The following is a guest article by Barry Posner, Esq., partner at Kudman Trachten Aloe & Posner LLP.
The COVID-19 pandemic has had an impact on many people’s lives, not the least of whom are the many brave and selfless frontline providers of healthcare services, including doctors, nurses, home health aides and others in a multitude of healthcare settings. Many healthcare practices have seen a large drop in patient visits and subsequent revenues, which may but doesn’t necessarily have to have a material impact on the valuation of those practices. Good planning and experienced healthcare advisors, such as practice lawyers and accountants can help you navigate the valuation process. And that has a direct impact on the price of a healthcare practice in a sale.
If you are buying or selling a medical practice, what’s included in the price typically includes patient lists, equipment, real property and equipment lease(s), staff, contracts/third party agreements with insurance carriers and (in stock sales) Medicare and Medicaid provider numbers (subject of course to notification and/or submission of applications, updated information, etc.). While less tangible but equally important, the goodwill created by the practice in the community comes with the sale.
In general, valuation is determined on a 12-month trailing basis. For a general practice, the price might be from 0.5 to 0.7 times the 12-month trailing revenues. For specialists, that number could be as high as 0.8 to 1.2 times the 12-month trailing revenue, or even higher. Reimbursement is the one consistent in healthcare pricing: it always declines. Whatever the practice collected in third party and governmental insurance reimbursements (as well as patient pay responsibility collections) from the previous year, it’s almost a guarantee that it will earn less in subsequent years.
One study by the AMA surveyed 3,500 physicians and found a 32% average drop in revenue from the beginning of the pandemic in February 2020 through October 2020. Offices saw visits drop on average from 97 a week to 57 a week. A study by the Commonwealth Fund found a 1/3 drop in patient office visits through May 2020 as compared to the beginning of the year, prior to the onset of the pandemic. Moreover, practices often had to close for periods of time due to COVID-19 positive staff in a practice group, facility or office.
The last year, however, has been anything but normal and if you are selling or buying a medical practice, the impact of the COVID-19 pandemic may impact pricing. However, informed sellers can work to exclude a period of time in which COVID-19 impacted the practice by excluding some time period or expanding the period of time over which collections are aggregating or averaging, thereby bringing up somewhat, but not entirely the ultimate sales price.
If you are unable to negotiate a longer net revenue period upon which you are basing your purchase price, you can also delay the sale until better numbers in 2021 are reflected in the valuation; simply, postpone your sale or retirement until your practice patient visits and collections normalize; this may be through a combination of in office visits and increasingly, reliance on telemedicine visits for those patients not ready to venture back out into the world.
In any case, the ultimate sale or purchase of a healthcare practice involves many factors and decisions (stock sale vs. assets sale for example). It’s best to get started early in the process with a lawyer who specializes in the sale and purchasing of healthcare practices. They can help you navigate all the complexities of the sale and make sure your interests are protected.
Every sale is different and brings with it unique issues specific to your practice and your circumstances. Whether you are the buyer or seller, it’s important to go into the process with your eyes open. If you do your homework and work with an experienced deal team, you’ll be assured the whole process will be easier before, during, and after the sale.
About Barry A. Posner, Esq
Barry A. Posner, Esq. is a partner at Kudman Trachten Aloe & Posner LLP. His legal expertise includes general business and commercial advisory and consulting services in mergers & acquisitions, divestitures, joint ventures and strategic relationships, public and private equity financings, venture capital raises, complex commercial debt lending transactions and alternative financing arrangements, with a particular emphasis on healthcare providers, including medical practices and pharmacies. To contact Barry, you can email BPosner@kudmanlaw.com or visit http://www.kudmanlaw.com.
