MDNews - Central New York

IN THE LIFE cycle of a medical practice there are many circumstances that may require a determination of the practice's value — sale to a hospital system, merger with another medical practice, sale to a private equity group, buy-ins and buy-outs of physicians, and death of a physician (valuation for estate tax purposes), as well as valuation for divorce. In each case, an appraisal should take into account both the value of tangible assets (e.g., equipment, furniture, accounts receivable, cash) and the value, if any, of intangible assets (e.g., goodwill, going concern value, medical records, etc.). Furniture, fixtures and equipment are relatively easy to value using adjusted book values or having the assets appraised. Naturally, sellers want to receive more than just the value of the underlying tan- gible assets, and most buyers — especially hospitals — want to pay little or nothing for intangible assets such as goodwill. But what is goodwill and is it true that hospitals cannot pay for it? There are actually two kinds of goodwill that apply to medical practices. There is the practice goodwill that is separate and distinct from the goodwill of individual physicians. It includes the reputation of the medical practice, the workforce in place, restrictions on competitive practice by the physicians in the group, valuable contracts and an established patient base. Then there is the professional goodwill that is attribut- able to the individual skills and reputation of the physicians in the practice. How do you calculate the intangible value of a practice? Take the total practice value and deduct the value of the tangible assets. What is left is the intangible value. It 's a common misconception that hospitals cannot pay for medical practice goodwill, but they can. What hospitals cannot do is pay physicians more than fair market value or for patient referrals to the hospital — illegal under both the Stark law and the anti-kickback statute. If a hospital pays a physician or medical practice a purchase price greater than the value of the tangible assets, the criti- cal question becomes whether the excess amount is attributable to the fair value of the medical practice goodwill (OK) or based on the expected volume or value of referrals after the sale is consummated (not OK). When valuing a practice, an appraiser will often plug in the replacement or market value of the selling physicians into the formula. For example, assume that a physi- cian currently earning $400,000 per year is willing to become an employee of the hospital, or can be replaced, at a fair salary of $300,000. In that instance, the physi- cian is essentially selling to the purchaser $100,000 per year of his earnings. An appraiser might value those earnings with a multiple of five to eight times, resulting in an intangible value to the physician in the range of $500,000 to $800,000, essentially trading a lower salary going forward for a lump sum upon sale. On the other hand, if the selling physician is not willing to accept a lower compen- sation from the hospital buyer, it will be necessary to substantiate other intangible value to the practice in order to justify a price higher than tangible asset value. Private equity firms will often pay higher prices than hospitals for medical practices because they don't have a referral relation- ship with selling physicians and thus the Stark law does not apply. Where price is the primary factor in a purchase transaction, it can be difficult for a hospital to effectively compete against the private equity buyer. To fully understand the elusiveness of medical practice goodwill, one needs to look no further than the Goodwill Registry published annually by The Health Care Group. The registry is a large database of healthcare practice transactions around the country. It lists the goodwill component of each transaction as a percentage of a practice's gross income by specialty. In the registry, one will find sales with zero goodwill and those with a goodwill fac- tor of 20 times the gross income of the practice — and everything in between. The lesson here is that each transaction is unique and dependent on all the facts and circumstances of the respective par- ties. Traditional valuation rules of thumb might make for interesting water cooler conversation, but in today's market, they have little usefulness. Bruce E. Wood is a member at CCB Law, a boutique law firm focused on providing counsel to physicians and healthcare professionals. He can be reached at 315-477-6292 or bwood@ccblaw.com. n MEDICAL PRACTICE GOODWILL — A MOVING TARGET BY BRUCE E. WOOD M D N E W S . C O M /// M D N E W S C E N T R A l N E W Y O R K ■ 2 019 1 1 l E G A l E A S E ❰❰❰❰❰ 1 1

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