Valuing Hospital-Based Practices

A sampling of the New Material in the 2001/2002 edition of The Medical Practice Valuation Guidebook

Introduction

Hospital-based practices include radiology, pathology, anesthesiology and in many cases, emergency room physicians. Additional practices which may be included are neonatology (physicians who work in neonatal intensive care units). In teaching hospitals or academic medical centers, entire departments such as Surgery or Medicine may be structured in this fashion.

Such practices are generally characterized by being located in the hospital building and being in the nature of Hospital Departments. The physicians utilize hospital facilitates. The billing for these services often consists of a professional component paid to the physician and a technical component paid to the hospital for use of the underlying equipment and facilities. The hospital has the right to determine the physicians who serve in these departments. This is in contrast to other members of the medical staff, such as internists or surgeons who have their own offices and patient and/or referral bases which they control. Such internists and surgeons will have hospital staff privileges, but these are generally awarded based upon approval of the medical staff in accord with the hospital’s medical staff policies, rather than on the basis of a contract with the hospital.

The physicians rely upon hospital inpatients or outpatients for their referrals, as opposed to receiving patients by direct referral. For example, a patient who has a biopsy (e.g., taking of a tissue sample) performed by a surgeon will then have the sample sent to the pathologist. The patient has nothing to do with directing the sample there nor does the surgeon. The pathologist receives the work by virtue of having a contract with the hospital. Similarly, if the procedure is performed under anesthesia, the anesthesiologist has the right to serve in that capacity not based upon an independent choice of the patient or surgeon, but rather due to a hospital contract.

These practices are typically characterized by a contract between the physician (or their entity) and the hospital for a specified period of time. The contract may "evergreen" (renew) automatically, or it may be renegotiated at the end of each term. As is the case with any contract, the terms should be read carefully as many valuation issues may be contained therein. In some cases, the contract may run between the hospital and the physician it designates as chair of the particular department, and that Chair (or Chief) then retains other physicians to fulfill the terms of the contract he or she holds. This is a critical factor to identify and consider.