The issue of practice valuation is a sensitive one. Some hospitalist practices might have significant monetary value, which could make it reasonable to ask new doctors to buy in or enable selling the practice for a profit. Still, it’s risky to assume this is the case for your practice.
Let’s examine the issue using a pair of situations I encountered not long ago. I have changed some details of the practices to more clearly illustrate a point and conceal which practices I’m describing. Both situations would have gone smoother if it was clear what the hospitalist practice was worth. But how do you assess that value?
Case No. 1
During a couple of days in 2006, I consulted with a high-performing private practice hospitalist group on the East Coast. The group was led by one of the most energetic and thoughtful leaders I’ve encountered.
Like many other private practice groups, they divided physician members of the practice into partners and non-partners (sometimes referred to as shareholder and non-shareholders in the corporation). A hospitalist who had been a full-time member of the practice for a specified period of time (two years in this case) was eligible to become partner.
This entailed a “buy-in” requiring the doctor to pay money to the practice (usually the doctor would pay using a loan from the practice, which was repaid through deductions from his/her paycheck).
For this practice, the principal benefits of partner status were having a vote in group decisions (non-partners couldn’t vote) and receiving a portion of the distribution of all corporate profits each year. These profits came from two sources:
- Money remaining after all salaries and overhead were paid; and
- Buy-in money received by the practice.
Because the partners had this “upside potential” they agreed they would cover any staff shortages by working extra shifts instead of the non-partners.
Setting things up with a buy-in to achieve partner/shareholder status seemed to make a lot of sense. After all, it is the way nearly all private-practice medical groups in other specialties are structured.
Problems soon arose when they realized there wasn’t significant “profit” available unless there happened to be two or three doctors buying into the practice in a given year.
So, the partners became disenchanted because they shouldered the burden of covering any extra shifts but didn’t get a significant profit distribution in most years. Non-partners who became eligible for partnership were choosing not to buy in because it seemed like more responsibility without more income. The group’s system began breaking down.
Keep in mind they had a terrific practice. The docs liked each other and were pleased with the group leader, were highly regarded by hospital executives and other doctors, and had a growing patient volume.
Yet, the partners were unhappy they weren’t seeing extra compensation as a reward for buying into the practice with the money, time, and effort they invested.
Despite being a desirable practice in nearly every respect, new doctors were choosing to forgo partnership status. These things were creating significant morale issues that threatened the ongoing success of the group.
So why did these problems arise?
Case No. 2
Later in 2006, I worked with a different private-practice hospitalist group out West. Their practice had been started by, and was still owned by, a “parent” medical group. As the hospitalist practice grew, everyone (hospitalists and non-hospitalist doctors in the group) agreed it made sense to have the hospitalist practice separate into its own distinct corporation. Like the practice in the first case, all parties had high regard for one another.