Radiology practice valuations are frequently contentious projects. The seller generally believes the determined value is too low, while the buyer often thinks it's too high. In addition, valuations usually happen due to a change in the structure of the practice such as a sale, retirement or withdrawal of a partner, a new owner buy-in, a merger, or a divorce of one of the partners.
Although certain formulas exist for general business valuation, radiology practice and imaging center valuation requires that elements unique to the group and where it delivers care be considered.
"There are benchmarks you can use, but generally they don't have anything to do with your center, in your market, in your neighborhood, with your infrastructure, and the way you run the business," said Douglas Smith, president and CEO of Barrington Lakes Group, a healthcare consulting firm in Barrington Lakes, IL.
"You can't just take a multiple out there that's a quoted industry standard; you have to develop for your own standard in your own practice in your own area," noted Reed Tinsley, a certified public accountant, certified valuation analyst, and principal of Houston-based Reed Tinsley and Associates.
Smith and Tinsley shared their insights on the valuation of radiology-specific entities at a Radiology Business Management Association conference in Phoenix late last year.
According to Smith and Tinsley, the key factors of influence in determining value for a practice or imaging center are:
- Revenue streams
- Cost elements
- Referral patterns
- Service mix
- Payor mix
- Competitive landscape
- Ownership and management
"Valuators are going to look retrospectively at what has historically been true, and that is going to be evidenced only by what information and data that you can provide," Smith said. "Get your systems together to be able to get your arms around this data in extreme detail so you can present your case to the valuator," he advised.
In addition to valuing a practice or imaging center on a historic basis, the valuator will also be seeking to determine a prospective value for the entity using the same criteria; that is, seeking to determine how much of what has been true will be true in the future given the implications of the cause for the valuation, such as a change of ownership.
Revenue valuation will examine volume by modality, net collections, and referral patterns. It will also take into account adjustments, such as subsidies, medical directorships, management services revenues, billing revenues, and special services revenues. A valuator will also seek to determine missing revenues such as poor coding, billing, and collection activities.
In addition, a valuation will factor in the impact of future diagnostic imaging reimbursement specific to the market of the practice or imaging center, such as the Deficit Reduction Act of 2005. It will also look closely at current discount rates being negotiated by area payors as well as other elements, such as increased utilization of radiology management companies by local payors.
"The key to a successful valuation is deciding whether or not the future income stream will mirror its present income stream," Smith said.
A cost element taken into consideration by a prospective buyer would be the age and status of imaging modalities owned by a practice or imaging center. Although the group's equipment may be fully depreciated, it may also need to be replaced -- which will be reflected in a valuation.
The valuation of prospective referral patterns can be affected by the retirement or withdrawal of a group partner; particularly if that individual was well-known in the referrer community or provided a specialized service such as neuroradiology. Conversely, the addition of a physician or merger with a group viewed unfavorably by referrers will alter prospective referral patterns and can affect valuation, according to Smith.
Service mix, the types of modalities and procedures performed on them, are an important element for determining value. Although a practice or imaging center may have a complete set of cutting-edge diagnostic imaging tools, a valuation is interested in determining the frequency and type of services being conducted with the equipment.
"The strength of the income stream and what it produces for the owner is what creates true value," Smith said.
The valuation of the payor mix of a practice or imaging center will not only focus on the percentages of private payor and government payor reimbursements for procedures, but also on this mix specific to the locality of the radiology entity.
"There are some locations, such as Austin, Texas, where in the past two years an imaging center will go to negotiate a discounted fee-for-service agreement only to be told by some payors that their networks are full and they don't need another imaging center," Smith said.
In situations such as this, where an imaging center market has grown around an existing practice, the prospective value of the facility built in that market five or more years ago may be decreased both by the amount of competition and its effect in favor of payors for reimbursement.
According to Smith, the competitive landscape analysis will either be downplayed or exaggerated, depending on which group -- buyer or seller -- is conducting the valuation.
"Whoever contracts for the valuation will influence the valuation," he noted.
By Jonathan S. Batchelor
AuntMinnie.com staff writer
January 8, 2007
Related Reading
Strategic elements define imaging center success, December 8, 2006
Managing the precertification process, December 4, 2006
Billing analysis makes dollars and sense, November 17, 2006
Revenue cycle review helps imaging centers face challenges to come, August 25, 2006
Increase image reimbursement with a designated coder, August 7, 2006
Copyright © 2007 AuntMinnie.com
