Valuating a Pain Management Practice and More

painThe valuation of a healthcare business can be said to be the heart and soul of a business transaction between two parties.  Although urgent care has been the focus of many past valuation articles, the valuations of other popular entities like pain management practices and anesthesiology centers are also topics that warrant a deeper look.  Though on the outside a valuation may seem like just a valuation, experts advise that different types of buyers can be the deciding factor of what matters most in these types of transactions.

With a focus of valuations of pain management practices and anesthesiology practices by buyers like management companies, private equity investors and hospitals all have different end goals in mind when investing in these businesses.  This changes the way the businesses are valuated in some situations.

Mark Dietrich, healthcare valuation expert with Mark O Dietrich, CPA, PC explains that from the standpoint of a private equity, or public company buyer, buyers are looking at a multiple of adjusted EBITDA.

“That adjusted EBITDA is generated typically by reducing prospective physician compensation.  So, in effect, a physician practice is contracting a percentage of its compensation to the management company or the private equity company in exchange for a cash payment.  That EBITDA model is pretty much consistent across urgent care centers, ambulatory surgery centers,” Dietrich says.  “If the physician-sellers are exiting the practice after the sale, the buyer will expect to replace their services with lower cost physicians or otherwise enhance earnings potential.”

Where investors are putting up real equity money, whether public or private; they are all buying future cash flow and making sure that they get that future cash flow by expressing it as a percentage of what would otherwise be physician compensation or pre-distribution earnings, Dietrich says.

“I think obviously the purpose of the purchase and what the buyer is looking for in the business is what makes each one different,” Curtis Bernstein, valuations director with Altegra Health says.

“A management company and private equity company are generally in the same boat in that they are looking to profit off of the entity going forward.  The management company may be able to do this in a more active manner.  They are going to look for opportunities to improve the practice and then make a profit.  The private equity group will be more of a passive buyer that will look for the entity to earn profit through growth or affiliations,” Bernstein says.

Bernstein adds that a hospital may not have the same profit motivation.  They may be looking at the entity as an additional service line offering for their patients.  They may be looking to maintain or create coverage within a local market and work with current doctors to grow that coverage.  While a hospital can’t pay for this they may ultimately earn profits in other ways through the affiliation.

“People are not investing money in physician practices without a reasonable prospect of getting a cash return on their investment.  In many instances, we see hospitals struggling to find a cash return on their potential investment because after the purchase, they continue to either employ the physicians or enter into a professional services agreement where much of the value that they were supposedly buying is sucked out in the form of future physician compensation.  In many cases, physicians are going to make the same amount or more money than they did historically, which makes it pretty difficult to find a cash on cash return to value,” Dietrich says.

Valuation Points

Dennis Hursh, principal at Hursh and Hursh PC says that one of the biggest things is looking at the patient list of a pain practice center.

“A lot of times with an urgent care center, the way that most of them are structured, they really don’t have a patient list.  All they have got is this concept of good will, they are there, people know they are there, and people are walking in. With a pain management center, they tend to have a fairly stable list of patients.  You don’t typically present for pain management, get treated, leave and be done with it.  It tends to be a longer term thing.  I think that a patient list is something that has some value in a pain management center that you wouldn’t see in most urgent care centers,” Hursh says.

He adds that with an anesthesiology practice the patient list is of value but to a lesser extent.

“A lot of times you don’t go to an anesthesiologist.   If it’s not for pain management you go to a surgeon or somebody else that is utilizing an anesthesiologist.”

From a valuation perspective, when valuating a pain management practice in the situation where a hospital is the buyer, Bernstein says the valuation will basically consider what the hospital will pay you.

“Most hospital systems are looking to employ doctors and possibly give them increases in compensation rather than pay them for any potential cash flow of the business.  When you are valuing the business, the upfront payment may be not as much, but the hospital will be looking for a longer term employment contract and more opportunity in growth that way,” Bernstein says, emphasizing that hospital buyers are more long-term.

Dietrich says the importance of equipment in these types of transactions depends upon the structure.

“Multiples of EBITDA are going to generate an enterprise value and would typically include equipment, working capital and intangible value.  Or again, it could simply be purchasing a piece of future earnings via a management contract,” Dietrich says.

“Some buyers charge a management fee to the target practice or entity post-transaction; this is common in surgery center transactions, for example. Sellers need to be sure they understand the transaction structure and what they are actually selling.  In a pain management practice, for example, there would be one or more C-arms in it so there would be a fairly significant investment in equipment.”

Why Sell Now?

“I think right now is a good time for these practices to sell.  A lot of private money is entering into the healthcare space.  On the anesthesia side, there are a number of companies looking to consolidate those types of entities and provide those services to hospitals and surgery centers to earn some profit off of those centers in the future,” Bernstein says.

With regard to pain management, he says that is a whole separate entity. Bernstein says that buying companies are generally not looking for pain management entities.  Some of the surgery center companies might be looking at that.  He says he has heard talk of them looking to acquire not only surgery centers, but to acquire the practices of the specialists that practice within the ASC.

Bernstein emphasizes that organization when prepping to sell your pain management or Anesthesiology Company is key to having a smooth valuation process when the time comes.

“Organizing everything always makes sense.  It helps to make sure that any valuation expert understands the breadth of scope of services of the entity and what might be going on in the overall practice,” Bernstein says.

“For example, in anesthesia, we are commonly seeing entities expanding their relationships with anesthesiologists and if that’s happening within a practice then a valuation expert should be made aware of that happening and what that’s going to mean from a service line perspective.  Anesthesiologists may have relationships with multiple entities and it makes sense for the anesthesia group to represent what is happening with each of those entities.”


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