Careful Appraisal Is Needed to Determine The True Value of an Oncology Practice

November 1, 1995
Oncology NEWS International, Oncology NEWS International Vol 4 No 11, Volume 4, Issue 11

MARINA DEL REY, Calif-Every physician needs to know the value of his or her practice, especially in this era of change-when mergers, affiliations, partner buy-ins or buy-outs, and outright sales of practices are common, Kim R. Johnson, RN, said at the annual conference of the Association of Community Cancer Centers (ACCC).

MARINA DEL REY, Calif-Every physician needs to know the valueof his or her practice, especially in this era of change-whenmergers, affiliations, partner buy-ins or buy-outs, and outrightsales of practices are common, Kim R. Johnson, RN, said at theannual conference of the Association of Community Cancer Centers(ACCC).

"Don't let the overwhelming presence of people who want tobuy your practice influence you to make an unsound business decision,"cautioned Ms. Johnson, principal owner of K.R. Johnson and Associates,a company based in Coeur d'Alene, Idaho, that provides health-careconsulting and management services.

In her consultations with more than 130 oncology practices, Ms.Johnson said that she has found many situations that can triggerthe need for a practice appraisal. A traditional, and extremelyimportant, time to get an appraisal is at retirement, especiallysince, she said, "there are still a lot of practices wherethe physicians have not set up very good pension plans for themselvesand view their practice as their retirement fund."

New partner buy-ins can also necessitate an appraisal, as do someunpleasant circumstances, such as, "divorce, IRS problems,or the death of a partner," she said. Sometimes physiciansare just tired of the hard work and long hours, and want to selltheir practice and "go do something else."

Fear that the values of their practices will fall in the era ofmanaged care is mo-tivating some people to want to sell, she said,adding that in certain parts of the country, such fears may bewell founded but not in others.

In the past, multispecialty and family practice groups had moreopportunities for sales, because hospitals and corporations wereinterested in purchasing them. Ms. Johnson noted that oncologypractices were not viewed as valuable commodities because "itwas perceived that everyone lost money taking care of cancer patients."But in the past few years, the situation has changed, and buyerscan be found for oncology practices in nearly every part of thecountry, she said.

This shift in attitude is based on a growing and aging population,as the baby boomers reach "cancer age," Ms. Johnsonsaid. "The NCI estimates that total cancer costs are greaterthan $100 billion, and corporate America wants its share,"she commented.

This atmosphere has created a great deal of interest in appraisingthe value of oncology practices, even if the physicians have noimmediate plans to sell.

The appraiser "should not just be a CPA, but should haveexperience appraising medical practices and, if possible, otheroncology practices, since some assets are common to most typesof practices, and some are very specific to oncology," shesaid. Physicians must also be informed, so they can judge if anappraiser is doing a good job.

Practice Assets

Tangible assets, such as buildings, real estate, furniture, fixtures,and medical and computer equipment, are a concrete part of thepractice, but can be difficult to place a value on because ofinadequate record keeping. Keeping records of purchases and depreciationover time is an ordinary standard practice in most businesses,but Ms. Johnson has found it less common in medical practices,making appraisals difficult.

The value of a computer system goes far beyond the monetary valueof the hardware and software components. Usable data can be consideredan extremely valuable asset. Such data would include practicemeasurements such as number of new patients, number of consults,cost per patient encounter, and cost per standard treatments.This information is valuable not only to the prospective buyerbut also to the seller, by providing a stronger bargaining stance,she said.

Accounts receivable should be valued at the actual projected collectibleamount, not the book value. Ms. Johnson observed that some officeshave a "huge pot of money" in accounts receivable ontheir books, but a good deal of it will never be collected. Thehistory of collections for the practice can be used to calculatea more realistic value for this asset.

The payer mix is also an important practice statistic. The percentof revenue from managed care, capitated care, and Medicare shouldbe determined. Medicare is viewed as a "cash cow" inmany practices, Ms. Johnson said, because it is at least a fairlypredictable and dependable payer.

Even though the current inventory of drugs stocked by the practicewill probably "turn over" by the time the sale is completed,a value should be determined and included as an asset. This isespecially true of oncology practices, which tend to carry expensivechemotherapy agents.

Intangible assets, such as referral patterns, are especially hardto put a value on and must be analyzed in reference to how theymay change after a sale. "This is a big issue in many partsof the country," Ms. Johnson said. "How is the saleperceived by your colleagues? Will they still refer to the practiceafter the sale?"

Staff members also bring value to a practice. For example, nursesmay run patient support groups or be involved with the AmericanCancer Society, increasing the practice's visibility within thecommunity. Since this can be an important source of patients,the effect of the sale on current employees should be examined.

"Sticker shock" can occur when physicians think theirpractice is worth much more than is being offered. As Ms. Johnsonnoted, many physicians have worked hard to build up a successfulpractice "so the emotional value they place on the practiceis not a realistic value."

Keeping good records of all the assets accumulated over time willhelp the physician "reconcile the difference between theserealistic and emotional values."

After an appraisal has been completed, Ms. Johnson suggested "packaging"a practice for sale, in much the same way as is done for realestate transactions. The package would include a marketing brochurewith pictures and descriptions of the practice. Also more in-depthinformation should be made available to prospective buyers, suchas market share relative to competing practices and possible opportunitiesfor growth of the business.

The packet could also include descriptions of the patient informationcollected by the practice, biographies of current key staff members,and results of any customer satisfaction surveys that have beengathered-basically, Ms. Johnson said, "anything that presentsthe best picture of your practice to buyers."

Packaging a practice helps physicians highlight positive aspectsand also points out deficiencies in the business, so that theycan be corrected before it is placed on the market. It may alsohelp a physician become comfortable with the idea of putting thepractice under scrutiny.

Ms. Johnson noted that while there are some very good companiesthat want to purchase practices, some of these companies may notbe experienced in the business of oncology. It is essential tobe certain that the purchaser's philosophy is compatible withthe physician's reasons for selling the practice. "Don'tbe in a panic to sell your practice to the first person who makesyou an offer; there will be others," she said.

Tangible and Intangible Assets of a Typical Oncology Practice

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