The document summarizes key issues related to physician practice acquisitions by hospitals, known as "buy and employ" transactions. It discusses typical transaction structures, key valuation issues such as determining fair market value and commercial reasonableness, regulatory compliance considerations, and accounting for the transactions. The presentation provides an overview of valuation methods and financial analysis used to value physician practices and assess transaction terms.
Auditing A Practical Approach Canadian 2nd Edition Moroney Solutions Manual
Physician Practice Acquisitions by Hospitals
1. Physician Practice Acquisitions by Hospitals Presented by W. James Lloyd, CPA/ABV, ASA Tennessee Society of CPAs 2010 Healthcare Conference November 30, 2010
18. Assessing Intangible Value The existence of intangible value primarily comes down to cash flow Physician groups that generate positive cash flow (above the physician’s “normalized” compensation based on professional productivity) will normally have some level of intangible value Practices that do not produce such positive cash flow, generally will not have intangible value Page
29. Accounting for the Transaction Hospitals acquiring physician practices must account for the transaction under the “acquisition” method. Accordingly, the transaction price (including debt assumed) must be allocated among the identifiable assets acquired from the transaction. Goodwill is recorded as the difference between the transaction price and the identifiable assets. Page
So what does this mean in the context of a physician practice? In summary, it means that fair market value is the amount determined from the perspective of a pool of potential investors in an arm’s-length transaction based solely on the underlying financial merits of the practice. Accordingly, the assumptions used to value the practice must be void of any potential synergies or other benefits that a particular buyer (i.e., hospital) might be able to achieve post acquisition, such as higher volume or reimbursement rates. Consideration of such synergies would generally change the standard of value from fair market value to investment value . This is often a challenging issue for physicians to grasp and accept because such synergies often do exist.