6 Best Practices to Streamline a Physician Practice Valuation

An important element of any merger or acquisition is the valuation of the hospital and/or physician practice. In a transaction between a hospital and a physician group, a valuation firm typically determines a set price upon which a willing buyer and a willing seller can agree. The price needs to fall into fair market value to maintain level competition and follow anti-trust regulations.

According to Chris Gauvin, CPA, manager at VMG Health, many times when hospital administrators discuss a potential transaction and related employment opportunities with physicians, it is in very general terms — the valuation process is not always included in discussions, but this should not be the case.  

"If the hospital can communicate to the physician the timing of the valuation process and offer details earlier on in the process, it leaves the physician practice with a clearer picture of what they may be able to expect," says Mr. Gauvin. "Furthermore, this helps to improve the overall relationship and can streamline the transaction process."

Mr. Gauvin recommends six best practices for streamlining a valuation for a hospital and physician group transaction.

1. Involve key decision makers in all communications. According to Mr. Gauvin, key leaders need to be involved in the initial communications as well as communication throughout the whole process. Key leaders may include physician owners, the CEO or CFO of the hospital, a hospital representative or a divisional contact for larger hospitals and health systems. "You want decision-makers involved from the beginning through the valuation and finalization of the valuation so they understand the process, the necessary documentation required and the outcome," says Mr. Gauvin. In some circumstances, the CEO or the practice may understand and accept the valuation but other decision makers like health system representatives may desire input. If those individuals were not included from the beginning, the education after the fact could slow the valuation. "If everyone moves together collaboratively [from the beginning], there is a better understanding of the value of the practice and its effect on the acquisition," says Mr. Gauvin.

Another element that needs to be discussed prior to the valuation is the anticipated compensation structure. "That's one area where I have seen communication breakdown," says Mr. Gauvin. "The deal still gets done but if a new or different compensation model needs to be discussed after an initial valuation, the valuation could change and require a new round of discussions." Communication breakdowns around the valuation could necessitate repeating the process from the beginning, which could delay the entire transaction.

2. Identify areas of limited practice financial support. Limited practice financial support refers to the quality of financial records a physician practice or group has or does not have. "We see a wide range of quality — everything from handwritten to fully audited financial statements," says Mr. Gauvin. Oftentimes inadequate records also lack supporting detail. Alerting the valuation firm upfront of the quality will help the valuation firm focus their efforts. A valuation firm needs detail including lists of procedures, costs billed to the patient and collections by providers to assess a physician group's value. When a physician group or hospital can provide an initial assessment of whether financial records are organized and up-to-date, the valuation firm can work with the physician group and hospital more effectively to gather accurate information. When supporting detail is hard to find up-front, the valuation firm must still look for the detail, which extends the valuation's timeline. "If accurate and detailed data is given up front, the valuation will go quicker because we have all the information to find the answers right away," says Mr. Gauvin.

3. Assess the quality of information available. This best practice goes hand-in-hand with the best practice prior. When valuation firms are given limited financial support, the valuation process cannot only become extremely lengthy but also inaccurate. "The valuation is only as good as data that goes into the valuation model," says Mr. Gauvin. Quality of information is very important because the valuation firm cannot correctly estimate the value of the physician group or practice without the supporting detail. "For instance, if I were to receive income statements for a physician's revenue, I would also ask for supporting detail such as CPT reports," says Mr. Gauvin. "A lot of times we receive reports at the summary level that might show one number but we need to ensure the detailed numbers — dates and collections by provider and by CPT code are consistent with the summarized financial statements." The gold standard would be financial reports that have been audited and reconciled to the billing system’s information. However, that is not usually available. A best practice is for the hospital administrators to help the physician group assess its data quality, or at least alert the physicians of what the valuation firm may need. "A valuation is more successful and accurate if the data going into the model by the valuation firm is valid," says Mr. Gauvin. Without valid data, the resulting output will not be valid, and antitrust issues could rise down the road for the hospital and the physician group.

4. Confirm access to appropriate contact. This best practice is also related to providing the financial data to the valuation firm. Since the valuation firm needs a lot of detail, having a key contact answer questions and address issues helps expedite the process. "If the hospital or physician group employs a proactive administrator or executive who understands the financials of the physician group, that person is ideal to work with," says Mr. Gauvin. "Sometimes there is not a person who understands the complete picture and the valuation firm runs into circular references because no one can explain all the expense line items." Valuation firms need to perform a certain level of due diligence, and a representative who can gather all the necessary materials or be the key contact allows the valuation to run smoothly and accurately. As stated previously, an accurate valuation is crucial. "It does not matter who the person is or what role they play, as long as there is someone with all the relevant information at their disposal," says Mr. Gauvin.

5. Hospital administrators as liaisons. Often physicians are newer to the transaction process than hospital administrators. The physicians may not understand the role the valuation plays in the transaction, how the valuation works or what documents are sufficient to provide. "We deal with a wide range of physicians. Some may not need as much briefing on how to coordinate with the appraisers," says Mr. Gauvin. "Others may need more explanation. They may need to be told that faxing last year's tax return does not suffice as the physician's complete set of financial information required." According to Mr. Gauvin, if a hospital executive or administrator is able to inform the physician group of the valuation process and procedures early on, it allows the transaction and the valuation to run a little more smoothly.

Additionally, Mr. Gauvin mentions that, dependent upon the physician group size and its situation such as whether physicians in the practice know the practice is being sold, certain communication barriers may arise between the valuation firm and the physician contact. "I have had physicians request that I call their cell phone, or only contact them after hours, or even fax them only at home. That is all fine and a valuation firm would gladly do that," says Mr. Gauvin. "However, if a hospital administrator could be a liaison and assist the physician to gather documents and reports to present to the valuation firm, the process may operate more efficiently."

6. Discuss timeline for valuation milestones. According to Mr. Gauvin, it is a best practice to conduct a kick-off call with key decision-makers right up front, so everyone understands the valuation timeline and milestones. A valuation usually has a few milestones. When a valuation begins the firm requests information and it is important for those involved to realize that data is needed sooner rather than later — "the first week of the valuation, not the third," says Mr. Gauvin. Then, once the data is processed, the firm will set up a site visit to the physician practice. The site visit allows the firm to incorporate feedback from the practice and its physicians. The last part of the valuation confirms the information based upon projections by the physician group and the hospital. If a physician group does not understand this process, it could disrupt the valuation flow. VMG Health tries to turn valuations around within three to four weeks from the initial request. Some physicians may have a different timeline in mind. According to Mr. Gauvin, almost any timeline may be accommodated as long as it is communicated, and there is an efficient flow of good information and communication between all parties. "Because it is important for all parties to understand the timeline and milestones, an initial kick-off call is a great best practice to enforce," says Mr. Gauvin.

As in any situation, there are differences in challenges a hospital may face when acquiring a small physician group versus a large physician group.

A smaller practice more likely faces challenges around financial data and quality of data. Without a high volume of data, there is less need for a financial manager or on-site accountant, which could result in unorganized, unaudited financial data. Thus, they may also have quality of data challenges such as handwritten instead of electronic records.

Quality of data is not usually a big concern for larger practices. Larger practices of about 20 to 30 physicians or more may have a site administrator or an accountant on staff — an individual who could answer a wider range of questions. A larger practice often has more data, which may necessitate an individual to organize and manage it, and that individual would be a great contact for the valuation firm. "In that case, it is more likely the data will also be electronic and audited or reviewed," says Mr. Gauvin. "Data in that form is easier to sift through and validate."

However, a big concern for a larger practice is guaranteeing all individuals involved are moving forward with similar expectations. Since there may be more key players — a board, a shareholder group or a CEO of the physician group — coordinating meetings and agreements could be more difficult. A smaller practice is less likely to have issues with key player involvement since there could be fewer individuals, says Mr. Gauvin.

Challenges may differ depending on the situation and the physician group size, but the best practices Mr. Gauvin recommends could work to streamline a valuation regardless of the circumstances. Streamlining a valuation is a great way to improve a hospital-physician acquisition and increase its likelihood for success overall.

More Articles on Hospital-Physician Transactions:

Longview Regional in Texas Partners With 132-Physician Group
5 Considerations for Successful Physician Acquisitions
Hospitals Buying Physicians: 10 Recent Transactions

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