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The mythology of transparency.

One of the more overused words in healthcare is “transparency.”  Data is transparent, charges are transparent, and quality measures are transparent.  With all of the transparency, there should be no magic in valuing a physician practice.  Estimate the value of hard assets, discount cash flows and market comparisons.  Pick a number.

But we all know it is not that simple.  How do you recognize the deal one group has with a large nursing home to provide medical directorship services?  What about payments for call in the emergency department or the sublet revenue generated from a local cardiologist? It is important for buyers and sellers to understand the entirety of the practice and how those ancillary revenue streams might look under a new ownership structure.

Two issues that we’ll address today are compliance and attachment, in the context of a transaction.  When a physician practice generates revenue, it generates compliance risk.  All claims to Medicare are subject to audit (and very recently, greater transparency…).  Heavy coders, meaning physicians who bill a preponderance of high severity codes, are audit targets.  Heavy coding generates revenue that could be at risk post-closing.  An owner with a comprehensive compliance program may experience a significant dip in cash flow if prior coding practices cannot be sustained.  The opposite is also true, in that many risk averse physicians automatically code light.  A knowledgeable investor may identify hidden value by improving documentation and billing more accurate codes.

Attachment describes the likelihood that an existing revenue stream will continue under new ownership.  It’s fairly easy to predict what will happen to call coverage support currently being paid to the practice by Local Hospital Alpha, if the practice is purchased by Local Hospital Beta.  The call stipend will likely end.

However, a more complex calculus arise when a purchaser tries to evaluate the call coverage agreement from an attachment and compliance perspective.  You must determine whether the hospital’s level of attachment is strong to an individual or strong to the service.  If it is strong to an individual practitioner, that revenue stream will be at risk if personnel changes are anticipated.  There is also significant compliance risk if the value of the arrangement exceeds the fair market value for the services provided.  For example, if a hospital pays a cardiologist $100 per hour for six nights of call each month, there are two factors at play: 1) Is $100 per hour the amount that a knowledgeable, willing, and unpressured buyer would probably pay for this service? 2) Is there a quid pro quo – is the practice expected to exclusively use the hospital for all cardiac workups and imaging studies?

These are two examples of situations where no degree of transparency will properly inform the buyer.  However, as more data becomes available on a healthcare transaction, it will continue to become easier to identify outliers.  Outliers can often present an opportunity for the right buyer, but should also trigger a more robust level of due diligence.

Quality talent and tools are needed for these nuanced value drivers.

Chuck Salvo is a HCMM Director and Founder of First Salvo Healthcare Advisory, LLC.  He is currently serving as Interim Vice President at the Brookdale Hospital Medical Center and has spent more than 20 years as an advisor to hospitals, health systems and large physician organizations.  He can be reached at


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