Affordable Care Act and Medical/Dental Practice Value: Winners and Losers

As the voluminous and still misunderstood “Patient Protection and Affordable Care Act” (hereafter “Affordable Care Act” or ACA) is being implemented slowly but surely, the costs and benefits and winners and losers are slowly being recognized and digested. Among these probable outcomes are the diverse affects of the new law on the probable value of the solo and other small medical and dental practices across the nation. While chiropractors and pediatric dentists stand to gain from the new law, it is the primary care physicians who appear to be suffering the most from the advent of Obamacare.

physician practice value

Family and Primary Care Practices Suffer Most

The combination of declining reimbursement rates and mandated operating costs appear to be the “perfect storm” for private medical practice profits and value with a corresponding decline in the number of practitioners making “perfect sense” to many pundits. The biggest losers would appear to be the large but shrinking pool of solo or duo “family care” or “primary care” physicians who prefer to work in their own practice. Somewhat ironically, it is the primary care physician who is most sought after by the hospitals and networks who are taking them away from private practice.

Many physicians of all stripes are now opting to give up their independence to gain the stability afforded by hospital employment. As reported by Jackson Healthcare, around 56% of all physicians are currently in “private practice” with 35% employed by hospitals (around 212,000 according to AHA Hospital Statistics) and 9% working as an independent contractor. Between 2003 and 2010, the percent of hospitals with doctors on staff rose from less than 30% to nearly 60%. Fifty years ago, around half of all doctors were “primary care” oriented but now that figure is closer to 30%. Less than 10% of all medical school graduates are entering family or primary care, accelerating this trend.

A recent survey from recruiting firm Merritt Hawkins indicates that as many as 75% of the nation’s physicians will be employed by hospitals in 2014. “Our projection reaffirms the trend that fewer and fewer doctors are going into solo practice or staying in solo practice,” Travis Singleton, senior vice president with Merritt Hawkins, told CNN. “It shows that no one wants to hire a solo doctor; no one wants to be a solo doctor. This is a dying breed of physician that is quickly disappearing from the American landscape,” he added.

This prediction, according to the firm, is based in part on the finding that only 1% of the 2,710 searches it performed for hospitals and physician practices in 2011 were for solo physicians, down from 22% in 2004. Other findings included:

  • For the seventh year in a row, family physicians and general internists remained the two most requested physician search assignments. Other high-demand physicians included psychiatrists, general surgeons, emergency medicine physicians, orthopedic surgeons, obstetrician/gynecologists, pulmonologists, urologists, dermatologists and hematologists/oncologists.
  • Around 63% of Merritt Hawkins’ search assignments in 2011/2012 featured hospital employment of the physician, up from 56% the previous year.

When physicians depart from their private practice, therefore, they are chiefly ending up in hospitals or a health network. In addition, Jackson Healthcare reports that a substantial 16% of all physicians surveyed were planning on retiring, leaving medicine or transitioning to part-time work during 2013. Furthermore, they report that:

  • 34% of physicians surveyed will most likely retire or leave medicine within the next 10 years versus 14% within the next 5 years
  • Generalists most likely to leave the practice of medicine within 10 years include general surgeons, family practitioners, emergency medicine physicians and obstetrician/gynecologists.
  • While specialists most likely to leave within 10 years include oncologists, urologists and cardiologists.

Based on factors as diverse as the “herd mentality” and a defensive strategy to expand the referral network, Jackson Healthcare reports that around 50% of all hospitals are actively acquiring physician practices today with a focus on family practice, primary care and internal medicine. Surprisingly, many transactions take place as a result of the physician contacting the hospital. The specific reasons for acquiring physician practices were identified to include the following:

pysician practices acquisition stats

Irrespective of the “right or wrong” arguments related to Obamacare, its impact on the small medical practice value – especially primary care – is likely to be negative. From a basic supply and demand perspective, however, rising demand by the hospitals may work in the practice owner’s favor despite historically low profitability.

Prior to Obamacare, private payers and private insurance reimbursements have made up for breakeven or loss outcomes for Medicare and Medicaid patients respectively. With the public or Medicare-like segment expanding by millions of patients, this historical balance will evaporate quickly to the detriment of private practice profitability and value.

The uncertainty alone is enough to make some doctors want to “jump ship” as soon as possible. The ultimate impact of the ACA on physicians, chiropractors, dentists and other providers will depend in large part on crucial and complicated decisions that the 50 states and the federal government must make between now and the commencement of coverage enrollment on Oct. 1, 2013. For example, does the mandated coverage for “pediatric dentistry” end at 18 or 21 years of age? Many other similar “decisions” will shape the winners and losers of tomorrow.

Not surprisingly, the major factor influencing the departure of generalists is the growing income gap between primary care and specialties. Specialists often earn three times as much as primary care doctors. The average annual income for family physicians is $173,000 compared to $335,000 for oncologists and $419,000 for cardiologists.

If the trend towards exiting accelerates as we believe it will, the impact on primary care physician practice value will not be positive. As a result, physicians can benefit from hiring professional assistance geared towards maximizing the value of their practices in preparation for selling at the right time (whenever that might be). Likewise, learning about the various compensation models being used by hospitals across the country is good advice.

There Are Winners, Too

The news is not all bad, however, as the ACA will also create some winners as well. With 30 to 40 million recently uninsured gaining some type of coverage which will include chiropractic care for all and dental and optometry for children, these segments of the “doctor” marketplace will surely benefit.

Because the “non-discrimination” clause referred to as PHSA 2706 applies to the majority of health plans used by the public, the boost in demand for chiro services will outweigh any impact from cost control measures to the point where IBIS World is projecting nominal industry growth of close to 5.2% per annum through 2018 (with expected profit margins falling somewhat from 18.5% to 17.5% of revenue).

Although dentistry and optometry was explicitly addressed in the ACA, coverage is extended ONLY to children and not to adults. The ACA effectively guarantees that there will be dental and optometry coverage available for purchase, either together with other benefits or through stand-alone plans as part of what are termed “Essential Health Benefits.” Pediatric dental and eye care MUST be covered by individual and small group plans.

Adult coverage may be possible in the future, but not likely for several years. On the plus side, the Affordable Care Act will make pediatric dental and eye care more accessible than ever before. An estimated 3 million children will gain dental and vision benefits by 2018 through health insurance exchanges, roughly a 5% increase over the number of children with private benefits currently according to the American Dental Association. Exchanges must be in place in time to begin enrolling beneficiaries by October, 2013.

Every state will have an exchange that is based on a set of rules aimed at improving competition among health plans as a means of encouraging the provision of quality coverage for a lower cost. These “plans” will have to compete in order to be listed, with those plans providing the “Essential Health Benefits” at the lowest cost eligible. The exchanges will also facilitate the usage of federal subsidies; i.e. the ACA will pay part of the premium if income is at or below 400% of the poverty level and there is no access via an employer.

Call to Action

If you are one of the 34% who will be retiring or leaving your medical practice within the next five years, taking a tour of the BizEquity website and using the online valuation tool may be a real eye-opener and take you on a path to optimizing practice value. There are steps that can be taken now which will enhance value in the future.

At BizEquity, we are working diligently to educate business owners about the “value in understanding valuation” while encouraging a proactive stance which includes valuing their businesses through our online valuation service. Our soon to be released “Co-Pilot” feature will alert owners to pertinent steps that can be taken to help maximize their business value and our ongoing blog series includes an overview of basic business valuation principles and procedures which can empower the entrepreneur to build the value of their most important personal asset.

Much can be learned by using the online valuation tool and all medical practice owners are encouraged to tap into this resource and, if needed, contact our valuation staff for more detailed, offline appraisal services. With many medical practice valuations likely to be at or near their peak as of midyear 2013, now is the perfect time to familiarize you with our tool and the art, science and language of business valuation.

Realizing that each incremental dollar of earnings will translate into 3 to 8 additional dollars at the time of sale should be motivation enough to look into the valuation process in the BizEquity cloud. We are proud of the opportunity to improve the fortunes of our nation’s entrepreneurs and anyone who endures the many years of medical school is worthy of receiving top dollar when the time to leave arrives.

Stay tuned for another blog coming soon which will delve further into the “physician practice transaction marketplace” of 2013 with data related to valuing and buying/selling private practices in the US today.

About the Author: This article is written by Scott Gabehart – BA, MIM, CBA certified appraiser. Author, “The Business Valuation Book,” Professor of Valuations at the Thunderbird School. Over 700 valuations completed over twenty years of consulting. You can check out this simple to use 7-step cloud tool for real time business valuation – For great affordable dental plans within the US I recommend Reassurance Dental as dental costs are souring, we all need to keep the costs to a minimum!