Selling Your Medical Practice: Initial Steps to Take

August 21, 2012
Susanne Madden

The best way to optimize your sales price, no matter what the market conditions are like, is to optimize your operations.

Think of it this way - before you sell a house, you invest a little to make sure it is as attractive as possible to potential buyers. The same is true for your practice. In many cases, buyers are looking to purchase a turn-key operation - location, staff, operations, and patients - so the better shape you are in, the more attractive you will be to buyers. So even a few improvements to your practice can result in a big payoff when it comes time to sell.

But first, a word or two about buying and selling practices. Depending upon a number of factors, today many practices have little actual value. A typical sale (particularly in the case of a hospital acquiring a practice) may look like this: The seller and buyer agree that on a certain date, the buyer will assume the costs of the practice and revenues generated from that date forward and employ the staff and selling physician(s) at a negotiated salary, and the seller is free to collect the outstanding accounts receivable as the sale's price. Now that doesn't mean that you can't sell "tangible" assets to the buyer as well. These may include such things as equipment and furniture. But what about the patients? Patient loyalty is not what it once was and so little value is placed on the patients/charts that have been built up over time at the practice.

Certainly there are many types of sales that are made. For example, if you are in an area where there is little competition (and therefore few practices to buy), there may be a considerable premium that can be applied to that scarcity. But the best way to optimize your sales price, no matter what the market conditions are like, is to optimize your operations. Low costs and efficient operations maximize revenues, and that is the key to selling your practice successfully.

Here's a checklist to help you optimize your value:

Trim Expenses

Pay attention to costs in order to bring down your overhead. A practice that is performing well compared to other practices in your specialty will help optimize your selling price.

1. Reduce payroll expenses

a. Start with cutting out overtime. If you routinely pay overtime, go here: "Don't Let Overtime Take Over." Overtime can be a huge drain on practices and having a zero tolerance for it can reduce your payroll costs substantially. A client recently reduced its annual payroll costs by 14 percent by implementing a zero-overtime policy.

b. Look at staffing levels. Are schedules maximizing productivity or are you heavy on resources at certain times of the day? Tiering schedules can really help to control costs. For example, rather than having all staff in at the same time every day, consider staggering start times and see if you can cut down a position or two from full-time to part-time.

c. Maximize providers. One client hired a nurse practitioner while the physicians still had room in their schedules to grow. Maximize provider schedules and see where you can either cut back time on your most expensive resources, or fill that time more wisely.

2. Trim material costs

a. Look at your supply and waste management costs. If you haven't looked at your costs in the last 12 months, you are leaving money on the table.

b. If you are not already participating in a buying group, sign up right away to take advantage of group volume discounts.

c. Ask suppliers how you can take advantage of better pricing - volume or prompt payment discounts for example - and let them know that you are shopping around for the best deals. Often they will reduce prices to retain your business.

d. Look to extend your leases on equipment. This can reduce your monthly costs and therefore your overhead (but just make sure that those leases are acquired as part of the practice sale).

Maximize Revenues

1. Code for everything you do

Many practices leave money on the table because they only code what they know, rather than what they do. Additionally, they don't code for services that usually do not get paid. Coding for everything that you do allows you to:

a. Take advantage of payers' changing policies (what was not covered yesterday might be paid tomorrow).

b. Have patients share in the cost of their care by billing for non-covered services.

c. Demonstrate the value of the services that you provide to a buyer.

2. Collect every dollar that you can

a. Do not waive copays and coinsurance! Apart from breaching your payer contracts when you do this, you are also doubly discounting your services. That is, you agree to a reduced payment when you join a payer network. They pay you their portion of that discounted fee and the patient is supposed to pay the rest. For example: Say your charges are $150 for a 99213 and the payer fee schedule is $120. If a patient has a $20 copay, the payer will give you $100. You may think you are giving a $30 discount to the payer, but if you don't collect the copay then it is $50 - one third of your charge!

b. Make it easy for patients to pay you. Accept credit and debit cards, checks, and cash. Set up payment plans and tie them to credit cards (if possible). Keep credit cards on file (following secure processes, of course) and automatically balance-bill patient responsibility fees. Have patients sign waivers for non-covered services that they request. Most payers allow you collect payment on services that are not covered by benefits, provided that the patient has been fully informed and signed a waiver stating that they understand their liability for payment for those services.

3. Housekeeping

a. Clean up your old accounts receivable. You will want to know exactly where your practice stands in the event of a sale, and old uncollectable A/R can "bloat" the books.

4. Negotiate

a. Make sure you understand your value. Hire a practice valuation expert, who will advise you what to ask for and why, and guide you through understanding the various buying models that exist today. Don't wait until you have an offer on the table! The sooner you understand your practice's worth, the sooner you can improve your value and maximize your sales price.

b. Ask for everything you want, making sure that it is within reason. The buyer can only say "no," right?

Susanne Madden, MBA, is founder and CEO of The Verden Group, a consulting and business intelligence firm that specializes in practice management, physician education, and healthcare policy. She can be reached at madden@theverdengroup.com or by visiting www.theverdengroup.com.