Performance Assessment and Improvement: The keys to Medical Practice Value

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“The price is what you pay; the value is what you receive.”

-Unknown

If you are a physician who is thinking about selling your medical practice soon, you’ve stumbled upon the right article.  The sale of a medical practice is no small undertaking and will probably be one of the most significant events in your personal life.  Consequently, it is essential that you be well organized and knowledgeable to avoid embarrassment, delay, and heaven forbid, loss of a sale. 

Many physicians who have gone through the sale of a medical practice compare the preparation and organization stages to that of following clinical protocols and meeting the standard of care.  It is the most prudent thing to do and puts you in the best position to succeed. 

In short, you must put your house in order before you even think about starting the sale process! 

This article is not meant to be a comprehensive guide nor is it legal advice to the reader. Its purpose is to give physicians a general idea of how to effectively start planning for the successful sale of their practice and if necessary, delay the sale and take extra time to fix processes which may be diminishing its value. 

Additionally, it is vital that a physician put together a professional team of advisors as soon as a decision is made to seriously consider selling a practice to help with negotiating the details of a good deal.

State and federal anti-kickback and anti-referral laws mandate that the sale price of a medical practice be at fair market value (FMV) without regard to the value of future referrals. FMV is any price within a range of reasonable prices and so the seller is free to negotiate the highest possible price within this range. 

A broker (Shameless plug here: We recommend Strategic Medical Brokers) or appraiser can help here, and one way for the appraiser or broker to help is to prove (not just assert but prove) a high value for the Goodwill of the practice.

So, what is Goodwill? In simple terms, Goodwill is the value of the practice over and above its tangible assets (including cash, cash equivalents and A/R). 

A September 15, 2008 article in the AMA’s American Medical News lists the following elements of Goodwill:

  1. location
  2. payer mix, A/R, and collection rate, not as a pot of cash in hand but as a predictor for the practice’s financial future;
  3. competitors in the market;
  4. the practice’s reputation
  5. the effect of the anti-kickback and anti-trust laws. 

So, which of these 5 elements of Goodwill does the seller have the most control? I would argue element (2): payor mix A/R and collection rate which is a function of a practice’s revenue cycle management process and (4): the practice’s reputation.

So let us talk about the practice’s reputation for a minute. While practice reputation is real, it cannot be transferred to anyone else, so it will not be part of the Goodwill value within the sale price unless the seller is going to work for the buyer.

That leaves us with payer mix, A/R and collection rate, which as stated previously, is a function of revenue cycle management and will be the focus of the rest of this article. 

Revenue cycle management (RCM), which is the full process of billing and payment in healthcare facilities is well within the control of a practice and directly affects revenue. A strong RCM foundation is essential to a practice’s financial viability and will affect whether the seller will be able to get a purchase price which is on the higher end of the FMV range. Think of RCM as the foundation of your house.

According to Gregory S. Feltenberger and David N. Gans, authors of “Benchmarking Success-The Essential Guide for Medical Practice Managers,” Accounts receivable (A/R) is usually the single largest balance sheet item.

They go on to state that practices identified as better performers in this area generally invest significant time and energy in managing this asset. They treat A/R and collections as a practice-wide endeavor and all staff work together to manage the A/R and collections process to increase cash flow and improve working capital position.  

The table below shows some keys to A/R and Collections Success. 

Keys to A/R and Collections Success

Use of Information TechnologyAggressive Incentive Plans for Employees
Involved PhysiciansCoding Audits
Close Watch on Trends In the Healthcare MarketPhysicians Engaged in Billing Processes
Outsourced Billing FunctionsPhysicians Dedicated to their Patients
Looking at the Data from Different AnglesAn internal Report Card for Benchmarking
Use of an Electronic Health Record SystemDedicated Staff Working as a Team
In-house Billing and Collections ProceduresStaff with vested interest in Making the Practice Successful

Some other A/R Metrics to consider include:

1) Total A/R per FTE Physician (Goal: Higher the better)

2) Gross Fee-For-Service (FFS) Collection Percentage (Goal: Higher the better)

3) Gross FFS Charges per FTE Physician (Goal: Higher the better)

4) Adjustments to FFS Charges per FTE Physician (Goal: Lower the better)

5) Bad Debt as a % of Charges (or per FTE Physician or provider) (Goal: Lower the better)

6)  Daily Charges – A review of daily charges identifies the billable productivity of the entire organization.

7) Payer Mix – This is the ranking of insurance providers by charges.

8) Payer Productivity – This is a report which ranks payers by receipts instead of charges.

If you and/or your staff are looking at these metrics and don’t know where you stand, it’s time to get to work. Nothing is more critical to revenue cycle profitability than to have highly efficient accounts receivable and denial management processes in place. It determines the difference between financial stability and financial loss. There are many RCM companies that can assess and improve upon your current RCM workflow processes, thereby improving your practice’s value.

Hopefully, this article assists you in creating a plan for a successful sale.  Remember, selling a medical practice is a significant event, involving many moving parts and it takes time. So, assemble a group of competent advisors to help you create a plan and be patient with the process.  Good Luck!

References:

  1. The Physician’s Guide to Selling a Medical Practice by Steven Mansfield Shaber, JD; Kim L. Bayless, JD; Michael Slipsky, JD & Poyner Spruill LLP. https://www.ncmedsoc.org/wp-content/uploads/2018/04/Selling-a-Medical-Practice-Anatomy-of-the-Sale-with-Checklist.pdf
  2. Gregory S. Feltenberger, PhD, MBA, FACMPE, FACHE & David Gans, MHSA, FACMPE Benchmarking Success-The Essential Guide for Medical Practice Managers 2nd Edition 
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