This article is not about selling your practice. There are many accountants and consultants to help you with that if you wish, but it is my observation that too many practices are sold to for the wrong reasons. The sale of a practice ought to come about for a relatively short list of reasons. This might include a desire to change one’s lifestyle, financial exigency, or retirement. Financial exigency often comes about due to escalating expenses, especially malpractice coverage, or a significant change in payor mix. Other issues can cause it as well; including increased market competition, and facility or equipment needs, but these matters should not come as a surprise, and should be foreseen by the physician and/or their management staff. Retirement should be planned for, unless a health matter arises without warning and forces a change.

The reader should understand how a hospital makes its money, as this is the basic knowledge needed to proceed with a strategic evaluation. The goal here is to evaluate the impact of your practice, not value it as a candidate for purchase; allowing the physician and practice administrator to determine the leverage they have in their interactions with the hospital management team. I am also striving here to provide both the physician and hospital administrator with a consistent frame of reference to understand the value of a particular practice’s patients to their institution. Each party needs to mutually understand the concepts herein in order to make certain that good decisions are made and successful outcomes achieved by all. It is particularly important that physicians have hard data and not exaggerate, as the common wisdom among hospital administrators is that physicians greatly over-value what they bring to the hospital. The key here will be to have the data to back up any statements. Many administrators simply divide by half whatever the physician says.

It should be noted again that the valuation of a practice for sale or purchase is a financial activity and has a body of knowledge possessed by companies that specialize in this activity. If this is your desired goal, consult one of these experts; however, the principles we will discuss here will improve the quality of the financial assessment and will best be accomplished first. A sound understanding of the strategic value of a physician’s practice will enhance the financial value to all parties in the transaction.

Understand the Numbers

In my experience, most physician practices cannot easily or quickly quantify the number of patients they are referring to hospitals, nor can they enumerate the numbers and types of procedures and tests these patients receive. Those physicians who have a good information system are ahead of the game and, if they are in receipt of information from each insurer they deal with to check against their own data, they are ahead of the game. Requesting this information from insurers is a good idea, in as much detail as possible regarding how many procedures, tests and operations your patient population has generated and where these activities took place. Some insurers will have this information, some will not. Some will refuse to share it, which then requires the data to be collected by the practice administrator and the physicians involved. Your own data is always necessary, and the time and effort and expense involved in generating it is worth the investment.

Estimate the Revenue

The next step is to translate the numbers of procedures, tests, etc., into an estimate of the revenue this amounts to for the hospital. Data sources exist to provide you with the actual payments made to the hospital for each procedure. Make certain to ignore charges, the gross price the hospital lists, and always focus on the actual cash payments they receive. Medicare and Medicaid payment rates are readily available from those agencies and each insurer can provide you with this data. Again, it will require time and effort, but the end result is worth it. Taking stock of every patient day and every procedure you provide to a particular hospital allows the practice’s real dollar impact to be calculated. This is a process not often undertaken as it is difficult to collect this information, but it is worth doing before you bring in the accountants or consultants, or before you engage in discussions with the hospital. Physicians or their practice administrator, using the resources of the Internet, can put together this analysis and provide the practice leadership with the essential knowledge of the dollars they generate for the hospital.

Know your Patients

The next key factor to include in the discussion is an understanding of your patients and their demographics. Where do your patients live and how does that relate to the primary service area of the hospital? Who are their insurers? What other physicians refer patients to you and what are their relationships to your hospital and to others? What practitioners do you refer to? What is the degree of influence you might exercise over these physicians? This is the type of information, coupled with the dollar impact of your practice, that resonates with hospital administrators and determines the strategic positioning of your practice for them. It is extremely valuable for you to understand the primary and secondary service areas of the hospital and their relative market share in those areas. Ask to see the strategic plan of the hospital so that you can relate the impact of your practice against the goals and objectives of the institution. Tying this together gives you a clear picture of the leverage you may have with the hospital.

Note well, the competent hospital executive has this information and has already put together an assessment of what each practice is worth to them. My goal is to try to level the playing field here.

Use the Information

So how do you apply this information? Let’s answer this by looking at an example followed by two approaches: the typical physician’s approach to discussing a need with a hospital executive and my suggested approach. For our example, let’s suggest that a physician wishes to exert some influence on a hospital matter that will affect his/her patients. This could be a decision regarding the purchase of a certain piece of medical equipment. The physician schedules a meeting with the appropriate hospital executive to push forward a specific viewpoint regarding this decision.

The common approach by a physician seeking something from a hospital is to schedule a meeting with the administrator (hopefully, you already have invested the time to get to know this person) and tell them that you need this equipment for your patients. You may add that some other hospital already has it and you both are losing business as a result.

The typical administrator’s response to this is to say that she will absolutely include your thoughts in the analysis that must take place before they decide to purchase the equipment. She will add that your opinion, and that of all the medical leadership, is very important to her and her colleagues.

I have used this answer many times myself. It’s a great answer, never fails to satisfy most people, but is obviously short on specifics.

The better way to approach this matter is to arm yourself with all of the information we have discussed here regarding the numbers and types of patients who will use this equipment, the amount of revenue it will generate for you and the hospital (don’t be shy about admitting that it will make money for you as well), and how it fits into the strategies of the hospital. For example, will it improve their market share, or generate more surgical revenue, perhaps compete successfully with the hospital across town, or support a product line the hospital is focusing on?

Armed with this perspective, the physician becomes a strategic partner, not just another doctor wanting something from the hospital. Strategic partners are few and far between, and are highly valued by every hospital administrator. The likelihood of a physician being involved in key decisions rises with the amount of hard data they bring to the table.

Understanding the strategic value of your practice is the single most valuable methodology to employ to become a key member of the hospital’s medical staff. Once you achieve this status, you can expect to be consulted about hospital decisions, and can broaden and solidify your influence to the institution, and also to your colleagues. Most importantly, it allows you to focus your practice activities in ways that both benefit you and the hospital(s) you support. This can only be beneficial to you and increase the value of your practice and the satisfaction you gain from it.