While hospitals and PPMs lick their wounds from their failure to successfully manage the practices of doctors, some physicians and their financiers couldn't be happier--those who are buying their practices back for much less than they sold them for.
"There must be thousands of practices" that are being sold back to doctors, says Tom Carden, vice president of Healthcare Business Credit Corp. in Mount Laurel, N.J. Carden says that at his company, which lends money for medical equipment, receivables and other items, the business of financing the repurchase of practices is up 50% from two years ago.
Healthcare Business Credit is not alone in seeing business surge. Patrick Robinson, vice president of the medical and dental banking group at PNC Bank in Edison, N.J., says he is working on 20 to 30 similar financing deals in the Northeast. Indeed, 19 practices were sold since the beginning of 1999, representing 1,155 physicians, says Sandy Steever, editor of the Health Care M&A Monthly, which is published by Irving Levin Associates in New Canaan, Conn.
Physician practice management companies were the big sellers in 1999, while this year, hospitals are boosting sales of practices they own, says Robert Bohlmann, a principal in the consulting service department of the Medical Group Management Association in Englewood, Colo., which has a membership of 20,000 administrators, managers and doctors involved in medical practice organizations.
One of PNC's clients, for example, bought a practice in March 1999 from Community Medical Center, a Toms River, N.J., hospital. The family practitioner, who is in her mid-30s and declined to give her name, was one of four physician employees of a group practice set up by the hospital in 1995.
But after continuously losing money, the hospital, she says, decided to end their employment contracts and shutter the practice at the end of 1998. While the other three doctors chose to leave, the family practitioner decided to stay and bought the practice, which serves about 5,000 patients.
The doctor purchased the practice for a dollar, but that doesn't necessarily mean that the hospital gave it away for a song, Bohlmann says. The hospital wants to retain the physician as an admitter and sought to retain the doctor's loyalty. Another reason for the low purchase price is that the doctor bought only the patient files. Items such as accounts receivable, equipment and real estate can add considerably to the price tag and may or may not be part of a deal, Bohlmann says.
The doctor then turned to PNC to finance 90 days of payroll for the five employees who stayed with the practice and to purchase computers and other items, totaling about $100,000, which has now been paid off from cash flow.
In deciding whether to buy and invest in the practice, the doctor says she consulted her accountant and her husband. After reviewing financial, patient and other records, she found that the hospital "took on just too many physicians" and that the practice could be profitable with one doctor and a physician assistant, which she subsequently hired.
Now the doctor works 50 hours a week and draws a salary of $120,000, as well as keeping a portion of the practice's income as retained earnings. This compares with earning $100,000 working 33 hours a week as an employee. Of course, not all practices can be bought for a dollar, says Carden, who has seen purchase prices range from $2 million to $70 million per practice.
Because each practice is different, coming up with average selling prices is difficult, Bohlmann says, but they generally are lower than what the doctors sold them for in the 1990s. According to Steever, the 19 transactions he has been following were, with one exception, sold for 30% to 40% of their original price. Carden says, however, "We don't see the better groups divested for much lower than what they were purchased for."
In most transactions, about 20% to 30% of the purchase price comes directly out of the pockets of the doctors, with the lender financing the rest at anywhere from prime (currently 9.50%) to prime plus 2 percentage points, Carden says.
Bohlmann, who is currently negotiating the sale of five practices on behalf of both hospitals and doctors, says that specialized finance companies as well as commercial banks will lend to doctors, though doctors usually have to personally guarantee 125% of the value of the loan.
In considering whether to buy a practice from a hospital or PPM, Carden urges doctors to consider:
- What is the value of the practice and what is the value of your relationship with the PPM or hospital, or in other words, "what are you getting for that management fee?"
- Looking at how the hospital or PPM valued your practice when it bought it. Often the PPM paid a substantial portion of the purchase price with stock. The drop in the PPM's share price should be reflected in the price at which you offer to buy it back.
- Hiring an adviser, which can be a big help to physicians.
The Toms River family practitioner also urged doctors to "consider your family, your private life and whether you think you can actually make money."
"Other doctors, I think, thought I was crazy at the time, but I think they also realize that it was probably the best decision that I could make," the doctor says. "The opportunity was there, and I just took it, but I also took a risk."
She concedes, however, that if she were in her 50s or older, "I probably wouldn't have done it."
In fact, Bohlmann has had physician clients first consider buying back their practices only to decide against it after weighing the reality of being an owner again. He explains that when doctors buy back their practices, they often have to close outlying offices to cut costs and thereby drop patients. Doctors also lose the quality assurance programs, patient education and compliance resources of a hospital--all costly items to implement on one's own.
Ultimately, some of his clients concluded that they were better off accepting the burdens the hospital placed on them than going it alone, he says.