What's a Practice Worth?

Headnote

There are differing opinions as to the value of, and acceptable valuation methods for valuing, a medical practice when it is acquired by a hospital or health system. This article discusses regulatory concerns, the interrelationship between physician compensation and practice value, why marginally profitable or unprofitable practices may still have value, and the approaches and methods to determine value.

Key words: Valuation; appraisal; intangible; value; practice; medical.

What's a practice worth? The simple answer is: what someone is willing to pay for it. And that's the answer for most businesses - but not when it comes to healthcare. Unlike most businesses, healthcare is highly regulated, particularly when it involves providers that accept payment from government payers (like Medicare and Medicaid); or when a for-profit entity and a nonprofit entity are involved in a transaction. Because of the industry's complex regulatory structure, special consideration must be taken when valuing healthcare entities. This article will focus on the valuation of practices for regulatory purposes under the fair market value standard.

Without getting into the regulatory details, in the case of providers, the government does not want money to influence referrals of patients covered by government programs. For example, if hospital A paid too much to acquire practice B, the reason could be to cause practice B to refer its Medicare patients to hospital A. Such a transaction could potentially violate several regulations. In fact, even if hospital A paid a fair price to acquire practice B, it could still be an illegal transaction under the antikickback law if hospital A's motive was to influence Medicare referrals.

Because nonprofits have a special status and don't pay taxes, the government wants nonprofit funds to benefit only the nonprofit's mission, rather than businesses or individuals who might be able to influence the nonprofit's management in their favor. If the nonprofit hospital A in our example pays more than fair market value for practice B (which is private), some of the benefit of being a nonprofit goes to the individuals who own practice B rather than being used to further the hospital's mission.

It's appropriate that the government takes these positions because there have been, and continue to be, abuses of Medicare (and other governmental payer systems) and nonprofit organizations....