Physician practices that are not owned by hospitals or health systems have become an increasingly valuable commodity in a market environment which continues to be focused on consolidation. The most recent survey by the American Medical Association revealed that the percentage of physicians and physician practices across the country joining with larger medical systems has nearly doubled in the past seven years to an all-time high of 29 percent. As further consolidation takes place in the physician care market, it should present opportunities for the remaining independently-owned practices to maximize their value while weighing their options for the future.
Beyond the potential for financial gains through the sale of a practice, physicians often view a health system’s established infrastructure as one of the most attractive aspects of an acquisition. A hospital or health system’s administrative organization, particularly in the era of the Affordable Healthcare Act, can offer an effective platform for facilitating the often burdensome, non-medical aspects of operating a practice – a.k.a. handling the business of medicine. As a result, physicians in a practice working under the umbrellas of a hospital or health system have more time and energy to focus on patient care. For the hospital, the acquired physician practices offer more direct routes for prospective patients to access hospital services.
While the decision to sell a practice or to become affiliated with a health system is one of the most significant business decisions a practice owner will ever make, it is not unlike placing a personal residence on the real estate market. Like a house, the precise value of an independently-owned physician practice is dependent on a number of factors. And, quite similar to creating a punch list of home improvements on a house to maximize its value prior to going on the market, physicians can also take steps to groom their businesses and enhance their practices’ “curb appeal.”
In today’s market, there are five key areas in which a physician practice can improve its value in the eyes of a hospital or health system. Those categories are:
- Revenue cycle
- Accounts receivable
- Accounts payable
- Overall expenses
- Increased productivity
The lifeblood of a physician’s income — the revenue cycle — should be solidified beginning with accurate and extensive documentation of patient care to ensure appropriate coding. From there, physicians should seek to streamline each step from billing, to fee schedule negotiations, to passing a claim along to the practice’s collection system on a timely basis. Hospitals and health systems are most interested in practices with efficient revenue cycles, and improvement in the bottom line means a higher price to the physician.
While competent management of accounts receivable becomes the process that converts a service into cash, directing accounts payable is a less obvious endeavor. These costs are not necessarily recorded on the balance sheet and, in the case of high drug costs, can be extended over a long-term payment schedule. In the case of high-cost drugs, payments may be extended over several months past the use and collection of charges. A wise approach for practices is to engage in a continuing analysis of those costs, as well as expenses such as benefit packages, lease agreements and staffing arrangements that could all be adjusted. Additionally, an undertaking as simple as physicians increasing their own productivity in comparison to other physicians in their field directly improves the practice’s bottom line.
Practice owners who make the effort to review their business operations in relation to how a hospital or health system would view them will be well positioned when considering future options. Taking the initiative to address various areas of the business functions of the practice should translate to an increase in the market value of the practice – whether it is placed on the market by the owner or it becomes a candidate for acquisition by a health system or hospital.
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Whether you want to sell your practice or make your practice more financially sound, contact Elliott Davis Decosimo’s experienced healthcare team to explore these concepts.