How to Value: Medical Practices

Industry Description

The Offices of Physicians contains establishments of health practitioners having the degree of M.D. (Doctor of Medicine) or D.O. (Doctor of Osteopathy) primarily engaged in general or specialized medicines (NAICS 621111).  These practitioners operate private or group practices in their own offices (e.g. centers, clinics) or in the facilities of others, such as hospitals or HMO medical centers.

This industry is separated into two segments: primary care and specialty care. Primary practitioners work with a broad understanding of all illness and are not limited to one particular field of medicine, including but not limited to, family medicine, internal medicine, pediatric medicine and geriatric. On the other hand, specialist care practices a particular brand of medicine or surgery, including but not limited to, obstetrics and gynecology, anesthesiology, psychiatry, general surgery, emergency medicine, radiology, and cardiovascular health.

The following are some basic characteristics of the Primary and Specialist Care industry:

  • Primary and Specialist Physician care industry have a combined revenue of $501 billion, with a growth rate of 2.6% in 2021-2026
  • There are approximately 376 thousand companies as of 2022
  • Primary and Specialist Physician care industry employs approximately 2.7 billion people

Not included in the scope of this analysis is Mental Health Specialists, Freestanding Ambulatory Surgical and Emergency Centers, Oral Pathologists, and Speech/Voice Pathologies.

Industry Trends

The Primary and Specialists Care industry is in the mature phase of its lifecycle. While the COVID-19 pandemic disrupted the industry, demand for physician services continue to grow. Some of the key external forces that influence the Primary and Specialist Care industry are (i) telehealth services are reshaping access, (ii) an aging population is increasing demand, (iii) socioeconomic factors potentially shifting private and federal funding (iv) widening gap between primary and specialist trained physicians and (v) rising number of group practices. Each of these is described in further detail below.

Telehealth is using electronic information and telecommunication technologies to distribute health-related services. There has been prolific growth in telehealth as a mode of healthcare delivery, originally spurred by the COVID-19 pandemic, and has since continued to grow in demand. This is expected to bridge the gap between urban and rural communities that have limited access to healthcare. 

The elderly populations aged 65 and older use greater amount of primary and specialty doctor services than younger generations. According to the Urban Institute, the elderly population will more than double over the next 40 years, reaching 80 million in 2040. In addition, the subpopulation aged 85 and older, who often need additional support with basic personal care, will nearly quadruple between 2000 and 2040. Therefore, there is a growing demand for geriatric industry services.

According to U.S. Census Bureau, private health insurance coverage constitutes an estimated 66.5% in 2020. Of the subtype of health insurance coverage, employment-based insurance was the most common insurance, covering 54.4% of the population for some or all of the calendar year. Factors such as unemployment rates, government policies and income levels affect the number of people with private coverage. Due to the recovery of the COVID-19 pandemic and risk of stagflation of 2022, the number of people with private health insurance is likely to decrease, posing a threat to the industry. On the other hand, in response to the aging baby-boomer population, federal funding for Medicare and Medicaid is expected to increase, thus increasing availability and demand for physician services.

The number of specialists has risen more quickly than the number of primary care doctors. This is likely due to specialists earning substantially higher wages and perceived to have greater leisure time than primary care physicians. These lifestyle considerations and educational debt of medical school are creating a shortage in primary care, posing a significant risk to the industry.

Traditionally, office-based physicians have worked alone or in small group practices. However, in response to change regulations and rising operational costs, many practitioners have shifted to creating larger group practices. This business model enables practitioners to share capital costs, while referrals from primary care doctors or other specialists within the group enable in network patient revenue.

Key Performance Metrics

In evaluating the Primary and Specialist Care industry, the following metrics can provide useful information in comparing a subject company to guideline companies and transactions. In addition to evaluating financial and operational efficiency metrics, value-based care metrics measure the quality of care that’s rendered and are equally as critical.

  • Readmission rates
  • Admissions per thousand patients
  • Patient-reported outcomes
  • Total cost of care
  • Average charge and reimbursement per treatment
  • Average revenue per patient, per day
  • Account Receivable per FTE physician
  • Gross/ Net Collection ratio
  • Insurance processing time
  • Patient appointments, wait times and turnover
  • Staff-to-patient ratio

Industry Organizations & Publications

The following organizations publish useful information:

  • Centers for Medicare and Medicaid Services (CMS)
  • Association of American Physicians and Surgeons (AAPS)
  • American Academy of Family Physicians (AAFP)
  • American College of Physicians (ACP)
  • American Medical Association (AMA)
  • National Society of Certified Healthcare Business Consultants (NSCHBC)
  • Association of American Medical College (AAMC)
  • Medical Group Management Association (MGMA)
  • American Hospital Association (AHA)
  • Healthcare Financial Management Association (AFMA)
  • American Medical Group Association (AMGA)

Guideline Information: Private Purchase Transactions

Most medical practices are privately owned. While there are publicly traded companies, data regarding the sale of 100% of closely held medical practices is generally the best source of information to appraise a subject company.

The following are typical appraisal multiples from sale of medical practices:

  • Revenue multiple between 0.31 and 1.1 times
  • Gross Profit is not meaningfully measured on the financial statements of Medical Practices
  • EBITDA multiples between 2.6 and 19.7 times

In selecting guideline transactions, it is of critical importance to select transactions that are similar to the subject company. Unique factors for any subject company must be considered to yield credible results. Additionally, industry economic conditions also vary over time, which must also be considered. 

Guideline Information: Publicly Traded Companies

Most Primary and Specialist Care establishments are privately owned or nonprofit. However, there are a few that are publicly traded, meaning it is possible to compare a subject company based on industry metrics and appraise using industry multiples. However, as with the guideline transactions described above, it is of critical importance to select publicly traded companies that are similar to the subject company. Also be aware that multiples of certain publicly traded companies may not accurately reflect a subject company.  

The ten largest publicly traded U.S Primary and Specialist Care services, ranked by market capitalization are:

  • HCA Healthcare (HCA) – $54.1 billion market capitalization
  • agilon health, inc (AGL) – $11.5 billion market capitalization
  • Universal Health Services, Inc (UHS) – $8.0 billion market capitalization
  • Chemed Corporation (CHE) $7.7 billion market capitalization
  • Oak Street Health, Inc. (OSH) – $6.7 billion market capitalization
  • Tenet Healthcare Corporation (THC) – $6.4 billion market capitalization
  • Select Medical Holding Corporations (SEM) $3.7 billion market capitalization
  • Surgery Partners, Inc. (SGRY) – $3.4 billion market capitalization
  • Cano Health, Inc (CANO) – $3.0 billion market capitalization
  • Apollo Medical Holdings (AMEH) – $2.9 billion market capitalization

The Price-to-Earnings (P/E) ratios of these five companies range between 7.9 times to 31.3 times.

Appraisal Rules of Thumb

Please note you should never use a Rule of Thumb in place of a professional appraisal. You will never see a competent professional appraiser do their work using a Rule of Thumb. The professional standards that govern professional appraisal practice, which all professional appraisers should follow, specifically prohibit the use of Rules of Thumb.

Medical practices are businesses sold based on sound economics. These economic considerations can be measured using the key performance indicators described above, but such economics cannot be accurately summarized in these simple formulae.