Magazine article The Journal of Lending & Credit Risk Management

Key Indicators for Medical Practice Valuation

Magazine article The Journal of Lending & Credit Risk Management

Key Indicators for Medical Practice Valuation

Article excerpt

The RMA Health Care Conference 2000 was held in Chicago in May. Mark O. Dietrich, CPA, ABV, who spoke at the conference about key indicators for medical practice valuation, reprises here part of his presentation. Included are 20 intangibles of an established practice and seven key financial indicators.

Like many industries that undergo a period of rapid consolidation and speculative buying, physician practices have declined in value, at least as far as third-party buyers on Wall Street are concerned. The focus of today's valuation activity is once again on the traditional value indicators important to the physician buyer and seller. Valuation is about future cash flow, and a good valuation considers, to the extent feasible, those factors that may cause future cash flow to differ from historical cash flow.

Physician Work Codes and Practice Income

The coding of services provided by the physician is the element (and a critical one) of physician practice value that is least understood by valuation consultants. Coding refers to the work code assigned to a patient service by the physician. This code determines the payment the physician will receive for the service from insurance companies. The codes were developed by the American Medical Association and are known as CPT (Current Procedural Terminology) Codes.

A patient who has previously been treated by a physician is considered an established patient. There are five codes typically available to a physician for recording the office service provided to an established patient. Each of these codes has a dollar value attached to it by the myriad of health insurance companies. The higher the code, the greater the payment made. For example, the typical office visit for a patient visiting the doctor for a routine health complaint is coded as 99213 or a Level III, and a typical payment by an insurer for this service is $50. If the service is coded as a Level IV, the payment may rise to $70. A level II, in contrast, may only be paid at $35. (The actual payments vary with each insurer.) It is easy to see that the income of a practice can be manipulated--deliberately or otherwise--through the use of the codes. Of course, there are rules for assigning the codes and the physician must document the services performed in the patient's medical record to justify the code.

A quality valuation report will include a comparison of the coding of the practice being valued to statistical norms for that physician's specialty. (Such a review is even advisable as part of the documentation in a loan request.) The norms for the Medicare population are readily available from the Health Care Financing Administration's website www.hcfa.gov). As with many other sets of statistical data, the distribution of codes generally follows the classic Bell Curve. The preponderance of codes are Level III, with a lesser amount of Level IIs and IVs, and still fewer Is and Vs. The actual percentage of each varies according to the specialty training of the physicians. Cardiologists, for example, use the Level IV code far more frequently than do family practice doctors. A coding pattern that is inconsistent with statistical norms may indicate improper use of codes that in turn would affect the certainty that historical revenues would continue.

The Regulatory Environment

The government's influence on the practice of medicine is pervasive and, at times, surprising to those unfamiliar with it. One grouping of the many statutes affecting the finances of a medical practice is the so-called Stark Laws. These laws are designed to forbid certain referrals by physicians in exchange for financial incentives. Although this may sound simple, the implications are expansive. In a group practice, the compensation plan employed by the physicians to determine who is paid how much must be Stark-compliant. For example, if the practice has a laboratory that performs blood chemistry tests, the income from those tests cannot be allocated to the physician who ordered the test. …

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