It's inevitable. Whether it comes about through retirement, sale, merger, death, new investment or dissolution of a partnership, the ownership of a medical practice is going to change. The challenge is to be ready when it happens.
"One of the major shortcomings of physician leaders is planning for succession," says Dan Gregorie, M.D., a nonpracticing internist in Castine, Maine, who consults with medical groups on outcomes and practice valuation.
"I have seen very few physician organizations where succession has been dealt with intelligently and effectively," Gregorie says. "Physicians used to be much better educated about organizational development and governance. It takes a big investment. Unfortunately, that investment often doesn't get made."
The investment in preparing for a change in ownership or management involves both time and money.
Elisabeth Houston, vice president of Greenway Consulting in Chicago and a former practice management specialist at the AMA, advises that the earlier planning starts, the better.
"Instead of coming up to retirement age and saying, 'Uh oh,' you can start five, 10, 15 years in advance of when you want to get out," she says. "You're not so much at the mercy of the practice at the time you want to get out."
To safeguard the future of the practice, Gregorie tells physician managers to develop successors by first identifying those in the group with leadership potential and then building support for those candidates among colleagues. CEOs should not handpick the next generation without the input of board members or directors, Gregorie says.
"Most docs want a stable business and clinical environment in which to practice," he says. A unilateral decision can create resentment among other officers and practitioners.
Finding suitable successors also can assure existing patients that they will receive quality care after their current physician retires.
"You ought to have a conscious, well-managed plan to retain those patients," Gregorie says.
If a physician is an employee of a large group practice or health system, the employer may already have retirement policies in place. But if the retiring physician has an equity stake in the group, the value of his or her share of the practice is a key concern.
Determining value is not an easy process, experts say, and gross revenue is not the only yardstick.
A physician may generate $400,000 in gross charges in a given year, but only a fraction of that amount could end up in the doctor's pocket. Managed care discounts, low Medicare and Medicaid reimbursement rates and bad debts could reduce net revenue to $250,000. More than half of that could go to overhead.
Don Barbo, senior associate at Value Management Group, a company in Dallas and Nashville, Tenn., specializing in medical practice valuation, often finds it difficult to explain this concept to physicians.
"It's almost like trying to convince an existing doctor that his value isn't the amount generated by his patients," he says.
When an established physician leaves, the practice may have to hire additional medical and support staff to absorb the existing patient load, Barbo says. The group also could incur significant recruiting costs finding a replacement.
Additional factors come into play in the case of a merger, acquisition or formation of a new partnership. Barbo says intangibles that add value can include practice goodwill--a trade name, trademarks and other licensed intellectual property in the name of the practice and existing payer contracts.
Other goodwill items are the reputations of the physicians and, depending on who owns them, the patient files kept at the practice. Employees count, too.
"There's a value to the fact that a practice has trained and valued and experienced people," he says.
In the case of an outside physician buying into an existing practice, Barbo tells clients to have extensive discussions with the potential partner before consummating a deal.
"It's important for the partners to determine what assets are included in a buy-in," he says. "Would it include tangibles only or intangible assets? That's when it gets a little thorny.
"A new partner wants to come into a practice that's definitely growing and where the equipment and support staff are top-of-the-line," he says. "The staff needs to be well-trained, they need to have a good attitude. The community in which the practice is located needs to fit the physician. What's an attractive practice? A lot of it is personal."
Personal considerations may include call schedule, working conditions, payer mix, percentage of Medicare and Medicaid patients, access to local hospitals and even whether the hospitals operate for profit, Barbo says.
But, he cautions, "You don't want to make a buy-in so high where a doctor that has helped build your practice's value will not be able to afford it." Maybe a partner has already paid his or her way as an employee and deserves equity for past contributions, he says.
According to Houston, the Chicago consultant, goodwill is not as valuable today as it was in the early 1990s. These days, not only are potential buyers more interested in hard assets, but physicians also are paying more attention to business matters.
"I ran into a lot of cases in which physicians were ready to retire and wanted to bring on a junior partner," she says. "At that time, the big issue was goodwill. It was very disappointing for them that their practices were not worth what they wanted."
What has fueled the change in valuation is a change in perception by many new physicians, Houston explains.
"They are buying an ongoing business, and they are not buying Dr. Smith's good name," he says. "Now they are buying cash flow and earnings."
New doctors also are looking for practice strength, strength that comes in numbers, Barbo says.
"Having more doctors could give you more leverage with managed care organizations," Barbo says. That alone can help boost value, demonstrating how a well-reasoned succession or growth plan can pay dividends for the whole practice.