What Is Involved in Medical Practice Valuation?

Medical practice valuation is the determination of the market value of a medical practice by a variety of methods. Valuations may be conducted for a variety of reasons, including mergers, partnership buy-ins and buy-outs, litigation, divorce, and death of the owner. Medical practice valuation is an imprecise endeavor, and appraisers use several methods to arrive at a reasonable estimate of an ongoing practice’s worth. The most common techniques by which medical appraisers value a practice are the income approach, the market approach, and the asset approach. Additionally, appraisers offer three levels of scrutiny and analysis from which a value may be derived, with each successive level of detailed examination demanding a higher fee.

The most common method of medical practice valuation is the income method, in which projected future cash flows of a practice are converted to a current value. In the asset approach, appraisers adjust the book value of the business assets minus its liabilities to a fair market value. This method works best for practices with a lot of tangible assets, such as expensive imaging equipment. The market approach uses benchmarking to compare the company to other practices that have been sold.

Determination of the value of the intangible assets constitutes the most difficult and controversial area of the medical practice valuation. The intangible value, or goodwill, may include an agreement not to compete, patient lists and referral patterns, health care contracts, a favorable location, and use of the seller’s name. Since the income method incorporates income that results from both the intangibles and the tangible assets, goodwill is not valued separately. The other two methods do break the assets into tangibles and intangibles, but there is no consensus for valuation of goodwill.

In addition to cash flows and assets, other factors that primarily influence the medical practice valuation include the local competition, real estate, and the presence of partners and key employees. Other considerations include the age and usability of the medical equipment and any anticipated purchases of new equipment, furniture, software, or fixtures. Payer mix can be a significant factor, since a high degree of dependence on one or more third-party contracts, such as Medicare, Medicaid, or a single private insurance, may disrupt the income of the practice if arbitrary insurance company decisions or government regulations reduce reimbursement rates or change provider arrangements. For example, if 75 percent of the practice’s patients are covered with Medicare, then a 10-percent cut in Medicare reimbursements will reduce the overall practice revenue by 7.5 percent.