How Much Is My Practice Worth? Part 1: Standard of Value
April 1, 2009

During the course of a physician’s private practice, it sometimes becomes necessary to determine what his or her practice is worth. The reasons for this include, but are not limited to:

Admittance or exit of a partner in the practice

Sale of the practice to another physician

Sale of the practice to a hospital

Estate tax purposes

Marital dissolution

Regardless of the reason, it is important to a stakeholder in a physician practice to understand the theory used in valuing a professional services company. Depending on the purpose of a valuation of a medical practice, the “standard of value” may vary. Some common standards of value include:

Fair Market Value

Fair Value

Investment Value

Fair Market Value is the standard that not-for-profit hospitals and health care systems that accept Medicare beneficiaries must use due to federal “anti-kickback” regulations. Basically stated, hospitals are not allowed to pay for medical practices based upon potential patient referrals or increased payments that the hospital can expect under hospital reimbursement rates. The value of the practice is limited to the practice’s current financial performance under the current managed care contracts.

Fair Value is a standard used sometimes in marital dissolutions, but other standards are sometimes used depending on state statutes regarding such matters. As a matter of fact, the very definition of fair value can vary based upon state law. Most often fair value comes into question in a marital dissolution when it is argued that the value of a medical practice is inseparable from the physician, and therefore the medical practice actually has very little value above the chairs and tables in the office. Although this is true on many levels, there is a laundry list of cases that have decided otherwise citing a standard such as fair value or some other similar basis for keeping some of the physician’s intangible value (i.e., goodwill) in the practice.

Investment Value is the value that a venture could potentially be worth to a specific investor. For example, if you and I own hot dog stands across the street from one another and you decide to sell, I may be willing to pay an amount greater than someone else since there is slightly more value to me in eliminating a competitor. For a medical practice, this standard could be used to determine value if the practice is being acquired or invested in by another physician or for-profit entity. This standard is strictly forbidden for not-for-profit health care investors.

By knowing these conventions used to define value for medical practices, physicians can avoid some of the confusion (and sometimes anger) over some “bean counter’s” opinion of what his or her medical practice is worth.

If you have any specific questions regarding this article or if you would like to suggest a topic for upcoming articles, feel free to call or email Jeff Moffatt at 317.275.7405 or jmoffatt@blueandco.com.