17 May How to Broker a Medical Practice
It is the worst medical practice brokerage market in my 30 years of doing startups, valuations and brokerage. At least half of my listings, properly priced and marketed, don’t sell. I just saw another overpriced medical practice listing come through one of the online directory services. It appears from the language that the broker had never tried to sell a medical practice before. I’ll bet that practice never sells!
When I say “medical practice”, I include any specialty that can be reimbursed by Medicare or Medicaid, or insurance plans like Blue Cross. This includes medicine, osteopathic, chiropractic, podiatric, physical therapy, and other specialties like small pathology laboratories. I also include specialties like cash-paid medical spas offering cosmetic services requiring an MD or DO license. It does not include dentistry or veterinary.
According to the giant accounting and consulting firm Deloitte LLP: “Providers feel the impact of government regulations on many fronts. Margins are down, and the need to control costs is acute. Compliance requirements are snowballing — as is the potential for risk. Providers will be under tremendous pressure due to lowered reimbursement rates and increased patient volume from health insurance exchanges and expanding Medicaid rolls. “Business as usual” for health care providers has been disrupted for a few years … and that trend will continue because these changes are both ACA- and market-driven.” “Confusion abounds, driven by uncertainties about issues from shifting payment models to new government mandates to ongoing battles over maintaining certification.” “Congress’ 2018 budget included approximately $1.5-trillion worth of cuts to Medicare and Medicaid.” As of December 2017 –within weeks of the Republican tax bill repealing the individual mandate– the number of plans offering health care exchange plans to individuals and small groups has dropped from 2,400 to 700 plans. This reduces the number of insured patients available to physicians –and employing hospitals– by as much as 13 million persons.
Lack of negotiating clout is forcing physicians to abandon small practices.” “44.7% of physicians say their practice income is “disappointing”, according to the Physician Compensation Survey of nearly 1,095 doctors by Physicians Practice. 84% of physicians agree that the medical profession is in decline. 33% would not again choose medicine as a profession. 60% would retire today if they had the means to do so. 26% have closed their practices to MediCaid, including PPACA MediCaid, and 52% have closed their practices to Medicare –or plan to do so. 92% are unsure where the health system will be within 5 years. “Residents” are graduate-physicians-in-training. 36% indicated they would prefer to be employed by a hospital than any other option. Only 2% of residents indicated they would prefer a solo setting as their first practice. 48% said they are unprepared to handle the business side of medicine. Residents identified “geographic location”, “personal time”, and “lifestyle” as their most important considerations when evaluating a medical practice opportunity. Only 6% would prefer to practice in communities of 50,000 or less.” This reduces the number of available purchasers of healthcare practices.
An editorial published in the Journal of General Internal Medicine reported burnout rates ranging from 30% to 65% across specialties, with the highest rates of burnout incurred by physicians at the front line of care, such as emergency medicine and primary care physicians.
There are many reasons that medical market transactions are down. With the passing of PPACA (“ObamaCare”); hospitals, insurance companies, and other large corporate entities became incentivized to acquire practices to protect their local “turf”. In almost none of these cases does the acquiror pay for any goodwill or intangible value, being advised by their attorneys that this can open the door for investigation by the Office of the Inspector General, resulting in millions of dollars in fines for “paying for a referral stream.” Due to regulatory edicts contained within the Internal Revenue Code, Stark Law, Anti-Kickback Statute, and False Claims Act, most types of healthcare transactions are required to adhere to the standard of Fair Market Value. On the other hand, these large entities pay handsome salaries and bonuses to the doctors. They can afford this because of “Hospital Outpatient Differential Billing” (HOPD). HOPD allows these entities to bill and collect 2-3 times as much as the doctor could on his/her own, seeing the same patients in the same office!
There is a worsening shortage of physicians in the U.S., reducing the number of candidates able to make a purchase. Major surveys find the U.S. to be up to 60,000 physicians short by 2025.
According to the largest physician recruitment company in America: “This time, reform will not be a ‘false dawn’ analogous to the health reform movement of the 1990s, but will usher in substantive and lasting changes. The independent, private physician practice model will be largely, though not uniformly, replaced,” increasing business risk for remaining private practice physicians.
Practices sell regularly, many with some goodwill value, most with minimal fanfare. Not every practice sells, but not every practice is in a condition to be sold; nor does every physician properly try to sell his or her practice. The truth is; the harder it is to start a practice from scratch in a particular location, and the more competition there is, the easier it usually is to buy an existing practice, and the more it is worth to a buyer.
I tell all my sellers that –in this down market– you don’t try to sell for financial gain; you sell for a lifestyle reason like disability, retirement, or relocation. They will almost always net more by working one more year rather than selling.
I find that most smaller practices are lucky to sell for as much as 1.5x EBITDA. Most have zero EBITDA; only compensation for their personal labor. A practice not leveraging & profiting on employed providers and ancillary services is unlikely to have any way of creating EBITDA.
There are hot exceptions to the down market. PEGs and VC funded rollups are happening in select specialties like dermatology, pathology, ophthalmology, ambulatory surgery centers and others on a regional basis. In most cases those “strategic buyers” are looking for acquisitions with at least $1-3M in EMITDA, if not more. That excludes most practices. Remember that EBITDA is after paying the treating providers, in addition to all other business costs. When you dig into the details of those PEG/VC deals though, what you commonly find is that they require the seller to stay on for 3-5 more years, working just as hard or harder, at a lower rate of pay. So the seller is basically giving up their EBITDA at 3-5x, and financing the purchase for the PEG/VC, whom will try to roll up enough of these to flip it to a bigger group at a higher multiple of 7-12x. It doesn’t always work out well, as we saw with the HMO disasters of the 80s and 90s.
I teach “options in practice” as faculty for a number of national medical associations, to residents, Fellows, and physicians re-entering practice from PHOs, failed groups and other settings. I am frequently asked “which is better; join a group, start a practice or buy a practice?” The answer is; it depends on the unique situation of the candidate, but all three options compete with each other creating a “marketplace”. At “fair market value”, the cost –or financial equivalent due to reduced compensation–to the buyer is similar for each option.
For a seller; selling the practice not only can result in financial reward, but it can also dispose of the ongoing future expensive liability of custodianship of a lifetime’s worth of patient charts.
If you want to broker a practice, here are some key issues:
- Plan at least a year ahead. Three years ahead is not too far. Most buyers are no fresh out of training, but 3-5 years out, and unhappy with their employment, or relocating to follow a spouse.
- Price it right. Expect the buyer to have expert counsel on values. If you are pricing it above 1.5x EBITDA, you need a very strong reason about why (PEGs/VCs excluded).
- Don’t let the seller slow down in advance. Try to even increase productivity and profitability if possible during the year prior to sale. Growing practices are more attractive than declining ones. Adding midlevel providers to do the work, and ancillary services, can help increase profitability, EBITDA, and attractiveness of the practice to a buyer if you have 1-3 years in advance to do so.
- Try to sell it first to another local buyer, probably a colleague of the seller or a nearby group in expansion-mode. The physician shortage means most physicians can get a job anywhere, often for more money than the seller earns. You want a buyer with other-than fiscal motivation. Most candidates whom want a practice in your town are already there. State licensure for out-of-state buyers can easily take 6 months. I like buyers that worked for a hospital and hated the politics, and want control of their own practices more than extra money.
- Always, always, always ask a hospital buyer or hospital sponsored buyer upfront if they will pay for goodwill value. If they won’t, it still is a better way to sell than just auctioning off the equipment, because of the legal requirements of medical record custodianship which can vary by state, and cost 10s of thousands of dollars. Or ask the doc’s malpractice carrier about it.
- Prepare a proper professional promotional package, including a dedicated “search-engine-optimized” web page, since most candidates now come via Internet searches. In addition, have a web page for the practice to demonstrate modernity. Ads in physician magazines & directories are a waste of money, since the candidate will always “Google” it anyway.
- Arrange bank financing in advance. The medical specialty divisions of Bank of America and Wells Fargo are aggressive about lending 100% to buyers, at excellent terms. Try to avoid SBA, whom I have found won’t lend to a buyer not of the seller’s specialty.
- Clean up the office and the doc’s desk, to make them appear more modern and attractive before any candidate ever visits. Create an attractive space where the candidate can mentally picture themselves working. Fresh paint, carpeting and flat screen computers for staff are inexpensive and create quality “staging”. This can take a month or two.
- Don’t try to do the negotiation of terms of sale, and documentation of sale yourself. Use a medical practice transactions specialist attorney, because the laws about price and terms under State & Federal law are not logical! Find attorneys at NSCHBC.org and HealthLawyers.org.
- Know the law in your state about the “prohibition on the corporate practice of medicine.” In other words, in many states, only physicians can own a medical practice. At least 70% of candidates that call on my listings are not qualified licensed buyers. Don’t waste your time with them. A common error is to have a spouse as a shareholder in violation of state medical practice laws; which needs to be corrected voluntarily in advance with an attorney.
- Make sure the last 1-3 years’ accounting & statistics conform to specialty standards like those at NSCHBC.com or MGMA.com. This will give the buyer and their advisors more confidence in the seller’s data and management skills.
- Be prepared to convince the buyer’s spouse and children to live in your community, with a tour of local homes with a real estate agent, visiting schools, malls, local attractions, etc.
- Consider offering the buyer a chance to work for 1-3 years at reduced income, then purchasing the practice for the value of the hard assets, “without goodwill”. The reduced income will probably equal the goodwill you would have received, and the price will be more attractive, with less risk to both parties. Make sure to document everything in advance of the first day of employment of the candidate to avoid misunderstandings and deal-collapse later.
- Consider asking the hospital if they will offer an income guarantee “forgivable loan” to the buyer for the first year or two.
- Check the billing and coding. I recently appraised a practice where the capitated revenues were posted three times; once as a patient charge, again as a charge by insurance plan, and again as receipts, radically inflating the charges, skewing the collection ratio, and making all the statistics unreliable. The same practice used CPT code 99213 for virtually all visits, further complicating statistics and creating distrust. Another practice was getting double-paid; collecting BOTH a capitation check and a fee-for-service payment on the same visits due to IPA error. That practice sure looked profitable on the surface, but needed to be cleaned up by an attorney prior to becoming sellable.
- Check the Medicare List of Excluded Individuals/Entities on the seller, their staff –and especially any buyer– to avoid nasty surprises later, like Medicare taking back any money they have paid the practice.
 “2014 Outlook on Health Care Providers”, Deloitte.com
 “Top 10 Challenges Facing Physicians in 2016, Medical Economics Magazine, Dec 2016
 “The Ever Changing Healthcare Marketplace”. Medical Economics, Dec 25, 2017
 CMS Notice 10401/OMB Control Number 0938-1155
 Congressional Budget Office statistic
 “Are Doctors Being Exploited?”, Medscape, Feb 13, 2014
 “2016 Physician Compensation Survey”, Physician Practice online magazine, Nov 2016
 “Health Reform and the Decline of Physician Private Practice”, MerrittHawkins.com, Sept 2015
 “Health Reform and the Decline of Physician Private Practice”, The Physicians Foundation, Merritt Hawkins 2011
Keith Borglum has been a licensed medical practice broker, appraiser, author and business consultant for over 30 years. Mr. Borglum is an Editorial Consultant to Medical Economics Magazine and contributor to many medical association journals. He is the author of one of the books on the topic; The Medical Practice Valuation Workbook published by PSR at PracticeSupport.com. Many more articles are posted to his website at MedicalPracticeAppraisal.com.