Valuing a Large Primary Care Practice With a Significant Ancillary Component
A large northeastern community hospital
To assist the hospital in acquiring a nine-physician primary care practice, in order to more closely align the physicians with the hospital; and to enhance clinical integration. The group practiced at one main location with a small rural office and three additional lab draw stations. The practice maintained a CLIA-certified lab which accounted for approximately one-third of enterprise revenues.
Hospitals in the area were involved in various discussions to explore partnerships, and physicians were actively seeking stability and reduced future business risks. A business valuation was required to support the terms of this large, time-sensitive, and pioneering transaction. In addition, Veralon identified early on that the labs contributed significantly to the practice value. This raised concerns for the client, who believed that the labs could make the ‘fair market value” unattractively high.
Veralon consulted with both the hospital and the physician group to explore the context of alignment options as well as the specifics of new compensation arrangements.
Through this process, stakeholders gained an appreciation for the impact of proposed compensation on the valuation calculus. In addition, discussions clarifying the fair market value standard served to resolve the hospital’s concerns about the more limited strategic value of the lab service.
This transparency facilitated trust among the stakeholders and led to a smooth process and sale agreement as well as compensation contracts for the physicians.