appraisers

  • Office operations and Staff

Consultants should also gain an understanding of the entity’s operations and key personnel. This can be accomplished by touring the facilities, interviewing key managers, and obtaining additional operational data. Obtaining enough information to thoroughly understand the entity, its operations, and its environment is the objective. The consultant becomes aware of operational data or contracts that may affect value by reviewing the following types of documents:

Corporate documents, including stockholder and director lists, compensation schedules for officers and directors, schedule of key man life insurance policies and organizational charts.

Operational documents, including practice business plans, brochures, price lists, catalogs and other product information, sales forecasts, data on customers and suppliers, and capital budgets.

Reports of other professionals, including appraisals on specific assets and reports by other consultants.

Other internal information, including documents or details relating to potential public offerings for debt or equity, venture capital prospectus or similar information, and tracking of incurred but not reported (IBNR) expenses.

  • Loan Agreements

The medical practice may have loaned or borrowed funds from affiliates. Such loan arrangements may require adjustments to be made to the economic value of the subject entity.

Uncollectible loans receivable should have been written off.

Collectible loans receivable may still be considered non-operating assets and evaluated separately.

Loans payable to related parties may be structured as demand notes, but there may be little chance that such loans will be repaid. Such loans may be considered either long-term debt or a form of owners’ equity.

B. Site Visit / Interview Information

The following types of information specific to the medical practice should be gathered by the financial executive or healthcare consultant. This information may be obtained through an interview, questionnaire, or preferably a site visit.

Valuation

  • Background Information

Include such information as the number of years the entity has operated at its current location and in the community, as well as the office hours.

  • Building Description

Include the location (urban/suburban), proximity to hospitals and other medical facilities, and its size, construction, electrical and computer wiring, age, access to parking, and so on.

  • Office Description

Approximate acquisition details and price, as well as ownership or lease details should be included.  The square footage and number of rooms, and a description of different office areas should be outlined, including, where applicable: medical equipment, including all diagnostic imaging and major medical equipment; pharmacy, laboratory, examination rooms, waiting rooms, and other areas.

  • Management Information Systems

Document types of hardware and software and the cost, age, and suitability of all components, including their management functions, reporting capabilities, and integration between programs.

  • History of the Practice Entity

Give the date founded and by whom, the number of full-time equivalent (FTE) physicians in practice by year, the physicians who have joined and left the entity, the dates they practiced at the entity, and their relationship and practice arrangement with the entity.

  • Office Staff Description

Include the number and types of non-physician positions as well as the tenure and salary of all current employees.

  • Competitive Analysis

Include details of hospital programs impacting practice, growth or decline in the volume of business and the reasons, association with other physicians, competitive strengths and threats, the number and volume of procedures performed, any change in the number and volume, and the corresponding fees.

  • Patient Base Information

Encompass income distribution and percentages from different payors, the number of new patients and total patients seen per week, the age mix of patients, the number of hours spent in patient care per week, and the number of surgeries performed.

  • Managed Care Environment

Detail the terms and conditions of all managed care contracts including discounts and withholds, the impact on referral patterns and revenues, willingness to participate in risk sharing contracts and capitation, and the entity’s managed care reporting capabilities.

  • Hospital Privileges and Facilities

List all hospital privileges held by physician members of the medical practice and the requirements for acquiring privileges at the different local hospitals.

  • Credit Policy and Collections

Include practice policies for billing and payment, use of collection agencies, acceptance of assignments, other sources of revenues, and an aged breakdown of accounts receivable.

  • Financial Management

Include cash management procedures and protections, credit lines and interest, controls to improve payment of accounts payable, late payment frequency, formal or informal financial planning methods, and budgeting processes.

  • Operational Assessment Include governance structure for the entity, detailing responsibilities and procedures for performance, conflicts, recruitment, outcomes measures, case management, reimbursement, income, continuing medical education (CME), credentialing, and utilization review.

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Assessment

Allow for discussion of overall relationships with physicians in the community, practice concerns, and needs.

Source: “Research and Financial Benchmarking in the Healthcare Industry”

By Robert James Cimasi; MHA, ASA, CBA. AVA, CM&AA, CMP™
By Todd A. Zigrang; MHA, MBA, CHE
By Anne P. Sharamitaro; Esq

Conclusion

And so, your thoughts and comments on this ME-P are appreciated. What did we forget and what is your experience? Why did you need a medical practice valuation?

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.

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Boosting Medical Practice Goodwill Value

Goodwill Hunting

What’s your Office Really Worth?

[By Dr. David E. MarcinkoStethoscope; MBA]

There are several measures a physician can take to increase the value of medical practice goodwill, which in turn will make the practice more desirable, and profitable, when selling or taking on a partner.

These are listed below for your consideration:  

  • Keep good financial records. Know your capital purchases, and have your balance sheet, statement of cash flow and net income statement up to date.
  • Continually monitor key financial ratios, such as profitability, creditors, long-term debt management and medical equity value-added.
  • Have adequate practice insurance, including property liability coverage, plus have workers’ compensation for staff and life and disability insurance on the key doctors.
  • Build a brand identity for the practice rather than an individual brand identity for you as a physician. This helps in developing a business that others could assume and operate.
  • Have a practice continuation plan that stipulates how the practice will be sold or continued in the event of a physician’s death or disability. Specify who will buy the practice and for how much. And specify whether the purchase will include land, buildings, inventory, licenses and goodwill. Have a covenant that specifies the procedures to follow when a physician leaves the practice.
  • Have strong relationships with everyone who does business with your practice, including supply vendors as well as referring doctors and fellow physicians.
  • Be organized when it comes time to present the supporting information. Don’t accept the first valuation given. Numbers can be changed, if you can present substantive reasons.

MORE: AMA News Interviews Dr. Marcinko

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. How have you reacted to the recent declines in both medical practice [business] and personal [doctor] goodwill?

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Understanding the Need for Onsite Practice Management Visits

Interview Information also Important

By Dr. David E. Marcinko and Staff Reporters

www.healthcareFinancials.comHO-JFMS-CD-ROM

According to Robert James Cimasi MHA, ASA, AVA, CMP™ of Health Capital Consultants, LLC, in St. Louis, MO, the following types of information specific to medical practices should be gathered by the financial executive, financial advisor or healthcare consultant when performing a practice enhancement engagement, or especially, an economic valuation and appraisal. This information may be obtained through an interview, questionnaire, or preferably a site visit:

  • Background Information: Include such information as the number of years the entity has operated at its current location and in the community, as well as the office hours.
  • Building Description: Include the location (urban/suburban), proximity to hospitals and other medical facilities, and its size, construction, electrical and computer wiring, age, access to parking, and so on.
  • Office Description: Approximate acquisition details and price, as well as ownership or lease details should be included.  The square footage and number of rooms, and a description of different office areas should be outlined, including, where applicable: medical equipment, including all diagnostic imaging and major medical equipment; pharmacy, laboratory, examination rooms, waiting rooms, and other areas.
  • Management Information Systems: Document types of hardware and software and the cost, age, and suitability of all components, including their management functions, reporting capabilities, and integration between programs.
  • History of the Entity: Give the date founded and by whom, the number of full-time equivalent (FTE) physicians in practice by year, the physicians who have joined and left the entity, the dates they practiced at the entity, and their relationship and practice arrangement with the entity.
  • Staff Description: Include the number and types of non-physician positions as well as the tenure and salary of all current employees.
  • Competitive Analysis: Include details of hospital programs impacting practice, growth or decline in the volume of business and the reasons, association with other physicians, competitive strengths and threats, the number and volume of procedures performed, any change in the number and volume, and the corresponding fees.
  • Patient Base Information: Encompass income distribution and percentages from different payors, the number of new patients and total patients seen per week, the age mix of patients, the number of hours spent in patient care per week, and the number of surgeries performed.
  • Managed Care Environment: Details the terms and conditions of all managed care contracts including discounts and withholds, the impact on referral patterns and revenues, willingness to participate in risk sharing contracts and capitation, and the entity’s managed care reporting capabilities.
  • Hospital Privileges and Facilities: List all hospital privileges held by physician members of the medical practice and the requirements for acquiring privileges at the different local hospitals.
  • Credit Policy and Collections: Include practice policies for billing and payment, use of collection agencies, acceptance of assignments, other sources of revenues, and an aged breakdown of accounts receivable.
  • Financial Management: Include cash management procedures and protections, credit lines and interest, controls to improve payment of accounts payable, late payment frequency, formal or informal financial planning methods, and budgeting processes.
  • Operational Assessment: Include governance structure for the entity, detailing responsibilities and procedures for performance, conflicts, recruitment, outcomes measures, case management, reimbursement; income, continuing medical education (CME), credentialing, and utilization review.

Assessment

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The financial advisor must also allow for discussion of overall relationships with physicians in the community, practice concerns, and needs.

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. Have you ever had such an onsite visit? Was it by a fiduciary financial advisor or medical management consultant; or other? What was the outcome? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe to the ME-P. It is fast, free and secure.

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Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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Appraising a Medical Practice

The “Art of the Deal” for Buyers and Sellers

By Dr. David Edward Marcinko; MBA, CMP™

Publisher-in-Chiefdem2

Are you considering selling your practice — or merging it with another? Thinking of buying? If you are, you’re hardly alone. Despite the decline of the big physician practice management companies [PPMCs] of the 1990s, the merger-and-acquisition market remains robust for small, private practices, as they respond to the continuing financial squeeze being placed on them, in 2009.

 

Read: http://www.humana.com/providers/NewsLetters/HumanaWeb1stQ07/articles/CoverStoryOne.html

Assessment

Humana’s YourPractice is a quarterly publication for office staff, physicians and other health care providers within the Humana network, and is produced by Corporate Communications in conjunction with “Physicians Practice”.

biz-book

Note: David Marcinko is also a writer for Physicians Practice 

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe to the ME-P. It is fast, free and secure.

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Healthcare Organizations: www.HealthcareFinancials.com

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Why Coding Professionals?

More on the NPI, the AAPC, Censorship and Quality Health Care

By Darrell K. Pruitt; DDS

pruittFor those who have been following me recently on Twitter (Proots), you know that unlike me, John Hamm has not yet been kicked off of DrBicuspid, and is awaiting a response from Dr. David J. Pettigrew – a dental coding expert with 14 years of experience as Chief Dental Officer for BCBS of New Jersey. I can only shadow the conversation because, as I said, I was kicked off.

Through John Hamm, I sent word to Dr. Pettigrew that he should just shut up and not enter into a discussion about the NPI number. Pettigrew told Johnhamm that I should come onto the DrBicuspid forum and say that in front of everyone. Of course, I am unable to do that because as shameful as it is to my family, I am still banned from posting anything on DrBicuspid.

For real-time developments concerning Dr. Pettigrew’s public defense of the NPI number, it would be better to follow that chunk of drama on Twitter or DrBicuspid. I’ve got other things cooking here. Can you smell it yet?

As you can see, sports fans, I have had Internet contact with a new class of fat, slow-moving healthcare IT stakeholders, and I haven’t been building long-term relationships fortified by good will – if you know what I mean. 14 years of employment at BCBS of New Jersey fails to impress me much.

American Academy of Professional Coders

Those who have studied alphanumeric science have a national organization called the American Academy of Professional Coders [AAPC] which represents business consultants in a growing healthcare niche. Most are employed by providers who are too busy actually performing healthcare to play games with insurance companies for the money owed them. Like SEO professionals who know gimmicks to increase a client’s page rank in relation to competitors, or perhaps a bolus of bad news from a special bastard, professional coders maximize providers’ profits by keeping on top of the ever-changing hoops involved in paying doctors almost all that is owed them following a shorter than average delay.

ICD-10 is Coming 

Learning coding is job security these days because in a few years the mandated ICD-10 codes will force even dental offices to hire IT staff, which also cuts down on the nation’s unemployment. I’ve taken a peek at the ICD-10, and it makes the ICD-9 look like simple algebra. I’d stick with well-trained coding professionals. They’ll cost more but you do want to approach making a profit, don’t you?

Of Censorship

I submitted the following stinker to be posted on the AAPC Website. To their credit, it was posted almost immediately. That could be a good sign … OOPS! Several minutes later it went back under moderation. I think someone is having problems with it. You’ll have to read it to understand why. It’s tricky to let go of, yet if it remains posted, it looks like a concession. Some poor slob in the AAPC is in a bad position. I hope you are enjoying this as much as I am.

-Darrell

“A recent change to Medicare policy made by the Centers for Medicare & Medicaid Services (CMS) helps ensure claims processing isn’t delayed when the only missing information on the CMS-1490S form is the provider or supplier’s National Provider Identifier (NPI).

CMS Transmittal 1747, Change Request 6434, issued May 22, notifies A/B Medicare Administrative Contractors (MAC) and carriers of editorial changes to Medicare policy in Pub. 100-04, Medicare Claims Processing Manual, chapter 1 regarding the monitoring of claims submission violations and the handling of incomplete or invalid claims.

In either case, as stated in the transmittal, “If the beneficiary furnishes all other information but fails to supply the provider or supplier’s NPI, the contractor shall not return the claim but rather look up the provider or supplier’s NPI using the NPI registry.”

http://www.aapc.com/news/index.php/2009/06/missing-npi-no-reason-to-deny-says-cms/

“How does an NPI number improve patient care?”

By D. Kellus Pruitt DDS – posted on AAPC Website, 6.4.09

Boxing Gloves I see that nobody from the American Academy of Professional Coders has yet attempted to answer my question. Some visitors to the AAPC Website who have followed the comments to the article “Missing NPI Won’t Delay Processing – CMS” (no byline) may think the lack of an answer is odd – that is if they happen to notice. The novice professional coder who still does not know much about HIPAA could easily assume that since the article itself is almost a week old, the lack of a response to my question is nothing more than the natural fading of interest. At some point, people logically move on to newer posts and other parts of their lives.

But I know a secret.

Based on nothing more than glaring silence from anonymous officials of AAPC, I know that my question of whether the NPI number improves care did not go unnoticed by a few knowledgeable and sharp individuals. They know enough not to touch a transparently trick question. The answer of course is:

The NPI number does nothing to improve patient care (Gasp!)

There’s more. Five years ago informatics experts (coders), promised that the ten digit identification number for providers will speed payments lightning fast. When is the last time you heard that fib? I cannot fault abundant optimism, AAPC, but by now you are surely aware that physicians have had to wait for a year or more for payment because of foul-ups at NPPES. Some have had to take out loans to pay the salaries of coding professionals and other new IT members of their staffs.

Improving Healthcare?

And as far as “improving” patient care? That would be worse than a fib. That would be called a harmful lie that upsets me in a very personal way. I know where it is documented that dental patients have been forced to leave dentists they preferred simply because one-third of the dentists in Texas do not have NPI numbers. BCBSTX requires that their clients only see dentists who have the numbers. Otherwise, the client has to pay their dental bill in full and BCBSTX isn’t even obligated to refund the employer the insurance premium. Yet BCBSTX sales reps tell these employers that their employees can see any Texas dentist they choose.

I’m sorry. Sometimes I ramble.

To keep it fair, I will ask if there is anyone who would like to point out the benefits of the NPI number. Your AAPC members and many others, including enthusiastic newbie coders, are interested in hearing from leaders of the organization. Many careers are built upon the complexities caused by digitalization and informatics. I don’t blame you for the complications. After all, you don’t make the rules – you just get along with them really well. It’s like our unavoidably complicated tax code and accountants. Accountants call themselves professionals. So why the hell shouldn’t you?

The Medical Executive-Post

Let me say that I am grateful that you believe enough in transparency that this comment remains posted. It wouldn’t surprise me if someone briefly considered deleting it until they discovered that it will be on the PennWell forum and probably on the Medical Executive-Post anyway. And of course, we can all see that you chose the honorable thing to do.

NPI Fallacy

The NPI fallacy reminds me of a scene in the Mike Judge movie “Idiocracy,” when a character 500 years in the future named Frito is asked why fields are fruitlessly irrigated with a politically-correct brand of green colored sports drink instead of water. Frito, who got his law degree from Costco, doesn’t even have to suffer minimal thought before he quickly repeats what he’s heard so many times, “’Cause it’s got ‘lectrolytes.”

Grnerod finds it incredible that I don’t have an NPI number. “How on earth are you billing and getting paid without an NPI?”

I told him (?) that I don’t work if I don’t get paid. Call me an old school radical.

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated. What are your feelings on the NPI situation? Does it really improve health care, or not? Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, be sure to subscribe to the ME-P. It is fast, free and secure.

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Healthcare Organizations: www.HealthcareFinancials.com

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More about Healthcare Organizations [Financial Management Strategies]

Our Print-Journal Preface

By Hope Rachel Hetico; RN, MHA, CMP™hetico1

As Managing Editor of a two volume – 1,200 pages – premium quarterly print journal, I am often asked about our Preface.

A Two-Volume Guide

As so, our hope is that Healthcare Organizations: [Financial Management Strategies] will shape the hospital management landscape by following three important principles.

What it is – How it works

1. First, we have assembled a world-class editorial advisory board and independent team of contributors and asked them to draw on their experience in economic thought leadership and managerial decision making in the healthcare industrial complex. Like many readers, each struggles mightily with the decreasing revenues, increasing costs, and high consumer expectations in today’s competitive healthcare marketplace. Yet, their practical experience and applied operating vision is a source of objective information, informed opinion, and crucial information for this manual and its quarterly updates.

2. Second, our writing style allows us to condense a great deal of information into each quarterly issue.  We integrate prose, applications and regulatory perspectives with real-world case models, as well as charts, tables, diagrams, sample contracts, and checklists.  The result is a comprehensive oeuvre of financial management and operation strategies, vital to all healthcare facility administrators, comptrollers, physician-executives, and consulting business advisors.

3. Third, as editors, we prefer engaged readers who demand compelling content. According to conventional wisdom, printed manuals like this one should be a relic of the past, from an era before instant messaging and high-speed connectivity. Our experience shows just the opposite.  Applied healthcare economics and management literature has grown exponentially in the past decade and the plethora of Internet information makes updates that sort through the clutter and provide strategic analysis all the more valuable. Oh, it should provide some personality and wit, too! Don’t forget, beneath the spreadsheets, profit and loss statements, and financial models are patients, colleagues and investors who depend on you.ho-journal9

www.HealthcareFinancials.com

Assessment

Rest assured, Healthcare Organizations: [Financial Management Strategies] will become an important peer-reviewed vehicle for the advancement of working knowledge and the dissemination of research information and best practices in our field. In the years ahead, we trust these principles will enhance utility and add value to your subscription. Most importantly, we hope to increase your return on investment [ROI] in some small increment.

Visit and Order Now

Specialty Technical Publishers

8 – 14th Street

Blaine, WA 98230

1-800-251-0381

orders@stpub.com

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TOC: http://www.stpub.com/pdfs/toc_ho.pdf

Conclusion

And so, your thoughts and comments on this Medical Executive-Post, complimentary e-companion are appreciated. If you would like to contribute material or suggest topics for a future update, please contact me. Subscribers, have we attained our goals and objectives, as a work-in-progress in this preface statement?

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Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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About: Healthcare Organizations [Financial Management Strategies]

Our Print Mission Statement

[By Dr. David Edward Marcinko; MBA, CMP™]

Publisher-in-Chief

dem25As Editor-in-Chief of a two volume – 1,200 pages – premium quarterly print journal, I am often asked about our mission statement; or the journal’s raison d’etra.

A Two-Volume Guide

As so, Healthcare Organizations: [Financial Management Strategies], with its quarterly updates, will promote and integrate academic and applied research, and serve as a multi-disciplined communications forum for the dissemination of financial, managerial, business and related economic information to decision makers in hospitals, outpatient centers, clinics, medical practices and all mature and emerging healthcare organizations. 

Target Market and Ideal Reader

Healthcare Organizations [Financial Management Strategies] and its quarterly updates should be in the hands of all:

* CFOs, CEOs, COOs, CTOs, VPs and CIOs from every type of hospital and healthcare organization including: public, federal, state, Veteran’s Administration and Indian Health Services hospitals; district, rural, long-term care and community hospitals; specialty, children’s and rehabilitation hospitals; diagnostic imaging centers and laboratories; private, religious-sponsored, and psychiatric institutions.

*  Physician Hospital Organizations, Management Services Organizations (MSOs), Independent Practice Associations (IPAs), Group Practices Without Walls (GPWWs), Integrated Delivery Systems (IDSs) and their administrators, comptrollers, cost accountants, budget directors, cash managers, auditors, healthcare attorneys and consultants,  and actuaries, and all endowment fund directors, executives, consultants and strategic financial managers.

*  Ambulatory care centers, hospices, and outpatient clinics; skilled nursing facilities, integrated networks and group practices; academic medical centers, nurses and physician executives; business school and health administration students, and all economic decision-makers and directors of allopathic, dental, podiatric and osteopathic healthcare organizations.

Assessment

After publication, my suggestion is to read, study and act upon the guide in this way:

1. First, browse through the entire text.

2. Next, slowly read those chapters and sections that are of specific interest to your professional efforts.

3. Then, extrapolate portions that can be implemented in specific strategies helpful to your healthcare setting.

4. Finally, use its’ ME-P updates as a reference manual to return to time and time again; and enjoy!

Conclusion

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: MarcinkoAdvisors@msn.com

OUR OTHER PRINT BOOKS AND RELATED INFORMATION SOURCES:

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Evaluate our 2-Volume Institutional Print Guide

Healthcare Organizations [Financial Management Strategies]

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Our 1,200 pages, 2-volume, quarterly institutional print guide Healthcare Organizations [Financial Management Strategies] is available on a 30-day, risk-free trial.

You may contact http://www.STPub.com at (604) 983-3434, fax (604) 983-3445, or e-mail at custinfo@stpub.com to place an order, or ask questions regarding pricing and/or availability.

All shipments arrive within 5 to 10 days. Prepayment is required for all international shipments and a small courier charge will be added to the subscription price.

After hours, we suggest you review the STP website FAQs section for answer to your inquiry: www.stpub.com/pubs/custinfo.htm

Assessment

Rest assured, Healthcare Organizations: [Financial Management Strategies] will become an important peer-reviewed vehicle for the advancement of working knowledge and the dissemination of research information and best practices in our field. In the years ahead, we trust these principles will enhance utility and add value to your subscription. Most importantly, we hope to increase your return on investment [ROI] by some small increment.

Review and Ordering Information:

Specialty Technical Publishers

8 – 14th Street

Blaine, WA 98230

1-800-251-0381

orders@stpub.com

http://www.stpub.com/pubs/ho.htm

TOC: http://www.stpub.com/pdfs/toc_ho.pdfcmp-logo

Note: The guide is sponsored by www.MedicalBusinessAdvisors.com with contributions from www.CertifiedMedicalPlanner.com and is edited by ME-P’s Dr. David E. Marcinko and Professor Hope R. Hetico; RN, MHA. Definitions and terms supplied by www.HealthDictionarySeries.com

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated? Reviews from current journal-guide subscribers are encouraged and appreciated.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Asset Allocation Methods for Physician-Investors

What’s Old … is New Again?

By Dr. David Edward Marcinko; MBA, CMP™

Publisher-in-Chiefdem23

Asset allocation policies, incorporating the risk/return fundamental equation, have traditionally been classified under the following approaches: Principal Stability and Income, Income, Income-Oriented, Balanced, Growth, and Aggressive Growth.

Traditional Concepts

In all forms of traditional asset allocation and diversification policy approaches, the physician-investor is presumed to diversify within the chosen asset class in order to reduce the potential for specific or unsystematic risk.

Principal stability and income approach

Objective: Income, liquidity, and stability of principal.

Investment: Shorter-term fixed income securities with a large concentration in money market exposure to enhance liquidity and price stability. Accounts tend to maintain cash equivalent reserve balance of 30–50% of the portfolio.

Income approach

Objective: Maximum income.

Investment: 100% fixed income exposure.

Income portfolios arise from the traditional notion that an investor should spend only income and reinvest capital gains. Sometimes this is a legal requirement, as in a trust that has an income beneficiary distinct from the principal beneficiary.

Income-oriented approach

Objective: Income and some capital growth.

Investment: Accounts tend to maintain 15–35% in equity investments; balance of investment in fixed income.

Income and growth approach

Objective: Capital growth and income using a balanced approach to limit volatility.

Investment:  Accounts tend to maintain 45–65% equity exposure; balance of investment in fixed income.

Income and growth portfolio policies generally refer to both the fixed income and equity portions of the portfolios. Because of the income bias, the overall stock portion of the portfolio will usually have a dividend yield greater than the market yield. This method allows the portfolio manager to invest in some no- or low-dividend yielding issues.

Growth approach

Objective: Capital growth with income as a secondary objective.

Investment: Accounts tend to maintain between 65%–85% equity exposure; balance of investment in fixed income, usually cash reserves.

Aggressive growth approach

Objective: Long-term capital growth.

Investment: Accounts maintain 100% equity exposure. Exposure to variety of equity types normal (small capitalization, international, emerging markets, etc).

fp-book15

Assessment Of course, the above is much more accurate during stable economic times, than it is today; don’t you think? Are newer concepts required today … or is past … prologue.

Link: https://healthcarefinancials.wordpress.com/2008/10/25/new-wave-thoughts-on-investing/

Conclusion

And so, your thoughts and comments on this Medical Executive-Post are appreciated.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Independent Medical Practitioner as Solo Primary Care Surrogate

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Doctors Facing a Bleak Future Business and Financial Planning Model

By Dr. David Edward Marcinko; MBA, CMP™

[Publisher-in-Chief]dem2

According to Physicians News, on March 19, 2009, the demand for family physicians is growing. Proposals for health system reform focus on increasing the number of primary care physicians in America. Yet, despite these trends, the number of future physicians who chose family medicine dipped this year, according to the 2009 National Resident Matching Program. What gives?

NRMP

The National Resident Matching Program [NRMP] recently announced that a total of 2,329 graduating medical students matched to family medicine training programs. This is a decrease in total student matches from 2008, when 2,404 family medicine residency positions were filled.

Primary Care Demand Explodes

Meanwhile, demand for primary care physicians continues to skyrocket. For example, in its most recent recruitment survey, Merritt Hawkins, a national physician recruiting company, reported primary care physician search assignments had more than doubled from 341 in 2003 to 848 last year. 

The Decline of Solo Medical Practitioners

Regular readers and subscribers to this Medical Executive- Post are aware of the declining number of solo medical practitioners; we have been sounding the alarm here, in our books, journal, speaking engagements and elsewhere for years now.dhimc-book4

In fact, the statistic that we often cite is that more than 40% of the nation’s physicians are employed doctors; not employers as in the past. This business model shift has occurred over the past decade or so, and has accelerated of late. The decline in solo and independent doctors has occurred elsewhere as well, but much more slowly [i.e., dentistry, podiatry and osteopathy] as these specialties have been somewhat isolated from the traditional allopathic mainstream.

Going forward, this solitary model seems to be a good thing, and a fortunate result of the un-intended consequence of previously keeping these folks out of the healthcare mainstream.

The Decline of Independent Medical Practitioners

Now, in the March 2009 issue of Healthcare Finance News, we learn that the number of hospital owned physician practices has been climbing over the last four years, according to the Medical Group Management Association [MGMA]. Think: PHOs back-in-the-day. ho-journal3

And, while this trend only marginally affects patients and patient care, it is quite disruptive to physicians, their families, personal wealth accumulation, retirement and estate planning endeavors.

For example, according to Professor Hope Rachel Hetico, RN, MHA, CMP™ of our firm www.MedicalBusinessAdvisors.com

“The professional good-will valuation component of a medical practice is being decimated. Today, some practices are being bought and sold for tangible asset value, only.

Assessment

Therefore, allow me to identify this emerging trend which suggests independent medical practice as reflective of solo primary medical care. In other words, as independence goes the way of the “dodo-bird”, so goes primary care practitioners precisely at a time when the later is needed more than the former.

Why? Employed doctors stay that way by making money for their employer and hospital-bosses. Specialists make more money than primary care doctors. So, if you want to stay an employed doctor; which specialty would you pursue?

Answer: The NRMP class this year spoke out loud and clear. Any specialty but primary care!

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Conclusion

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Medical Practice Financial Statement Valuation Adjustments

Why Benchmarks are Out – and Scrutiny is In

By Dr. David Edward Marcinko; MBA, CMP™

Publisher-in-Chief

CEO: www.MedicalBusinessAdvisors.comdr-david-marcinko11

As discussed elsewhere on this ME-P, the medical practice appraiser’s primary goal is to determine the value of the business based on its expected earnings or cash flow. To accomplish this, the medical practice appraiser looks to the company’s historical financial statements to see how it has been reporting its earnings. Because of differences in accounting practices across organizations, the appraiser must analyze how the medical practice’s financial statements differ from those of other practices and how those differences might have an effect on the practice’s value. This is particularly true when the appraiser is comparing the performance of the medical practice company being valued with those of so-called industry benchmarks. In all instances, it is important that the appraiser compare numbers that have been accounted for in the same way. Below is a discussion of the most common adjustments.biz-book4

Nonrecurring or Extraordinary Items

Nonrecurring or extraordinary items of income or expense reported by the practice will be eliminated from the profit and loss statement. These include the following:

• Insurance settlements (income or expense) or life insurance proceeds on the death of the key physician-partner.

• Large payments in settlement of lawsuits (either as income or as expense).

• The gain or loss on the sale of certain assets or portions of the practice which are not likely to be repeated.

• Expenses related to the start-up or discontinuance of a new or old segment of the practice.

• Moving and related expenses.

• Expenses relating to fire or flood damage not covered by insurance.

• Adjustments to prior years’ financial statements when the practice discontinued an employee benefit (such as eliminating the company’s pension or profit-sharing plan).

• Adjustments for income and/or expenses related to non-operating assets, such as a portfolio of marketable securities not used in the practice or medical real estate held for investment purposes.fp-book12

Valuation Calculations

The appraiser needs to gather the following facts regarding the financial statements of the practice and may need to make adjustments to account for these differences. The information will give the appraiser an understanding of the company’s normalized earnings and will be used to make valuation calculations.

• How does a specialty practice [such as physiatry’s DME] value its inventory—LIFO or FIFO? In certain specialties, inventory is accounted for on the LIFO or “last-in, first-out” basis. When prices are rising, profits are reduced because the DME items being sold are presumably bought most recently at higher prices. The “old” or lower-cost inventory is held in reserve while the higher-cost inventory is sold off. This situation may reverse in times of recession and low or no inflation. At that point, profits will be distorted by the low-cost items. Recognizing these facts, practice owners have more commonly used FIFO or “first-in, first-out,” inventory accounting to value their inventory.

• What kind of reserves has the practice been taking for doubtful accounts receivable? Some doctors will not – or very slowly – write off bad debts or take reserves for them, and thus the income is improperly overstated. The appraiser will look at the actual bad debt expenses relative to the doubtful accounts receivable booked to determine if the practice’s adjustments are reasonable.

• How does the practice depreciate its hard assets? A variety of approved methods are used to depreciate assets over their useful lives. It is important for the appraiser to recognize the impact these methods have on corporate earnings. Some assets can be depreciated over a short time frame, which will mean higher annual write-offs; others, such as real estate, must be depreciated over a much longer period and thus will have a smaller impact on annual expenses.insurance-book6

Asset-Related Issues

The appraiser must address asset-related issues, such as:

• Has the practice’s assets been valued recently? If not, will current appraisals be required?

• Are any non-operating assets carried on the books of the practice? These assets may have to be valued separately and added to the operating value of the business.

Assessment

In our experience valuating medical practices, adjustments made for excess compensation and perquisites paid to the physician-owner and other family members, are the most common items of contention between buyer and seller.

For example, above average physician income usually equates to lower medical practice transferrable enterprise value; and vice versa.

Link: https://healthcarefinancials.wordpress.com/2007/11/30/90

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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: MarcinkoAdvisors@msn.com

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Integrating Financial and Medical Practice Succession Planning

Some Steps to Consider

By Dr. David Edward Marcinko; MBA, CMP™

[Publisher-in-Chief]dr-david-marcinko8

Medical practice succession planning is a dynamic process requiring current physician ownership and management to plan for the future and implement the resulting plan. Many doctors approach succession planning initially through retirement planning. Once they understand the issues and realities of the tax laws, they are much more amenable to working out a viable succession plan. At the Institute of Medical Business Advisors Inc, we find that some physician-clients have not clearly articulated their goals, but have many pieces of the plan that need to be organized and analyzed to meet their objectives; including both personal and financial issues.

Link: www.MedicalBusinessAdvisors.com

A Step Wise Process

The steps necessary for successful succession planning are as follows: 

  • Gathering and analyzing data and personal information
  • Contacting the doctor’s other advisors
  • Valuing the practice according to USPAP and IRS guidelines
  • Indentifying the right qualified physician purchaser
  • Projecting estate and transfer taxes
  • Presenting liquidity needs
  • Gathering additional corporate information
  • Identifying dispositive and financial goals
  • Analyzing the needs and desires of non-key employees

An Integrated Approach 

Succession planning can help address financial and nonfinancial issues in a timely manner. Proper planning can also help the doctor accomplish goals with effective, appropriate strategies that satisfy family needs as well as tax issues. Here is a triad approach:

1. First: Address financial and nonfinancial issues in a timely manner

As with other estate planning engagements, there is no due date for succession planning. The owner of a medical practice is busy growing and managing the office. S/he is often not focused on the desirable outcomes in an orderly practice succession. For example, if family members are involved in the practice, there is a good chance that personal issues will need to be addressed. These nonfinancial issues can be just as important as financial concerns when building a comprehensive, workable succession plan.

2. Next: Focus on taxes

Taxes are important because the medical practice probably represents the largest concentration of wealth in the doctor’s estate. When planning for estates with large amounts of wealth, doctors frequently ignore personal issues. It’s important not to make the critical error of maximizing tax savings but destroying the practice through a poor succession plan.

3. Finally: Identify and reach goals

When the physician-owner has addressed succession planning issues in a timely manner, s/he has the opportunity to develop the most effective objectives to accomplish goals. Given enough time, the doctor can even modify goals to reflect changes in the economic environments, as well changes in his or her personal life.

Assessment 

fp-book8

Medical practices exhibit particular strengths and weaknesses not typically found in publicly owned companies or non-professional family businesses. For example, many times the doctor doesn’t realize the type and amount of planning that needs to be done to transfer the business to a new doctor for maximum value. That is why doctors often need the advice of professionals to define goals and formulate medical practice succession strategies.

Conclusion

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Avoiding an IRS Appraisal Audit

Valued Friends and Colleagues

By Linda Trugman; CPA, CVAtrugman-logo

We hope this e-mail post finds you well. We have attached our most recent newsletter “Valuation Trends” for your perusal and hope you find something of interest in it; especially “20 Ways to Avoid an IRS Appraisal Audit.”

Link: trugman-valuation

Assessment

As a reminder, our updated website at www.trugmanvaluation.com includes a resource center which provides additional information that might be useful to you including sample reports, various conference presentations and podcasts.

Conclusion

We are available to assist you, and your clients, with your valuation and litigation support needs and look forward to hearing from you. And so, your thoughts and comments on this Medical Executive-Post are appreciated.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com  or Bio: www.stpub.com/pubs/authors/MARCINKO.htm

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Healthcare Organizations: www.HealthcareFinancials.com

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Introducing Douglas B. Sherlock MBA CFA

About Our Newest Thought-Leader

By Ann Miller; RN, MHAcap-and-gown

Douglas B. Sherlock CFA is President of Sherlock Company which assists health plans, their business partners and their investors in the treasury and control functions of finance.

Resume

Prior to the founding of Sherlock Company, Mr. Sherlock was Vice President of Financial Analysis of U.S. Healthcare, Inc. where he directed the company’s merger and joint venture activity, its investor relations program and its HMO product for Medicare beneficiaries. Sherlock was formerly Vice President of Salomon Brothers, Inc where he specialized in the financial research of prepaid health plans and hospital systems, and assisted in the capital formation and merger activities of health care companies. He was the Greenwich Survey First Place HMO Analyst and a runner-up in the Institutional Investor polls. 

Professional Associations and Memberships

Mr. Sherlock is a Chartered Financial Analyst. He has been a member of the Financial Accounting Policy Committee of the CFA Institute. He has served on the Editorial Board of Inquiry, a journal of health care organization, provision and financing published by the Blue Cross Blue Shield Association, and is a reviewer for Chartered Financial Analyst. He has been a member of the Financial Accounting Policy Committee. Sherlock is a frequent speaker before health care groups including the American Association of Health Plans, the HealthCare Financial Management Association, and the Blue Cross Blue Shield Association. The research of Sherlock Company has recently been cited in such periodicals as The New York Times, Forbes, Investor’s Business Daily, Modern Healthcare, Hospitals, The Wall Street Journal, HMO Managers Letter, Business Week and The Medical Business Journal.

Educational Background

Mr. Sherlock holds an M.B.A. in finance from Loyola College in Maryland. He received his bachelor’s degree in economics from Franklin and Marshall College, Lancaster, Pennsylvania.

Conclusion

We look forward to his contributions and now professionally welcome him warmly, as our newest ME-P thought-leader. 

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Avoiding Medical Practice Valuation Mistakes

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Top Ten Appraisal Blunders to Avoid

By Dr. David Edward Marcinko; MBA, CMP™dr-david-marcinko

The science of the modern medical practice valuation can be traced to the Estate of Edgar A. Berg v. Commissioner (T. C. Memo 1991-279). In this case, the Court criticized CPAs as not being qualified to perform business valuations, failing to provide analysis of an appropriate discount rates, and making only general references to justify their   “Opinion of Value.”  In rejecting accountants, the Court accepted IRS economists because of background, education and training, as well as discount rate calculations and reproducible evidence applied to the assets being examined. This marked the beginning of the Tax Court leaning toward the side with the most comprehensive appraisal. Previously, it had a tendency to “split the difference.” Now, some feel the Berg case launched the valuation profession; especially for contemporaneous health economists.

But, it was not until after 1995 that the IRS issued guidelines for the valuation of physician practices. As a result, the Uniform Standards of Professional Appraisal Practice [USPAP] requires that a blended constellation of three recognized valuation approaches (income, market, and cost approaches) be considered when estimating fair market value.

Operative Valuation Definitions

When pursuing any discussion of medical practice worth, two key elements must be understood: (1) the valuation process, and (2) fair market value.  According to the Dictionary of Health Economics and Finance http://www.HealthDictionarySeries.org

1. Practice valuation is the “the formal process of determining the worth of a healthcare or other medical business entity, at a specific point in time, and the act or process of determining fair market value.”

2. Fair market value [FMV] is “a legal term generally meaning the price at which a willing buyer will buy, and a willing seller will sell an asset in an open free market with full disclosure.”  IRS Revenue Ruling 59-60 clearly states that FMV “is essentially a future prophesy and must be based on facts available at the required date of appraisal”

Unfortunately, the value of a medical practice cannot be directly observed by activity in thinly traded private markets. Perhaps this is why we continually observe the following valuation blunders? They are committed by both sellers and buyers who are pursuing opposite objectives; sale price maximization versus price minimization?

Top 10 Blunders:

1. Not Understanding What a Medical Practice Valuation Is and Is Not

  • Valuations are not source document fraud audits.
  • Valuations are material representations providing a range of transferable worth.
  • Valuations are reproducible estimates based on economic assumptions.
  • Valuations are not “back-of-the envelope multiples” using specious benchmarks.
  • Valuations are defensible and “signed-off” attesting to USPAP/IRS formats.
  • Financial accounting value [book-value] is not fair market value.
  • Professional valuators represent only one party at arm’s length; not both sides.
  • Engagement solicitor and/or valuation payer is the client.
  • Unbiased valuators do not provide financing or equity-participation schemes.

2. Not Understanding Engagement Types and Levels

Although not standardized, the Institute of Medical Business Advisors, Inc uses the following three levels that approximate engagement types for the industry [www.MedicalBusinessAdvisors.com]:

A] A Comprehensive Valuation is an extensive service designed to provide an unambiguous Opinion of Value range. It is supported by all procedures that valuators deem relevant with mandatory onsite review. This “gold-standard” is suitable for contentious situations like divorce, partnership dissolution, estate planning and gifting, etc. The written Opinion of Value is applicable for litigation support activities like depositions and trial. It is also useful for external reporting to bankers, investors, the public and IRS, etc.

B] A Limited Valuation lacks additional suggested USPAP procedures.  It is considered an “agreed-upon-procedure”, used in circumstances where the client is the only user [i.e., updating a buy-sell agreement, or practice buy-in for a valued associate] and not for external purposes. No onsite visit is needed. A formal Opinion of Value is not rendered.

C] Ad-Hoc Valuation is low level engagement that provides a gross and non-specific approximation of value based on limited meters by involved parties. Neither a written report, nor an Opinion of Value is rendered. It is often used periodically as an internal organic growth / decline gauge. 

3. Not Observing Industry Standards, Rules and Regulations

Specifically, in USPAP transactions involving physician practices, the IRS implied: 

  • Discounted cash flow (DCF) analysis is the most relevant income approach and must be done on an “after-tax” basis.
  • Practice collections must be projected based on reasonable assumptions for the practice and market; etc.
  • Physician compensation must be based on market rates consistent with age, experience and productivity.
  • Majority premiums and minority discounts are to be considered.

4. Not Understanding the Value of Personal Goodwill

Goodwill represents the difference between practice purchase price and the value of the net assets.  Personal goodwill results from the charisma, skills and reputation of a specific doctor. Its attributes accrue solely to the individual, are not transferable and can’t be sold. It has little or no economic value as it “goes to the grave” with the doctor.  

5. Not Understanding the Value of Practice Goodwill

Transferable medical practice goodwill has value, 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).  

Even the Goodwill Registry however, a classic source used to determine the average percentage of revenue contributed to practice goodwill, may be dated for some specialties leading to abnormally high values. We therefore prefer the more recent data, structure and representations contained within the quarterly print periodical: Healthcare Organizations [Financial Management Strategies]. It is a more useful; yet still imperfect guide.*  

And so, one must also appreciate the: (i) impact of a changing environment; (ii) practice transfer in a local market which can augment or blunt goodwill value; and the (iii) determination of whether patients or HMOs return because of true goodwill, or are mandated by contractual obligations; among many other multi-variable determinants.

Now, to further confuse the issue, how each kind of goodwill is allocated in situations like divorce depends on state law. For example, some courts include both kinds of goodwill to be apportioned – some exclude both – and others pursue a case-by-case approach. 

6. Not Understanding “Excess Earnings Capitalization”

Another way to determine goodwill value is through “excess earnings capitalization.” This economic method looks at the difference between salary, and what you’d have to pay a comparable doctor replacement.

As an example, when you subtract the numbers, and divide the result by 20%, an important percentage referred to as the Capitalization Rate emerges. The final number gives a dollar value for practice goodwill. Courts seem to prefer this method in divorces because it tends to reflect a practice’s current value.

7. Not Understanding the Present Compensation versus Future Value Paradox

Regardless of practice business model, physician compensation is inversely related to practice value. In other words, the more a doctor takes home in above-average salary, the less the practice is generally worth, and vice versa; ceteris paribus

8. Substituting Benchmarks and Formulas for Practice Specificity

In the stable economic past, industry benchmarks might have been used as quick and inexpensive substitutes for professionally prepared valuations.  Muck like preparing one’s own income tax return today – while legal – it is a fraught with peril if challenged. The Courts seem to frown on this simplistic and dated methodology.

Moreover, generic benchmark formulas assume a financial statement reporting standard that just does not exist in public accounting.

Therefore, most every competitive issue that impacts value should be addressed with each practice engagement. This includes, but is not limited to contemporary dislocations by third parties, Medicare and commercial payers; retail clinics and changes in supply/demand and specialty trends; rise of ambulatory surgery centers and specialty hospitals; outsourced care and medical tourism, alterations in resource based-relative value units, APCs, DRGs and newer MS-DRGs; the Medicare Modernization Act, HIPAA, OSHA, EEOC, Sarbanes-Oxley and US Patriot Acts; among other regulations.

Current employee trends to high-deductible health care plans [HD-HCPs] and private concierge medicine must also be considered, as well as demographic and employer shifts to defined contribution plans – from defined benefits plans – to name just a few more complicating issues. 

9. Not Aggregating or “Normalizing” Financial Information

Employees may be interviewed and financial information must be gathered before a medical practice can be properly valued. The following data, for the most recent three year period, serves as a starting point:

  • Practice (corporate) tax returns.
  • Equipment / automobile leasing and/or tax depreciation schedules.
  • Accounts Receivable aging-schedule.
  • Practice consolidated financial statements (P&L, Cash Flow, Balance Sheet and Retained Earnings).
  • Prior Buy-Sell and/or non-compete agreements, and;
  • Sample medical record chart review is increasingly being demanded.
  • It is especially important to eliminate one-time, non-recurring practice expenses. These are adjusted for excessive or below normal expenses on the profit and loss statement. Such “normalization” can produce a big surprise for benchmark proponents and formula-driven advocates when a selling doctor runs personal expenditures through the practice that a buyer [or Court] wouldn’t consider legitimate.  Of course, such shenanigans are less noted using professional USPAP/IRS guidelines.

For example, we recall one doctor who painted his personal residence and wrote it-off as a valid business expense. Deleting other major expenses such as country club memberships, make a practice look more profitable—good news if you’re selling it, bad news if you’re getting a divorce.

Conversely, you may have to defend legitimate business expenses that an appraiser may seek to normalize. For example, doctors may pay for a vehicle through their practice, but if used to travel between multiple offices and hospitals, the expense may be legitimate. 

Realize too, that the appraiser may also add expenses that have not been incurred; like an office manager’s salary if your spouse is in that role for free. This produces a lower appraised value and is common in small medical practices. Honoraria are another example that does not figure into value calculations.

Of course, normalization is a sophisticated and time-intensive process. But, it is where the expert earns his/her professional fee, and defends the resulting valuation range when challenged.

10. Selecting the Wrong Valuator and Not Understanding Professional Fees

The most important credential to look for is fiduciary experience, specificity and independence. Some doctors mistakenly turn to those who may have never appraised a practice before. And, just because an appraiser has initials behind his name, doesn’t mean he understands the peculiarities of medical specialties, especially podiatry. We believe that only an independent health economist, who will be your advocate under Securities Exchange Commission [SEC] fiduciary [not lower “suitability”] guidelines, should be selected.

Moreover, look-out if the valuation not done at an-arm’s-length and independent manner; or worse still, if it is performed for both parties simultaneously.

Of course, it is almost impossible to answer concerns regarding fees without specific information. The cost of a valuation can range from $0 (benchmarks-rule of thumb) to $50,000 for an onsite team of experts for behemoth practices and ambulatory surgery centers. Keep in mind that in most cases you want to ensure the value determination will stand up to IRS scrutiny, so the $0 rule-of-thumb is not an option

However, most reputable firms use a blended fee-schedule of fixed and hourly rates (plus expenses). So, doctors should expect to spend approximately $5,000-10,000 for an average sized – limited appraisal – that is completely suitable for most internal activities.

External appraisals, or poorly aggregated financial information, onsite reviews and litigation support services incur additional costs; yet most doctors find the money well spent. Expect to pay a retainer and sign a formal professional engagement letter.

Finally, once practice price is mutually agreed upon, sales contract terms and agreements present a plethora of financing challenges for both involved parties to consider [bank loan payment rates and length, personal promissory guarantees, down-payment offsets, earn-out arrangements, Uniform Commercial Codes-1 asset guarantees, etc] in their due-diligence efforts.

Assessment

ho-journal9

Don’t be surprised if a sales-broker does not consider the above issues as the modern health era emerges. Most agent-appraisers are predominantly concerned with earning commissions by working both transaction parties, and may not represent your best interests. And, they are usually not obliged to disclose conflicts-of-interest and don’t provide legal testimony.

But, it is a fait accompli that medical practice worth is presently deteriorating. As the population ages and third-party reimbursements plummet, doctors are commoditized and traditional retail medicine is replaced by more efficient wholesale business models like workplace health clinics. The recent sub-prime mortgage de-fault fiasco, potential tax-reform law expiration and the political specter of a nationalized healthcare system, only adds fuel to the macro-economic fires of uncertainly.

As a result, a good medical practice is no longer necessarily a good business; and retiring doctors can no longer automatically expect to extract premium sales prices. Moreover, uninformed young physicians should not be goaded to over-pay. Regardless of your dismay – or delight – in the changing healthcare milieu, always be foreword thinking and remember the admonition, Trust-but Verify, for any business transaction.

Conclusion

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: MarcinkoAdvisors@msn.com

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About Practice Valuation On-Site Visits

Establishing Medical Practice Value

Staff Reporters 

One effective means for any valuation professional to confirm his or her understanding of medical business value, and how internal controls over financial and managerial reporting are designed and operated in a practice, is to evaluate and test its effectiveness, in-situ.

Purpose of the Visit 

According to valuation experts Robert James Cimasi, Tim Alexander and Todd A. Zigrang, of Health Capital Consultnts, LLC in St. Louis MO, the following information specific to the medical entity should be gathered by the financial executive, valuation expert or healthcare consultant. This information may be obtained through an interview, questionnaire, but preferably the on-site visit:

  • Background Information: Include such information as the number of years the entity has operated at its current location and in the community, as well as the office hours.
  • Building Description: Include the location (urban/suburban), proximity to hospitals and other medical facilities, and its size, construction, electrical and computer wiring, age, access to parking, and so on.
  • Office Description: Determine ownership or lease details, the square footage and number of rooms, and a description of different office areas. These should include, where applicable: x-ray, pharmacy, laboratory, exam rooms, waiting rooms, and other areas.
  • Management Information Systems: Document types of hardware and software and the cost, age, and suitability of all components, including their management functions, reporting capabilities, and integration between programs.
  • History of the Entity: Give the date founded and by whom, the number of full-time equivalent (FTE) physicians in practice by year, the physicians who have joined and left the entity, the dates they practiced and their relationship and practice arrangement with the entity.
  • Staff Description: Include the number and types of non-physician positions and the tenure and salary of all current employees.
  • Competitive Analysis: Include details of hospital programs impacting practice, growth or decline in the volume of business and the reasons, association with other physicians, competitive strengths and threats, the number and volume of procedures performed, any change in the number and volume, and the corresponding fees.
  • Patient Base Information: Encompass income distribution and percentages from different payers, the number of new patients and total patients seen per week, the age mix of patients, the number of hours spent in patient care per week, and the number of surgeries performed.
  • Managed Care Environment: Detail the terms and conditions of all managed care contracts including discounts and withholds, the impact on referral patterns and revenues, willingness to participate in risk sharing contracts and capitation, and the entity’s managed care reporting capabilities.
  • Hospital Privileges and Facilities: List all hospital privileges held and the requirements for acquiring privileges at the different local hospitals.
  • Credit Policy and Collections: Include practice policies for billing and payment, use of collection agencies, acceptance of assignment, other sources of revenues, and an aged breakdown of accounts receivable.
  • Financial Management: Include cash management procedures and protections, credit lines and interest, controls to improve payment of accounts payable, late payment frequency, formal or informal financial planning methods, and budgeting processes.
  • Operational Assessment: Include practice governance structure, responsibilities and procedures for performance, conflicts, recruitment, outcomes measures, case management, reimbursement, income, continuing medical education (CME), credentialing, and utilization review.

Assessment

Be sure to allow for discussion of overall relationships with physicians in the community, practice concerns, and needs.

For more info: Consult the chapter: Research and Financial Benchmarking in the Healthcare Industry, by the same authors, in www.HealthcareFinancials.com

Conclusion

And so, your thoughts and comments on this Executive-Post are appreciated.

Related Information Sources:

Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759

Physician Financial Planning: http://www.jbpub.com/catalog/0763745790

Medical Risk Management: http://www.jbpub.com/catalog/9780763733421

Healthcare Organizations: www.HealthcareFinancials.com

Health Administration Terms: www.HealthDictionarySeries.com

Physician Advisors: www.CertifiedMedicalPlanner.com

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