In good news for hospitals and other acquirers of physician practices, practice prices now seem to be pegged to profitability. Hospitals, in particular, appear to have become more savvy in their acquisitions.
So says a study by the Center for Healthcare Industry Performance Studies, Columbus, Ohio. The 1998-99 Practice Acquisition Resource Book incorporates data on 110 transactions that occurred in 1997 and the first half of 1998 and that covered 938 physicians. It also includes data on 505 pre-1997 deals.
Hospitals accounted for 71% of all deals, with physician practice management companies and medical groups accounting for 12% each. Other buyers were academic medical groups, individual doctors and insurers.
Surprisingly, while the volume of acquisitions dropped in 1997 and early 1998, prices did not, according to the report. For example, the per-physician price for family practices jumped 43.7%, to $220,000 for 1996 through mid-1998, from $153,000 for pre-1996. The report breaks out data by year.
The explanation given: Buyers became pickier.
In earlier deals, acquired practices often were destined to be money-losers, with projected salaries and expenses exceeding revenues, CHIPS President William Cleverley says.
"It seems there wasn't any rhyme or reason" to valuations in earlier deals, he says. That changed in 1997, he says, when lucrative practices suddenly began to dominate the deals.
Hospitals were still less likely than other buyers to anticipate a gain but began to stem red ink in some specialty areas (See chart). The exceptions were OB/GYN and multispecialty groups. Hospitals seemed willing to subsidize those types of practices in exchange for strategic benefits.
One caveat: The survey preceded most of last year's dramatic downturn in the PPM industry, which Cleverley admits might have nullified his company's assertion that prices have jumped more than 100% since 1996.
"In think in general one conclusion is going to remain: People will pay more for practices that are profitable," he says.
The survey is available by calling CHIPS at 800-859-2447.