Managing Your Practice

Difficult economic times and the unpredictable consequences of health care reform are making an increasing number of solo practitioners and small private groups very nervous. Yet, many balk at the prospect of selling to private equity companies. I have received many inquiries about other protective options, such as merging two or more small practices into one larger entity.

Merging offers many benefits: Better overall management, centralized and efficient billing and collection, group purchasing discounts, and reduced overhead, among others; but careful planning, and a written agreement, are essential. If you are considering such an option, here are some things to think about.

You should begin with an evaluation and comparison of the separate groups’ respective finances. This should include a history of production, collections, overhead, and liabilities. Basically, you want to locate and identify all assets and liabilities that will be combined into the new group. One area of immediate importance is Medicare participation. Which members now currently participate and which do not? Since the new group will need to have a single position, all of the physicians must agree on that issue.

Who will be in charge? Not every physician is a qualified manager. The manager should be the physician who is willing to spend the time it takes to sign checks, interact with the administrator, and ensure that other matters such as filing tax returns and approving minor purchases arc carried out properly.

What is the compensation formula? Compensation arrangements should be based on each physician’s current financial data and the goals of the practice. Will everyone be paid only for what they do individually, or will revenue be shared equally? I favor a combination, so productivity is rewarded but your income doesn’t drop to zero when you take time off.

Which practices have a retirement plan and which do not? Will you keep your retirement plans separate, or combine them? If the latter, you will have to agree on the terms of the new plan, which can be the same or different from any of the existing plans. You’ll probably need some legal guidance to insure that assets from existing plans can be transferred into a new plan without tax issues. You may also have to address the problem of physicians who currently do not have a plan who, for whatever reason, may not want to be forced into making retirement plan contributions.

The often-problematic issue of employees and their salaries needs to be addressed, to decide which employees will be needed in the new group, and to determine a salary structure. Each practice’s policies related to vacation, sick leave, and other such issues should be reviewed, and an overall policy for the new group developed.

Other common sticking points are issues related to facilities. If the practices intend to consolidate into one location, the physicians must decide which of the specific assets of each practice will be contributed to the new entity. Ideally, each party brings an equal amount of assets to the table, but in the real world that is hardly ever the case. Physicians whose assets are to be used generally want to be compensated, and those who have to dispose of or store assets are in a quandary. The solution to this predicament will vary depending on the circumstances of each merger. One alternative is to agree that any inequalities will be compensated at the other end, in the form of buyout value; that is, physicians contributing more assets will receive larger buyouts when they leave or retire than those contributing less.

Buyouts should be addressed in advance as well. You must decide when a buyout would occur – usually in the event of retirement, death, disability, or withdrawal (voluntary or involuntary) – how the buyout amount will be calculated, and how it will be paid. Then, you must agree on how a buyout amount will be valued. Remember that any buyout calculated at “appraised value” is a problem, because the buyout amount remains a mystery until an appraisal is performed. If the appraised value ends up being too high, the remaining owners may refuse to pay it. I suggest having an actuary create a formula, so that the buyout figure can be calculated at any time. This area, especially, is where you need experienced, competent legal advice.

Noncompete provisions are always a difficult issue, mostly because they are so hard (and expensive) to enforce. An increasingly popular alternative is, once again, to deal with it at the other end, with a buyout penalty. An unhappy partner can leave, and compete, but at the cost of a substantially reduced buyout. This permits competition, but discourages it; and it compensates the remaining partners.

These are only some of the pivotal business and legal issues that must be settled in advance. A little planning and negotiation can prevent a lot of grief, regret, and legal expenses in the future. I’ll discuss some other, more complicated merger options in my next column.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

Difficult economic times and the unpredictable consequences of health care reform are making an increasing number of solo practitioners and small private groups very nervous. Yet, many balk at the prospect of selling to private equity companies. I have received many inquiries about other protective options, such as merging two or more small practices into one larger entity.

Merging offers many benefits: Better overall management, centralized and efficient billing and collection, group purchasing discounts, and reduced overhead, among others; but careful planning, and a written agreement, are essential. If you are considering such an option, here are some things to think about.

You should begin with an evaluation and comparison of the separate groups’ respective finances. This should include a history of production, collections, overhead, and liabilities. Basically, you want to locate and identify all assets and liabilities that will be combined into the new group. One area of immediate importance is Medicare participation. Which members now currently participate and which do not? Since the new group will need to have a single position, all of the physicians must agree on that issue.

Who will be in charge? Not every physician is a qualified manager. The manager should be the physician who is willing to spend the time it takes to sign checks, interact with the administrator, and ensure that other matters such as filing tax returns and approving minor purchases arc carried out properly.

What is the compensation formula? Compensation arrangements should be based on each physician’s current financial data and the goals of the practice. Will everyone be paid only for what they do individually, or will revenue be shared equally? I favor a combination, so productivity is rewarded but your income doesn’t drop to zero when you take time off.

Which practices have a retirement plan and which do not? Will you keep your retirement plans separate, or combine them? If the latter, you will have to agree on the terms of the new plan, which can be the same or different from any of the existing plans. You’ll probably need some legal guidance to insure that assets from existing plans can be transferred into a new plan without tax issues. You may also have to address the problem of physicians who currently do not have a plan who, for whatever reason, may not want to be forced into making retirement plan contributions.

The often-problematic issue of employees and their salaries needs to be addressed, to decide which employees will be needed in the new group, and to determine a salary structure. Each practice’s policies related to vacation, sick leave, and other such issues should be reviewed, and an overall policy for the new group developed.

Other common sticking points are issues related to facilities. If the practices intend to consolidate into one location, the physicians must decide which of the specific assets of each practice will be contributed to the new entity. Ideally, each party brings an equal amount of assets to the table, but in the real world that is hardly ever the case. Physicians whose assets are to be used generally want to be compensated, and those who have to dispose of or store assets are in a quandary. The solution to this predicament will vary depending on the circumstances of each merger. One alternative is to agree that any inequalities will be compensated at the other end, in the form of buyout value; that is, physicians contributing more assets will receive larger buyouts when they leave or retire than those contributing less.

Buyouts should be addressed in advance as well. You must decide when a buyout would occur – usually in the event of retirement, death, disability, or withdrawal (voluntary or involuntary) – how the buyout amount will be calculated, and how it will be paid. Then, you must agree on how a buyout amount will be valued. Remember that any buyout calculated at “appraised value” is a problem, because the buyout amount remains a mystery until an appraisal is performed. If the appraised value ends up being too high, the remaining owners may refuse to pay it. I suggest having an actuary create a formula, so that the buyout figure can be calculated at any time. This area, especially, is where you need experienced, competent legal advice.

Noncompete provisions are always a difficult issue, mostly because they are so hard (and expensive) to enforce. An increasingly popular alternative is, once again, to deal with it at the other end, with a buyout penalty. An unhappy partner can leave, and compete, but at the cost of a substantially reduced buyout. This permits competition, but discourages it; and it compensates the remaining partners.

These are only some of the pivotal business and legal issues that must be settled in advance. A little planning and negotiation can prevent a lot of grief, regret, and legal expenses in the future. I’ll discuss some other, more complicated merger options in my next column.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

Difficult economic times and the unpredictable consequences of health care reform are making an increasing number of solo practitioners and small private groups very nervous. Yet, many balk at the prospect of selling to private equity companies. I have received many inquiries about other protective options, such as merging two or more small practices into one larger entity.

Merging offers many benefits: Better overall management, centralized and efficient billing and collection, group purchasing discounts, and reduced overhead, among others; but careful planning, and a written agreement, are essential. If you are considering such an option, here are some things to think about.

You should begin with an evaluation and comparison of the separate groups’ respective finances. This should include a history of production, collections, overhead, and liabilities. Basically, you want to locate and identify all assets and liabilities that will be combined into the new group. One area of immediate importance is Medicare participation. Which members now currently participate and which do not? Since the new group will need to have a single position, all of the physicians must agree on that issue.

Who will be in charge? Not every physician is a qualified manager. The manager should be the physician who is willing to spend the time it takes to sign checks, interact with the administrator, and ensure that other matters such as filing tax returns and approving minor purchases arc carried out properly.

What is the compensation formula? Compensation arrangements should be based on each physician’s current financial data and the goals of the practice. Will everyone be paid only for what they do individually, or will revenue be shared equally? I favor a combination, so productivity is rewarded but your income doesn’t drop to zero when you take time off.

Which practices have a retirement plan and which do not? Will you keep your retirement plans separate, or combine them? If the latter, you will have to agree on the terms of the new plan, which can be the same or different from any of the existing plans. You’ll probably need some legal guidance to insure that assets from existing plans can be transferred into a new plan without tax issues. You may also have to address the problem of physicians who currently do not have a plan who, for whatever reason, may not want to be forced into making retirement plan contributions.

The often-problematic issue of employees and their salaries needs to be addressed, to decide which employees will be needed in the new group, and to determine a salary structure. Each practice’s policies related to vacation, sick leave, and other such issues should be reviewed, and an overall policy for the new group developed.

Other common sticking points are issues related to facilities. If the practices intend to consolidate into one location, the physicians must decide which of the specific assets of each practice will be contributed to the new entity. Ideally, each party brings an equal amount of assets to the table, but in the real world that is hardly ever the case. Physicians whose assets are to be used generally want to be compensated, and those who have to dispose of or store assets are in a quandary. The solution to this predicament will vary depending on the circumstances of each merger. One alternative is to agree that any inequalities will be compensated at the other end, in the form of buyout value; that is, physicians contributing more assets will receive larger buyouts when they leave or retire than those contributing less.

Buyouts should be addressed in advance as well. You must decide when a buyout would occur – usually in the event of retirement, death, disability, or withdrawal (voluntary or involuntary) – how the buyout amount will be calculated, and how it will be paid. Then, you must agree on how a buyout amount will be valued. Remember that any buyout calculated at “appraised value” is a problem, because the buyout amount remains a mystery until an appraisal is performed. If the appraised value ends up being too high, the remaining owners may refuse to pay it. I suggest having an actuary create a formula, so that the buyout figure can be calculated at any time. This area, especially, is where you need experienced, competent legal advice.

Noncompete provisions are always a difficult issue, mostly because they are so hard (and expensive) to enforce. An increasingly popular alternative is, once again, to deal with it at the other end, with a buyout penalty. An unhappy partner can leave, and compete, but at the cost of a substantially reduced buyout. This permits competition, but discourages it; and it compensates the remaining partners.

These are only some of the pivotal business and legal issues that must be settled in advance. A little planning and negotiation can prevent a lot of grief, regret, and legal expenses in the future. I’ll discuss some other, more complicated merger options in my next column.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

My previous column on practice valuation prompted a number of questions on the mechanics of selling a private practice. As usual, I cannot hope to cover this complex topic comprehensively in only 750 words, but here are the basics.

A generation ago, the sale of a medical practice was much like the sale of any other business: A retiring physician would sell his or her practice to a young doctor and the practice would continue on as before. Occasionally, that still happens, but changes in the business of medicine – most significantly the growth of managed care – have had a big impact on the way medical practices are bought and sold.

For one thing, there are far fewer solo practitioners these days, and polls indicate that most young physicians intend to continue that trend. The buyer of a medical practice today is more likely to be an institution, such as a hospital, an HMO, or a large practice group, rather than an individual.

For another, because the rules governing such sales have become so numbingly complex, the services of expert (and expensive) third parties are essential.

While these issues may complicate matters, there is still a market for the sale of medical practices. However, you must do everything possible to ensure you identify the best possible buyer and structure the best deal.

The first hurdle is the accurate valuation of your practice, which was covered in some detail in my last column. Briefly, for the protection of both parties, it is important that the appraisal be done by an experienced and neutral financial consultant, that all techniques used in the valuation be divulged and explained, and that documentation be supplied to support the conclusions reached.

Keep in mind that the valuation will not necessarily equal the purchase price; other factors may need to be considered before a final price can be agreed upon. Keep in mind, too, that there may be legal constraints on the purchase price. For example, if the buyer is a nonprofit corporation such as a hospital or HMO, by law it cannot pay in excess of fair market value for the practice – which may rule out any valuation of “good will.” In some states, the purchase of private practices by hospitals is prohibited altogether – so you might need to consider a long-term lease rather than a sale.

Once a value has been agreed upon, you must consider how the transaction will be structured. The most popular structures include purchase of assets, purchase of corporate stock, and merger.

Many buyers prefer to purchase assets, because it allows them to pick and choose only those items that have value to them. This can leave you with a bunch of “odd lot” assets to dispose of. But depending on the circumstances, an asset sale may still be to your advantage.

Sellers typically prefer to sell stock, because it allows them to sell their entire practice, which is often worth more than the sum of its parts, and often provides tax advantages.

The third option, merger, continues to grow in popularity and is a column subject in itself, and I will address it separately next month.

Tax issues must always be considered. Most private practices are corporations, and the sale of corporate stock will result in a long-term capital gain that will be taxed – currently at 15%-20%. As the saying goes, it’s not what you earn, it’s what you keep. So it may benefit you to accept a slightly lower price if the sale can be structured to provide significantly lower tax treatment. However, any gain that does not qualify as a long-term capital gain will be taxed as regular income – currently in the 32%-37% percent range – plus a Social Security tax of about 15%.

Payment in installments is a popular way to defer taxes, since they are incurred on each installment as it is paid; but such payments may be mistaken by the IRS for payments for referrals, which is illegal. And there is always the problem of making certain all payments are eventually made.

You may wish to continue working at the practice as an employee for an agreed-upon period of time, and this is often to the buyer’s advantage as well. Transitioning to new ownership in stages often maximizes the value of the business by improving patient retention, and allows patients to become accustomed to the transition. However, care must be taken, with the aid of good legal advice, to structure such an arrangement in a way that minimizes concerns of fraud and abuse.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

My previous column on practice valuation prompted a number of questions on the mechanics of selling a private practice. As usual, I cannot hope to cover this complex topic comprehensively in only 750 words, but here are the basics.

A generation ago, the sale of a medical practice was much like the sale of any other business: A retiring physician would sell his or her practice to a young doctor and the practice would continue on as before. Occasionally, that still happens, but changes in the business of medicine – most significantly the growth of managed care – have had a big impact on the way medical practices are bought and sold.

For one thing, there are far fewer solo practitioners these days, and polls indicate that most young physicians intend to continue that trend. The buyer of a medical practice today is more likely to be an institution, such as a hospital, an HMO, or a large practice group, rather than an individual.

For another, because the rules governing such sales have become so numbingly complex, the services of expert (and expensive) third parties are essential.

While these issues may complicate matters, there is still a market for the sale of medical practices. However, you must do everything possible to ensure you identify the best possible buyer and structure the best deal.

The first hurdle is the accurate valuation of your practice, which was covered in some detail in my last column. Briefly, for the protection of both parties, it is important that the appraisal be done by an experienced and neutral financial consultant, that all techniques used in the valuation be divulged and explained, and that documentation be supplied to support the conclusions reached.

Keep in mind that the valuation will not necessarily equal the purchase price; other factors may need to be considered before a final price can be agreed upon. Keep in mind, too, that there may be legal constraints on the purchase price. For example, if the buyer is a nonprofit corporation such as a hospital or HMO, by law it cannot pay in excess of fair market value for the practice – which may rule out any valuation of “good will.” In some states, the purchase of private practices by hospitals is prohibited altogether – so you might need to consider a long-term lease rather than a sale.

Once a value has been agreed upon, you must consider how the transaction will be structured. The most popular structures include purchase of assets, purchase of corporate stock, and merger.

Many buyers prefer to purchase assets, because it allows them to pick and choose only those items that have value to them. This can leave you with a bunch of “odd lot” assets to dispose of. But depending on the circumstances, an asset sale may still be to your advantage.

Sellers typically prefer to sell stock, because it allows them to sell their entire practice, which is often worth more than the sum of its parts, and often provides tax advantages.

The third option, merger, continues to grow in popularity and is a column subject in itself, and I will address it separately next month.

Tax issues must always be considered. Most private practices are corporations, and the sale of corporate stock will result in a long-term capital gain that will be taxed – currently at 15%-20%. As the saying goes, it’s not what you earn, it’s what you keep. So it may benefit you to accept a slightly lower price if the sale can be structured to provide significantly lower tax treatment. However, any gain that does not qualify as a long-term capital gain will be taxed as regular income – currently in the 32%-37% percent range – plus a Social Security tax of about 15%.

Payment in installments is a popular way to defer taxes, since they are incurred on each installment as it is paid; but such payments may be mistaken by the IRS for payments for referrals, which is illegal. And there is always the problem of making certain all payments are eventually made.

You may wish to continue working at the practice as an employee for an agreed-upon period of time, and this is often to the buyer’s advantage as well. Transitioning to new ownership in stages often maximizes the value of the business by improving patient retention, and allows patients to become accustomed to the transition. However, care must be taken, with the aid of good legal advice, to structure such an arrangement in a way that minimizes concerns of fraud and abuse.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

My previous column on practice valuation prompted a number of questions on the mechanics of selling a private practice. As usual, I cannot hope to cover this complex topic comprehensively in only 750 words, but here are the basics.

A generation ago, the sale of a medical practice was much like the sale of any other business: A retiring physician would sell his or her practice to a young doctor and the practice would continue on as before. Occasionally, that still happens, but changes in the business of medicine – most significantly the growth of managed care – have had a big impact on the way medical practices are bought and sold.

For one thing, there are far fewer solo practitioners these days, and polls indicate that most young physicians intend to continue that trend. The buyer of a medical practice today is more likely to be an institution, such as a hospital, an HMO, or a large practice group, rather than an individual.

For another, because the rules governing such sales have become so numbingly complex, the services of expert (and expensive) third parties are essential.

While these issues may complicate matters, there is still a market for the sale of medical practices. However, you must do everything possible to ensure you identify the best possible buyer and structure the best deal.

The first hurdle is the accurate valuation of your practice, which was covered in some detail in my last column. Briefly, for the protection of both parties, it is important that the appraisal be done by an experienced and neutral financial consultant, that all techniques used in the valuation be divulged and explained, and that documentation be supplied to support the conclusions reached.

Keep in mind that the valuation will not necessarily equal the purchase price; other factors may need to be considered before a final price can be agreed upon. Keep in mind, too, that there may be legal constraints on the purchase price. For example, if the buyer is a nonprofit corporation such as a hospital or HMO, by law it cannot pay in excess of fair market value for the practice – which may rule out any valuation of “good will.” In some states, the purchase of private practices by hospitals is prohibited altogether – so you might need to consider a long-term lease rather than a sale.

Once a value has been agreed upon, you must consider how the transaction will be structured. The most popular structures include purchase of assets, purchase of corporate stock, and merger.

Many buyers prefer to purchase assets, because it allows them to pick and choose only those items that have value to them. This can leave you with a bunch of “odd lot” assets to dispose of. But depending on the circumstances, an asset sale may still be to your advantage.

Sellers typically prefer to sell stock, because it allows them to sell their entire practice, which is often worth more than the sum of its parts, and often provides tax advantages.

The third option, merger, continues to grow in popularity and is a column subject in itself, and I will address it separately next month.

Tax issues must always be considered. Most private practices are corporations, and the sale of corporate stock will result in a long-term capital gain that will be taxed – currently at 15%-20%. As the saying goes, it’s not what you earn, it’s what you keep. So it may benefit you to accept a slightly lower price if the sale can be structured to provide significantly lower tax treatment. However, any gain that does not qualify as a long-term capital gain will be taxed as regular income – currently in the 32%-37% percent range – plus a Social Security tax of about 15%.

Payment in installments is a popular way to defer taxes, since they are incurred on each installment as it is paid; but such payments may be mistaken by the IRS for payments for referrals, which is illegal. And there is always the problem of making certain all payments are eventually made.

You may wish to continue working at the practice as an employee for an agreed-upon period of time, and this is often to the buyer’s advantage as well. Transitioning to new ownership in stages often maximizes the value of the business by improving patient retention, and allows patients to become accustomed to the transition. However, care must be taken, with the aid of good legal advice, to structure such an arrangement in a way that minimizes concerns of fraud and abuse.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

Recent columns on closing, selling, or merging a practice have sparked numerous questions about proper practice valuation.

Too often, physicians are not receiving a fair return on the equity they have worked so hard to build over several decades, either because they have waited too long and must accept what is offered, or because they simply take the buyer’s word for their practice’s value. Don’t put yourself in either of those positions, and don’t entertain any offers until you obtain an objective appraisal from a neutral party.

Of course, a medical practice is trickier to value than an ordinary business, and usually requires the services of an experienced professional appraiser. Entire books have been written about the process, so I can’t hope to cover it completely in 750 words; but three basic yardsticks are essential for determining the equity, or book value, of a practice:

• Tangible assets. Equipment, cash, accounts receivable, and other property owned by the practice.
• Liabilities. Accounts payable, outstanding loans, and anything else owed to others.
• Intangible assets. Sometimes called “good will” – the reputation of the physicians, the location and name recognition of the practice, the loyalty and volume of patients, and other, well, intangibles.

Valuing tangible assets is comparatively straightforward, but there are several ways to do it, and when reviewing a practice appraisal you should ask which of them was used. Depreciated value is the book value of equipment and supplies as determined by their purchase price, less the amount their value has decreased since purchase. Remaining useful life value estimates how long the equipment can be expected to last. Market (or replacement) value is the amount it would cost on the open market to replace all equipment and supplies.

Intangible assets are more difficult to value. Many components are analyzed, including location, interior and exterior decor, accessibility to patients, age and functional status of equipment, systems in place to promote efficiency, reasons why patients come back (if in fact they do), and the overall reputation of the practice in the community. Other important factors include the “payer mix” (what percentage pays cash, how many third-party contracts are in place and how well they pay, etcetera), the extent and strength of the referral base, and the presence of supplemental income streams, such as clinical research.

It is also important to determine to what extent intangible assets are transferable. For example, unique skills with a laser, neurotoxins, or filler substances, or extraordinary personal charisma, may increase your practice’s value to you, but they are worthless to the next owner, and he or she will be unwilling to pay for them unless your services become part of the deal.

Once again there are many ways to estimate intangible asset value, and once again you should ask which were used. Cash flow analysis works on the assumption that cash flow is a measure of intangible value. Capitalization of earnings puts a value, or capitalization, on the practice’s income streams using a variety of assumptions. Guideline comparison uses various databases to compare your practice with other, similar ones that have changed hands in the past.

Two newer techniques that some consider a better estimate of intangible assets are the replacement method, which estimates the costs of starting the practice over again in the current market; and the excess earnings method, which measures how far above average your practice’s earnings (and thus its overall value) are.

Asset-based valuation is the most popular, but by no means the only method available. Income-based valuation looks at the source and strength of a practice’s income stream as a creator of value, as well as whether or not its income stream under a different owner would mirror its present one. This in turn becomes the basis for an understanding of the fair market value of both tangible and intangible assets. Market valuation combines the asset-based and income-based approaches, along with an analysis of sales and mergers of comparable practices in the community, to determine the value of a practice in its local market.

Whatever methods are used, it is important that the appraisal be done by an experienced and independent financial consultant, that all techniques used in the valuation be divulged and explained, and that documentation is supplied to support the conclusions reached. This is especially important if the appraisal will be relied upon in the sale or merger of the practice.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

Recent columns on closing, selling, or merging a practice have sparked numerous questions about proper practice valuation.

Too often, physicians are not receiving a fair return on the equity they have worked so hard to build over several decades, either because they have waited too long and must accept what is offered, or because they simply take the buyer’s word for their practice’s value. Don’t put yourself in either of those positions, and don’t entertain any offers until you obtain an objective appraisal from a neutral party.

Of course, a medical practice is trickier to value than an ordinary business, and usually requires the services of an experienced professional appraiser. Entire books have been written about the process, so I can’t hope to cover it completely in 750 words; but three basic yardsticks are essential for determining the equity, or book value, of a practice:

• Tangible assets. Equipment, cash, accounts receivable, and other property owned by the practice.
• Liabilities. Accounts payable, outstanding loans, and anything else owed to others.
• Intangible assets. Sometimes called “good will” – the reputation of the physicians, the location and name recognition of the practice, the loyalty and volume of patients, and other, well, intangibles.

Valuing tangible assets is comparatively straightforward, but there are several ways to do it, and when reviewing a practice appraisal you should ask which of them was used. Depreciated value is the book value of equipment and supplies as determined by their purchase price, less the amount their value has decreased since purchase. Remaining useful life value estimates how long the equipment can be expected to last. Market (or replacement) value is the amount it would cost on the open market to replace all equipment and supplies.

Intangible assets are more difficult to value. Many components are analyzed, including location, interior and exterior decor, accessibility to patients, age and functional status of equipment, systems in place to promote efficiency, reasons why patients come back (if in fact they do), and the overall reputation of the practice in the community. Other important factors include the “payer mix” (what percentage pays cash, how many third-party contracts are in place and how well they pay, etcetera), the extent and strength of the referral base, and the presence of supplemental income streams, such as clinical research.

It is also important to determine to what extent intangible assets are transferable. For example, unique skills with a laser, neurotoxins, or filler substances, or extraordinary personal charisma, may increase your practice’s value to you, but they are worthless to the next owner, and he or she will be unwilling to pay for them unless your services become part of the deal.

Once again there are many ways to estimate intangible asset value, and once again you should ask which were used. Cash flow analysis works on the assumption that cash flow is a measure of intangible value. Capitalization of earnings puts a value, or capitalization, on the practice’s income streams using a variety of assumptions. Guideline comparison uses various databases to compare your practice with other, similar ones that have changed hands in the past.

Two newer techniques that some consider a better estimate of intangible assets are the replacement method, which estimates the costs of starting the practice over again in the current market; and the excess earnings method, which measures how far above average your practice’s earnings (and thus its overall value) are.

Asset-based valuation is the most popular, but by no means the only method available. Income-based valuation looks at the source and strength of a practice’s income stream as a creator of value, as well as whether or not its income stream under a different owner would mirror its present one. This in turn becomes the basis for an understanding of the fair market value of both tangible and intangible assets. Market valuation combines the asset-based and income-based approaches, along with an analysis of sales and mergers of comparable practices in the community, to determine the value of a practice in its local market.

Whatever methods are used, it is important that the appraisal be done by an experienced and independent financial consultant, that all techniques used in the valuation be divulged and explained, and that documentation is supplied to support the conclusions reached. This is especially important if the appraisal will be relied upon in the sale or merger of the practice.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

Recent columns on closing, selling, or merging a practice have sparked numerous questions about proper practice valuation.

Too often, physicians are not receiving a fair return on the equity they have worked so hard to build over several decades, either because they have waited too long and must accept what is offered, or because they simply take the buyer’s word for their practice’s value. Don’t put yourself in either of those positions, and don’t entertain any offers until you obtain an objective appraisal from a neutral party.

Of course, a medical practice is trickier to value than an ordinary business, and usually requires the services of an experienced professional appraiser. Entire books have been written about the process, so I can’t hope to cover it completely in 750 words; but three basic yardsticks are essential for determining the equity, or book value, of a practice:

• Tangible assets. Equipment, cash, accounts receivable, and other property owned by the practice.
• Liabilities. Accounts payable, outstanding loans, and anything else owed to others.
• Intangible assets. Sometimes called “good will” – the reputation of the physicians, the location and name recognition of the practice, the loyalty and volume of patients, and other, well, intangibles.

Valuing tangible assets is comparatively straightforward, but there are several ways to do it, and when reviewing a practice appraisal you should ask which of them was used. Depreciated value is the book value of equipment and supplies as determined by their purchase price, less the amount their value has decreased since purchase. Remaining useful life value estimates how long the equipment can be expected to last. Market (or replacement) value is the amount it would cost on the open market to replace all equipment and supplies.

Intangible assets are more difficult to value. Many components are analyzed, including location, interior and exterior decor, accessibility to patients, age and functional status of equipment, systems in place to promote efficiency, reasons why patients come back (if in fact they do), and the overall reputation of the practice in the community. Other important factors include the “payer mix” (what percentage pays cash, how many third-party contracts are in place and how well they pay, etcetera), the extent and strength of the referral base, and the presence of supplemental income streams, such as clinical research.

It is also important to determine to what extent intangible assets are transferable. For example, unique skills with a laser, neurotoxins, or filler substances, or extraordinary personal charisma, may increase your practice’s value to you, but they are worthless to the next owner, and he or she will be unwilling to pay for them unless your services become part of the deal.

Once again there are many ways to estimate intangible asset value, and once again you should ask which were used. Cash flow analysis works on the assumption that cash flow is a measure of intangible value. Capitalization of earnings puts a value, or capitalization, on the practice’s income streams using a variety of assumptions. Guideline comparison uses various databases to compare your practice with other, similar ones that have changed hands in the past.

Two newer techniques that some consider a better estimate of intangible assets are the replacement method, which estimates the costs of starting the practice over again in the current market; and the excess earnings method, which measures how far above average your practice’s earnings (and thus its overall value) are.

Asset-based valuation is the most popular, but by no means the only method available. Income-based valuation looks at the source and strength of a practice’s income stream as a creator of value, as well as whether or not its income stream under a different owner would mirror its present one. This in turn becomes the basis for an understanding of the fair market value of both tangible and intangible assets. Market valuation combines the asset-based and income-based approaches, along with an analysis of sales and mergers of comparable practices in the community, to determine the value of a practice in its local market.

Whatever methods are used, it is important that the appraisal be done by an experienced and independent financial consultant, that all techniques used in the valuation be divulged and explained, and that documentation is supplied to support the conclusions reached. This is especially important if the appraisal will be relied upon in the sale or merger of the practice.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

After a recent column about the dilemma of dealing with patients who refuse to be vaccinated against COVID-19, several readers raised the question of how to properly dismiss patients from a practice, for that or any other reason. Specifically, most asked: “How do I dismiss a patient without violating any laws?”

Contrary to what seems to be the popular opinion, there are no statutory laws that I am aware of that directly apply to patient dismissal, beyond the obvious ones prohibiting discrimination that I’ve discussed many times. The more realistic concern is leaving yourself vulnerable to civil litigation – usually charges of abandonment.

Criteria will vary by region, jurisdiction, and practice. Since there are no hard and fast rules, your reasons for dismissal should be determined in advance, written out, and included in your practice manual. Once you have laid down your rules, follow them. Exceptions should be rare and made only under extraordinary circumstances.

Most patients are dismissed because of interpersonal conflicts between physician or staff members. Usually, that involves noncompliance with a reasonable treatment plan (including vaccinations), but there are other valid reasons. These include threats of violence, inappropriate sexual advances, providing false or misleading medical history, demands for inappropriate treatments or medications, and repeated failure to keep appointments or pay bills. And most ethics experts agree that you can dismiss someone who insists on treatment outside your area of expertise, or at a location other than your private office.

Even when circumstances warrant, dismissal should be a last resort. As with most interpersonal conflicts, your best option is usually reconciliation. Sit down with the patient, explain your concerns, and discuss what must be done if your doctor-patient relationship is to continue. Often, such patients are not aware (or willing to admit) that they are violating your office policies. Honest communication will often save such relationships. But be sure to make it clear that failure to address the problems you have outlined will result in dismissal from your practice. Document this conversation in detail in the patient’s chart, and follow up with a written communication reconfirming what you discussed.

If, despite your best (documented) efforts, the problems continue and dismissal becomes necessary, following a few generally accepted guidelines will help keep the process smooth and consequence free.

First, try to avoid dismissing a patient in the middle of a course of treatment. If that is unavoidable, you might want to contact your malpractice carrier and review the case with them prior to doing so.

Inform the patient, preferably by certified mail, of your decision. Spell out your reasons, with a reminder that these problems were discussed, and that a warning was issued and not heeded. If the patient belongs to a third-party health plan, be certain that you are acting within the stipulations of your contract with that plan, and inform the payer in writing of your action.

Once again, you must clearly document in the patient’s chart exactly how he or she violated your office policies. This will minimize grounds for charges of discrimination of any sort. Be especially diligent about this step if the patient has any known physical or mental disability.

Give the patient a reasonable amount of time (30 days is common) to find another physician, and mention that you will address any emergent problems within the scope of your specialty within that 30-day period. To minimize any potential allegations of abandonment, include a list of competent physicians in your area (without any guarantees) who might be willing to assume the patient’s care. Alternatively, you can list the phone number or website of a local medical society that they can contact to find a replacement. Offer to transfer medical records to the new physician upon receipt of written permission.

File a copy or scan of the letter, the certified delivery receipt, and the returned signature card in the patient’s chart. While the law states that a first-class letter, properly addressed and stamped, is presumed to have been delivered, you don’t want any question as to whether the patient received written notice of dismissal.

Forcibly ending a physician-patient relationship is a significant event that should not be undertaken lightly. Again, dismissal should be a rare occurrence, a last resort.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

After a recent column about the dilemma of dealing with patients who refuse to be vaccinated against COVID-19, several readers raised the question of how to properly dismiss patients from a practice, for that or any other reason. Specifically, most asked: “How do I dismiss a patient without violating any laws?”

Contrary to what seems to be the popular opinion, there are no statutory laws that I am aware of that directly apply to patient dismissal, beyond the obvious ones prohibiting discrimination that I’ve discussed many times. The more realistic concern is leaving yourself vulnerable to civil litigation – usually charges of abandonment.

Criteria will vary by region, jurisdiction, and practice. Since there are no hard and fast rules, your reasons for dismissal should be determined in advance, written out, and included in your practice manual. Once you have laid down your rules, follow them. Exceptions should be rare and made only under extraordinary circumstances.

Most patients are dismissed because of interpersonal conflicts between physician or staff members. Usually, that involves noncompliance with a reasonable treatment plan (including vaccinations), but there are other valid reasons. These include threats of violence, inappropriate sexual advances, providing false or misleading medical history, demands for inappropriate treatments or medications, and repeated failure to keep appointments or pay bills. And most ethics experts agree that you can dismiss someone who insists on treatment outside your area of expertise, or at a location other than your private office.

Even when circumstances warrant, dismissal should be a last resort. As with most interpersonal conflicts, your best option is usually reconciliation. Sit down with the patient, explain your concerns, and discuss what must be done if your doctor-patient relationship is to continue. Often, such patients are not aware (or willing to admit) that they are violating your office policies. Honest communication will often save such relationships. But be sure to make it clear that failure to address the problems you have outlined will result in dismissal from your practice. Document this conversation in detail in the patient’s chart, and follow up with a written communication reconfirming what you discussed.

If, despite your best (documented) efforts, the problems continue and dismissal becomes necessary, following a few generally accepted guidelines will help keep the process smooth and consequence free.

First, try to avoid dismissing a patient in the middle of a course of treatment. If that is unavoidable, you might want to contact your malpractice carrier and review the case with them prior to doing so.

Inform the patient, preferably by certified mail, of your decision. Spell out your reasons, with a reminder that these problems were discussed, and that a warning was issued and not heeded. If the patient belongs to a third-party health plan, be certain that you are acting within the stipulations of your contract with that plan, and inform the payer in writing of your action.

Once again, you must clearly document in the patient’s chart exactly how he or she violated your office policies. This will minimize grounds for charges of discrimination of any sort. Be especially diligent about this step if the patient has any known physical or mental disability.

Give the patient a reasonable amount of time (30 days is common) to find another physician, and mention that you will address any emergent problems within the scope of your specialty within that 30-day period. To minimize any potential allegations of abandonment, include a list of competent physicians in your area (without any guarantees) who might be willing to assume the patient’s care. Alternatively, you can list the phone number or website of a local medical society that they can contact to find a replacement. Offer to transfer medical records to the new physician upon receipt of written permission.

File a copy or scan of the letter, the certified delivery receipt, and the returned signature card in the patient’s chart. While the law states that a first-class letter, properly addressed and stamped, is presumed to have been delivered, you don’t want any question as to whether the patient received written notice of dismissal.

Forcibly ending a physician-patient relationship is a significant event that should not be undertaken lightly. Again, dismissal should be a rare occurrence, a last resort.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

After a recent column about the dilemma of dealing with patients who refuse to be vaccinated against COVID-19, several readers raised the question of how to properly dismiss patients from a practice, for that or any other reason. Specifically, most asked: “How do I dismiss a patient without violating any laws?”

Contrary to what seems to be the popular opinion, there are no statutory laws that I am aware of that directly apply to patient dismissal, beyond the obvious ones prohibiting discrimination that I’ve discussed many times. The more realistic concern is leaving yourself vulnerable to civil litigation – usually charges of abandonment.

Criteria will vary by region, jurisdiction, and practice. Since there are no hard and fast rules, your reasons for dismissal should be determined in advance, written out, and included in your practice manual. Once you have laid down your rules, follow them. Exceptions should be rare and made only under extraordinary circumstances.

Most patients are dismissed because of interpersonal conflicts between physician or staff members. Usually, that involves noncompliance with a reasonable treatment plan (including vaccinations), but there are other valid reasons. These include threats of violence, inappropriate sexual advances, providing false or misleading medical history, demands for inappropriate treatments or medications, and repeated failure to keep appointments or pay bills. And most ethics experts agree that you can dismiss someone who insists on treatment outside your area of expertise, or at a location other than your private office.

Even when circumstances warrant, dismissal should be a last resort. As with most interpersonal conflicts, your best option is usually reconciliation. Sit down with the patient, explain your concerns, and discuss what must be done if your doctor-patient relationship is to continue. Often, such patients are not aware (or willing to admit) that they are violating your office policies. Honest communication will often save such relationships. But be sure to make it clear that failure to address the problems you have outlined will result in dismissal from your practice. Document this conversation in detail in the patient’s chart, and follow up with a written communication reconfirming what you discussed.

If, despite your best (documented) efforts, the problems continue and dismissal becomes necessary, following a few generally accepted guidelines will help keep the process smooth and consequence free.

First, try to avoid dismissing a patient in the middle of a course of treatment. If that is unavoidable, you might want to contact your malpractice carrier and review the case with them prior to doing so.

Inform the patient, preferably by certified mail, of your decision. Spell out your reasons, with a reminder that these problems were discussed, and that a warning was issued and not heeded. If the patient belongs to a third-party health plan, be certain that you are acting within the stipulations of your contract with that plan, and inform the payer in writing of your action.

Once again, you must clearly document in the patient’s chart exactly how he or she violated your office policies. This will minimize grounds for charges of discrimination of any sort. Be especially diligent about this step if the patient has any known physical or mental disability.

Give the patient a reasonable amount of time (30 days is common) to find another physician, and mention that you will address any emergent problems within the scope of your specialty within that 30-day period. To minimize any potential allegations of abandonment, include a list of competent physicians in your area (without any guarantees) who might be willing to assume the patient’s care. Alternatively, you can list the phone number or website of a local medical society that they can contact to find a replacement. Offer to transfer medical records to the new physician upon receipt of written permission.

File a copy or scan of the letter, the certified delivery receipt, and the returned signature card in the patient’s chart. While the law states that a first-class letter, properly addressed and stamped, is presumed to have been delivered, you don’t want any question as to whether the patient received written notice of dismissal.

Forcibly ending a physician-patient relationship is a significant event that should not be undertaken lightly. Again, dismissal should be a rare occurrence, a last resort.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

“I might have to close my office,” a colleague wrote me recently. “I can’t find reliable medical assistants; no one good applies. Sad, but oh, well.”

A paucity of good employees is just one of many reasons given by physicians who have decided to close up shop. (See my recent column, “Finding Employees During a Pandemic”).

At this point, you should also begin thinking about disposition of your patients’ records. You can’t just shred them, much as you might be tempted. Your attorney and malpractice carrier will guide you in how long they must be retained; 7-10 years is typical in many states, but it could be longer in yours. Unless you are selling part or all of your practice to another physician, you will have to designate someone else to be the legal custodian of the records and obtain a written custodial agreement from that person or organization.

Once that is arranged, you can notify your patients. Send them a letter or e-mail (or both) informing them of the date that you intend to close the practice. Let them know where their records will be kept, who to contact for a copy, and that their written consent will be required to obtain it. Some states also require that a notice be placed in the local newspaper or online, including the date of closure and how to request records.

This is also the time to inform all your third-party payers, including Medicare and Medicaid if applicable, any hospitals where you have privileges, and referring physicians. Notify any business concerns not notified already, such as utilities and other ancillary services. Your state medical board and the Drug Enforcement Agency will need to know as well. Contact a liquidator or used equipment dealer to arrange for disposal of any office equipment that has resale value. It is also a good time to decide how you will handle patient collections that trickle in after closing, and where mail should be forwarded.

As the closing date approaches, determine how to properly dispose of any medications you have on-hand. Your state may have requirements for disposal of controlled substances, and possibly for noncontrolled pharmaceuticals as well. Check your state’s controlled substances reporting system and other applicable regulators. Once the office is closed, don’t forget to shred any blank prescription pads and dissolve your corporation, if you have one.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

“I might have to close my office,” a colleague wrote me recently. “I can’t find reliable medical assistants; no one good applies. Sad, but oh, well.”

A paucity of good employees is just one of many reasons given by physicians who have decided to close up shop. (See my recent column, “Finding Employees During a Pandemic”).

At this point, you should also begin thinking about disposition of your patients’ records. You can’t just shred them, much as you might be tempted. Your attorney and malpractice carrier will guide you in how long they must be retained; 7-10 years is typical in many states, but it could be longer in yours. Unless you are selling part or all of your practice to another physician, you will have to designate someone else to be the legal custodian of the records and obtain a written custodial agreement from that person or organization.

Once that is arranged, you can notify your patients. Send them a letter or e-mail (or both) informing them of the date that you intend to close the practice. Let them know where their records will be kept, who to contact for a copy, and that their written consent will be required to obtain it. Some states also require that a notice be placed in the local newspaper or online, including the date of closure and how to request records.

This is also the time to inform all your third-party payers, including Medicare and Medicaid if applicable, any hospitals where you have privileges, and referring physicians. Notify any business concerns not notified already, such as utilities and other ancillary services. Your state medical board and the Drug Enforcement Agency will need to know as well. Contact a liquidator or used equipment dealer to arrange for disposal of any office equipment that has resale value. It is also a good time to decide how you will handle patient collections that trickle in after closing, and where mail should be forwarded.

As the closing date approaches, determine how to properly dispose of any medications you have on-hand. Your state may have requirements for disposal of controlled substances, and possibly for noncontrolled pharmaceuticals as well. Check your state’s controlled substances reporting system and other applicable regulators. Once the office is closed, don’t forget to shred any blank prescription pads and dissolve your corporation, if you have one.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.

“I might have to close my office,” a colleague wrote me recently. “I can’t find reliable medical assistants; no one good applies. Sad, but oh, well.”

A paucity of good employees is just one of many reasons given by physicians who have decided to close up shop. (See my recent column, “Finding Employees During a Pandemic”).

At this point, you should also begin thinking about disposition of your patients’ records. You can’t just shred them, much as you might be tempted. Your attorney and malpractice carrier will guide you in how long they must be retained; 7-10 years is typical in many states, but it could be longer in yours. Unless you are selling part or all of your practice to another physician, you will have to designate someone else to be the legal custodian of the records and obtain a written custodial agreement from that person or organization.

Once that is arranged, you can notify your patients. Send them a letter or e-mail (or both) informing them of the date that you intend to close the practice. Let them know where their records will be kept, who to contact for a copy, and that their written consent will be required to obtain it. Some states also require that a notice be placed in the local newspaper or online, including the date of closure and how to request records.

This is also the time to inform all your third-party payers, including Medicare and Medicaid if applicable, any hospitals where you have privileges, and referring physicians. Notify any business concerns not notified already, such as utilities and other ancillary services. Your state medical board and the Drug Enforcement Agency will need to know as well. Contact a liquidator or used equipment dealer to arrange for disposal of any office equipment that has resale value. It is also a good time to decide how you will handle patient collections that trickle in after closing, and where mail should be forwarded.

As the closing date approaches, determine how to properly dispose of any medications you have on-hand. Your state may have requirements for disposal of controlled substances, and possibly for noncontrolled pharmaceuticals as well. Check your state’s controlled substances reporting system and other applicable regulators. Once the office is closed, don’t forget to shred any blank prescription pads and dissolve your corporation, if you have one.

Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at dermnews@mdedge.com.