The Science and Art of Medical Practice Valuation
[Fair Market Value Appraisal Considerations]
When one cannot appraise out of one’s own experience, the temptation to blunder is minimized, but even when one can, appraisal seems chiefly useful as appraisal of the appraiser – Marianne Moore
The health care industry continues to undergo major systemic and political revisions in its form of health care delivery. Market evolution has been described as revolutionary, fraught with continual organizational changes. Recent years have been marked by significant and increasing politically sensitive industry consolidations, although the frenzied rate of the previous merger and acquisitions activity last decade has abated.
Today, the major industry segments grabbing the headlines are physician-to-physician consolidations and retirement successions.
The Urge to Merge
And so, why is there this urge to buy, sell or merge in the private clinical and micro-economic practice arena? Medical practice consolidation is being fueled by the uncertainty over healthcare reform measures and the continuing squeeze on the health care dollar, due to rising costs. Aging physicians are retiring, mid-life doctors are getting divorced, and newly minted physicians are desperately seeking to retain one last vestige of business autonomy.
The health care market is approximately 2.56 trillion dollars, with physician and clinical services accounting for 20.8% of total healthcare spending. Direct spending on physicians has grown from $5.3 billion in 1960 to $527.6 billion in 2009, and is projected to exceed 800 billion dollars by 2018. The following chart illustrates this explosive growth trend in physician spending.
Strong Impetus to Consolidate
The federal government is the largest single payer in the U.S., accounting for approximately one-half of all of health care expenditures. With the aging population, legislative efforts to control health care spending can only escalate. Further accelerating the urge to merge, many insurers are increasingly basing provider payments on some level of Medicare reimbursement. Medical practices are continually attempting to offset declining revenues by controlling costs and offering broader services. With market forces squeezing the health care dollar, continual change and industry consolidation is eminent, and is the reason for many public and private political debates.
The Regulatory Climate
Federal and state fraud and abuse laws, self-referral laws, tax-exempt entities prohibitions on inurement and private benefit, and a host of other federal and state laws and regulations have significant impact on what medical practices can acquire and how those acquisitions are structured.
The IRS and the Office of the Inspector General (“OIG”), Department of Health and Human Services are scrutinizing the formation of integrated delivery systems (“IDS”), with major focus on physician transactions. The impact to the health care industry has been:
- Increased scrutiny by regulators
- Need for greater understanding of regulations and their impact on determining value
- Need for greater documentation in rationale and support of underlying value conclusions.
Current health care policy issues are likely to address four broad areas: Medicare, Medicaid, access to care, and public or managed care. With Medicare and Medicaid taking up significant portions of the federal budget, efforts to bring revenues in line with spending will require painful reductions of provider payments. Under previously enacted Medicare reform legislation, provider-sponsored organizations (“PSOs”), that are groups of hospitals, physicians, and other providers, are allowed to contract directly for Medicare capitation. This legislation also has significant negative impact to physician payments, and in particular specialty practices. Medicare, Medicaid, access to care, and anti-managed-care legislation will continue to be hotly debated topics.
The Economic Climate
Other legislative risks negatively impacting traditional physician economics and independence include:
- Health Insurance Portability and Accountability (HIPAA), risks
- Balanced Budget Amendment, risks
- Deficit Reduction Act, risks
- Anti-Trust, risks
- Federal False Claims Act, risks
- Civil Asset Forfeiture, risks
- OSHA and CLIA, risks
- Drug Enforcement Agency, risks
- Environmental Protection Agency, risks
- Managed Care Contractual risks
- ERISA, risks
- Business and employee, risks
- Systemic economic, risks
- Workplace Violence and Terrorism, risks
- Political reform, risks.
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Plastic Surgeons: http://www.PlasticSurgeryPractice.com/issues/articles/2006-08_10.asp
Dictionary of Health Economics and Finance: http://www.springerpub.com/prod.aspx?prod_id=02549