Where to find hidden value in a physician practice

Hospitals are acquiring physician practices at a frantic pace. To help ensure the financial success of this type of acquisition, it’s critical to look at areas where there may be untapped value. A new report reveals the top value drivers of a physician practice in this new environment, which points to opportunities to boost value after the deal is done.

1. Use of extenders. Physician extenders are nurse practitioners or physician assistants that can perform certain tasks in place of the physician. These individuals cost less than physicians, so the more they can be used, the more the opportunity for profit—and value. This is particularly important due to healthcare reform that will trigger an increase in insured individuals without the corresponding increase in primary physicians. Extenders can play a key role in handling the influx of new business.

2. Ancillary services. Some larger practices have invested in capital-intensive services to augment their practices, such as CT and MRI services. Are these services being used to capacity? If not, there’s an opportunity to boost the bottom line by increasing volume. And future profits will be even greater if physicians are compensated for personally performed services only and do not receive a cut of the extra business.

3. Payer mix. A practice receives payments from commercial and government insurers. Commercial reimbursement rates are higher than government rates and increase annually at a faster rate. A practice with more commercial payers in the mix—or the potential to shift to more commercial payers—will be more valuable, especially as healthcare reform eats away at government reimbursements. Also, there may be the potential to negotiate higher rates with the commercial insurers. Of course, this depends on the relative size and market strength of the hospital versus the insurer.

4. Overhead costs. Does the practice have high overhead costs when compared to industry norms? If so, this could be a chance to create value by reducing overhead to a more efficient level. Of course, you need to analyze this very carefully. There may be good reasons why overhead is higher than normal, so you can’t simply assume you can make wholesale cuts.

Learn more: Now more than ever, hospital systems need to understand how physician practices function, both operationally and financially, and what ultimately drives their value. Physician Practices: Key Value Drivers in a Changing Environment examines these drivers as well as the critical questions to ask and analyses to perform to help ensure the success of a potential acquisition.