Changes to the health care profession this year as a result of the Affordable Care Act may lead to more mergers of physician practices. The Stark Law, which was put in place to prevent physicians from referring patients to facilities from which they would personally benefit, prohibits the inclusion of the value of incidental patient referrals when valuing a practice for the purpose of a sale to a hospital or other medical facility.
So how does an acquirer value a physician practice without including the value of patient referrals?
High-level valuation approaches. There are three commonly used methods:
- Asset/cost approach – estimates the fair value of the practice’s assets, including intangibles, required to replicate the current operations of the facility.
- Market approach – looks at similar physician practices and applies a market multiple to determine fair value. Market multiples can be determined by looking at similar public companies or transactions involving similar companies.
- Income approach – uses estimated cash flows to determine a net present value of the practice.
Practice-specific factors. Valuation issues unique to the revenue and expenses of physician practices must be considered. For example, physician practices report sources of revenue such as Medicare, Medicaid, private pay or managed care. The valuation must include current and expected reimbursement trends for each revenue source, including regulatory changes such as the potential impact of the Affordable Care Act.
Other adjustments to the valuation include potential synergies from a merger or acquisition by a hospital facility, though not the possible referrals, due to the prohibitions of the Stark Law.
The Affordable Care Act is likely to impact health care organizations and physician practices and may lead to more acquisitions or mergers. Awareness of the unique characteristics of physician practices and the limitations of the Stark Law are critical to an accurate valuation.
— Anthony Law is a managing director at Valuation Research Corp. in Milwaukee.
