Best Practices

Current Trends in Practice Goodwill Value

By Richard C. Koval

Goodwill value is a prominent subject whenever a co-ownership share or practice is bought or sold. Contrary to rumor, goodwill value continues to exist within ophthalmology although downward trends are obvious over recent years.

Goodwill value, also known as intangible asset value, represents practice worth related to its infrastructure, market presence and future profitability. This value is measured by revenue volume and/or the difference in compensation available to a practice owner compared to an employed associate, assuming equivalent productivity. Under the former approach, all practices have goodwill value. But under the latter approach, goodwill value depends on profitability. For example, if a practice owner receives 40% of collections at the in verse of the usual overhead percentage at 60, and an employed associate is typically contracted at a 30% rate, goodwill value comprises the 10-point difference between the two.

As a result, a high-overhead/low profitability practice may have diminished or nominal goodwill value, while a low-overhead/high profitability practice will likely have enhanced goodwill value. Depending on the method used, some practices have significant goodwill value, others have modest value, and some may have little or none.

Regardless of the practice characteristics involved, goodwill value within ophthalmology has diminished over recent years. When viewed by the simple percentage-of-revenue and assuming typical 60% overhead, value has decreased from the 30% of collections commonly seen 12 to 15 years ago to a level closer to 25% of collections now. In regions where managed care is prevalent or restrictive covenants are of limited enforceability, these percentages can be much lower.

Overall, current trends suggest a continuing decrease of goodwill value at a rate of one to two percent each year. As a result, a practice having $100,000 in goodwill value 10 years ago is likely to have a current goodwill value of approximately $80,000 to $90,000 now; further, that practice will see that value continue to diminish at a similar rate in years to come.

Why the Decline?

The trends are due primarily to the following key factors:

• Decreasing practice revenue imposed by lower payer reimbursements that erode practice profitability.
• Increasing expenses for labor, supplies, utilities and other components required for the delivery of care, also eroding practice profitability.
• Industry volatility due to unknown future reimbursement levels from Medicare and private payers, combined with potential government initiatives that limit physician control, making purchase and co-ownership of physician practices less attractive to many buyers.
• Increasing market competition within many areas due to provider consolidation, exclusive group contracting, the advent of integrated hospital-physician delivery systems and other developments that can limit provider access to patients.
• Perceptions of risk among purchasers causing practice buyers and prospective co-owners to mitigate their perceived risk of investment by reducing price.
• Alternatives available to buyers in the form of long-term employment opportunities offering attractive compensation without the risks of ownership.

The rate of future decline could become even more pronounced if the industry sustains more drastic changes over future years. To some extent, practices can offset those factors by seeking diversification of revenue (i.e., developing other income sources through ASCs, optical dispensaries, cosmetics, etc.), carefully examining operational efficiency (i.e., eliminating redundancy, seeking appropriate economies of scale, adopting effective budgeting mechanisms), maintaining stability of their financial performance (i.e., improving the predictability of future performance) and seeking the stability of a larger entity through sensible affiliation or merger with other providers.

No panacea exists to arrest downward trends in goodwill values, but prudent practice owners will consider appropriate interventions and adjust their expectations for future sales accordingly. OM

Richard C. Koval is a principal and senior consultant at BSM Consulting, an inter nation ally recognized healthcare consulting firm. For more information and resources, visit www.bsmcafe.com.