Mark Dietrich Follow Up: Assessing Intangible Value in Physician Practices Using The Cost Approach

Cost Approach is Best Used Simply to Allocate Value Under the Income Approach, Contends Mark Dietrich  

Mark Dietrich is concerned that a recent presentation at the NACVA annual conference may have misrepresented the views he expressed with a number of other authors in a paper published in Hospitals and Health Systems RX that was titled Assessing Intangible Value in a Physician Practice Acquisition.  He cuts to the chase on his blog:

I had to turn down an invitation to speak at NACVA this past June in favor of my 35th wedding anniversary.  I would not have decided differently, but was surprised to see that Bob Cimasi’s presentation was devoted in its entirety to refuting the White Paper written by me and 7 other co-authors and published in the American Health Lawyers Association Hospitals and Health Systems Rx publication.

There are a variety of specious arguments in the presentation, but I will limit myself to a few.

There are a variety of citations to IRS CPE texts and the Friendly Hills private letter ruling in support of the notion that it is appropriate to use the cost approach to value physician workforce in place.  These citations conveniently ignore the fact that the CPE texts clearly state that the cost approach is used to allocate the value determined under the Income Approach (discounted cashflow method) and CRITICALLY that the appraisal in support of the Friendly Hills private letter ruling included a letter from the managing partner of the physician practice that stated the following:

 “It has been clearly stated to the partners that, in the past, their compensation reflected not only the value of their medical services, but also the profits attributable to their ownership of the Network; that the latter element will be replaced by a cash payment, which they can invest … that the Medical Group’s income will thereafter be derived from arms-length contract for medical services; and that these rates will necessarily be significantly lower than the total historical income they have been receiving …”   

Now, lest there be any doubt what is stated here, “the Medical Group’s income will thereafter be derived from arms-length contract for medical services; and that these rates will necessarily be significantly lower than the total historical income they have been receiving” is in stark contrast to many of the transactions that take place where physician workforce is paid for and post-transaction the physicians receive a higher income than they historically earned.  There is simply no basis whatsoever for believing that the IRS was unaware of the interrelationship between practice valuation and physician compensation. 

I still have a copy of that letter, which was an integral part of the valuation and the granting of IRS approval for the transaction.

Read Dietrich’s whole piece here. 

There’s a Critical Relationship Between Physician Compensation and Physician Practice Valuation