In a session at the Becker’s Hospital Review annual meeting in Chicago on May 17, senior vice president of VMG Health Jon O’Sullivan and Jonathan Helm, an accredited valuation analyst and VMG Health manager, discussed valuation of physician practice acquisitions and post-transaction compensation.
Mr. O’Sullivan began by providing a brief history of physician acquisition. He discussed physician practice management companies from the 1990s and integrated delivery networks. PPMCs fell off the radar in the late 90s, Mr. O’Sullivan noted, because physicians were frustrated over how hospitals managed practices.
Fast forward to the present. Transactions are on the rise, Mr. O’Sullivan said, because physicians are concerned about how secure their practices will be in an era of bundled payments and accountable care. Mr. O’Sullivan discussed the trend of hospitals and health systems acquiring primary care physicians. By 2008, a majority of physicians were hospital-employed. The trend continues within some specialties, including cardiology.
He noted several driving forces motivating physicians into acquisitions:
Mr. Helm then stepped in and discussed specifics about valuation and post-transaction compensation. He discussed two broad transaction types, a whole practice acquisition and an ancillary-only purchase in which physician groups maintain some autonomy when they integrate with the hospital.
He also noted three valuation approaches: the income approach, the market approach and the asset — or cost — approach.
Mr. O’Sullivan said the asset value might sometimes be the most practical means of valuating a physician practice.
“The reality is if you’re buying a practice and you don’t expect to generate revenue, then the floor value is the asset value,” he said.
Discussing physician service agreements, Mr. Helm noted the prominence of physician groups “stacking” services in those agreements. He said hospitals should seriously evaluate whether they need all the services offered in service agreements. Hospitals also need to consider whether the physicians a part of the PSA will have the time and resources to offer all services promised.
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Mr. O’Sullivan began by providing a brief history of physician acquisition. He discussed physician practice management companies from the 1990s and integrated delivery networks. PPMCs fell off the radar in the late 90s, Mr. O’Sullivan noted, because physicians were frustrated over how hospitals managed practices.
Fast forward to the present. Transactions are on the rise, Mr. O’Sullivan said, because physicians are concerned about how secure their practices will be in an era of bundled payments and accountable care. Mr. O’Sullivan discussed the trend of hospitals and health systems acquiring primary care physicians. By 2008, a majority of physicians were hospital-employed. The trend continues within some specialties, including cardiology.
He noted several driving forces motivating physicians into acquisitions:
- A desire to be shielded from market forces
- Reimbursement cuts
- Increasing costs to maintain independence, particularly malpractice
Mr. Helm then stepped in and discussed specifics about valuation and post-transaction compensation. He discussed two broad transaction types, a whole practice acquisition and an ancillary-only purchase in which physician groups maintain some autonomy when they integrate with the hospital.
He also noted three valuation approaches: the income approach, the market approach and the asset — or cost — approach.
Mr. O’Sullivan said the asset value might sometimes be the most practical means of valuating a physician practice.
“The reality is if you’re buying a practice and you don’t expect to generate revenue, then the floor value is the asset value,” he said.
Discussing physician service agreements, Mr. Helm noted the prominence of physician groups “stacking” services in those agreements. He said hospitals should seriously evaluate whether they need all the services offered in service agreements. Hospitals also need to consider whether the physicians a part of the PSA will have the time and resources to offer all services promised.
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