Past trends in medical practice acquisition deals should be considered by both the hospital-employer and the physician-employee when structuring an agreement in today’s market. The medical practice acquisition boom of the 1990’s resulted in many failed investments, unsuccessful practices, and unhappy physicians. Hospitals often provided physicians with salary guarantees, essentially eliminating the physician’s incentive to remain productive while providing a pathway for a smooth transition into retirement. Between the lessons learned from failed acquisitions in the past and the evolving federal and state regulations pertaining to medical practice valuation, the message is clear: Physicians and hospitals need to structure an acquisition agreement so that the deal provides performance-based compensation that is consistent with the fair market value of the services provided by the physician.

Federal law prohibits tax-exempt entities from compensating physician-employee’s in excess of the fair market value of their services. The “anti-kickback” regulations limit the financial incentives hospitals can consider when determining the value of a sought-after practice. Accordingly, the price paid for a practice can only take into account the business generated by the practice itself, not what the practice can generate for the hospital through referrals and facility fees. Whether the physician’s salary is production based or fixed, compensating physicians in excess of the fair market value of their services can expose both the hospital and the physicians to fines and/or criminal prosecution.

The safest and most logical way to structure a purchase price within the bounds of federal regulation is through credible third-party valuation experts.  A competent valuation expert can take the guess-work out of the hands of the hospitals and physicians by determining the fair market value of a medical practice as well as a compensation package that is compliant with the myriad of federal laws and regulations.

- Contact Michael Brocks & Associates to learn more about Health Care acquisitions and fair market value.