Diverse offerings, growth may increase the value of medical practices for investors
Diverse offerings and growth may increase the value of practices for investors, while having regulatory risks may decrease that value, according to a presenter at the Physician Transactions Conference.
“As you have more sophisticated buyers coming in, they have the choice to participate in a number of geographic markets,” Kathleen M. Premo, a member of the firm Epstein Becker Green, said. “If they are looking at you, they want to know that you have a good, solid diverse footprint in the market, meaning you are not reliant on one payer only; you do not have such a limited range of services that if volatility comes in, that investment might be compromised.”
Growth may increase value
Premo added that demonstrated growth is another key to increasing value in a practice.
“You cannot be in a situation where you are stagnant or you are going backward. In order to stay attractive in the market, you need to show that you are nimble enough to be moving forward,” she said.
Owners of a medical practice should also make ensure their contracts with providers include non-competes to lock providers in and make sure they stay with the practice, because providers are the greatest asset to the practice, according to Premo. She added it is important to understand whether the practice has a good relationship with the payer and whether that relationship is adequately documented.
“Your revenue sources are going to be scrutinized as carefully, if not more so, than your service provider relationships,” Premo said. “The question is going to be posed about whether those contracts are long term, whether those contracts have rights of first refusal by the payers or other limitations on being able to carry forward preferred rates if the transaction occurs.”
Premo noted another value drive for purchasers includes having added elements to the practice, such as value-based care sophistication and having enough infrastructure to make the practice a desirable platform.
Factors that depress value
However, Premo said being too dependent on one payer and not anticipating transitions of providers can depress the value of a practice. She noted practices will also see a depression in value if there are any regulatory risks, such as not verifying compliance with the law, having security breaches, multiple lawsuits, regulatory inquiries or bad audit results.
“Those are all things that make a purchaser think twice and possibly walk away from a transaction or start to reduce the value of the overall asset that they are looking to acquire, because they realize that maybe the coding practices are not correct,” Premo said. “They will be adjusted going forward, [but] that is going to reduce the revenue stream and, therefore, they are not going to be able to offer up the same purchase price.”
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Premo KM, et al. Medical practice optimization. Presented at: Physician Transactions Conference: Strategic Positioning in the Post-COVID Era; April 6, 13, 20 and 27, 2021 (virtual meeting).