Injury to a Medical Professional

One Economic Loss or Two?

A medical professional suffered a career ending injury. The injured person owned and managed the practice through which he provided his services. This medical professional also had employees who aided him and generated additional revenue and profits for the practice. The situation addressed in this article is as follows: While it seems plain that the physician here has lost earning capacity, has this injured medical professional also lost the value of his practice? If, the answer to the latter is ”yes”, how should such a calculation be made? In this article, the author discusses his views on this matter.

I enjoy being a member of several professional associations whose members are among those working in the litigation support field. Recently, I received a telephone call from a member of one of these associations. He asked a question which I think would be of interest to QuickRead readers.

His question centered around the impact of a career ending injury to a professional. In this situation, the injured person was a medical professional. The injured person owned and managed the practice through which he provided his services. He also had employees who aided him and also generated additional revenue and profits for the practice.

The professional was injured in a motor vehicle accident. Due to the nature of his injuries, he would no longer be able to work as a medical professional. The question my associate asked, “Yes, he has lost earning capacity, but the professional is arguing that he has lost the value of his practice? Do you think he is correct? And if so, how to you make such a calculation?”

Fortunately, I have experience in making such calculations and was able to share my experience. This is the information I shared with my associate.

Two Losses or One?

One of the problems in assessing the losses for an injured self-employed person is the question, “How much of his or her annual income is earnings and how much are profits?” Many self-employed people file a Schedule C with their 1040 income tax return to show their business income. Schedule C shows the net income (profits or losses) from the owner’s business. In this situation, the self-employed person’s income is also his or her profits. Because these are small businesses, few of them have a business value greater than their net asset value. Therefore, these self-employed individuals’ losses are their lost annual income. This means there is one loss to calculate lost income which includes the business’ profits.

However, many self-employed professionals operate through a subchapter S corporate structure. This means the owner receives W-2 income and a K-1 which reports their corporation’s profits or losses. This non-passive income or loss flows through the entity to the self-employed person’s personal income tax form each year. If the business is successful, the self-employed owner reports two forms of income from the same entity: wages and non-passive income (net profits).

For medical professionals, most of their practice’s revenue comes from the work of the professional/owner/operator. Other trained staff also generate revenue for the firm so that the overall revenue is a mixture of the professional and staff members’ work. Because of this mix of profits, a situation may be created which may require two loss calculations.

Courts have addressed the source of profits in a closely held business and how that impacts assessing losses incurred by injured self-employed individuals.

“If a plaintiff is engaged in a business and suffers personal injury because of another’s negligence, it is unquestioned that the plaintiff may recover his/her lost earnings. But most courts hold that a plaintiff may not recover lost profits, as such. Most modern cases have held, however, that evidence of lost profits of a business can be admitted as evidence of lost earnings in a proper case. The standard set down is that plaintiff’s personal efforts must be the predominant factor in producing business profits, not invested capital or the labor of employees. The admissibility of evidence of lost profits to prove lost earnings appears least open to question when the plaintiff is a sole proprietor and self-employed.”[1]

“It is a generally accepted proposition that evidence of the profits of a business in which the injured party in a personal damage suit is interested, which depend for the most part upon the employment of capital, the labor of others, and similar variable factors, is inadmissible in such a suit and cannot be considered for the purpose of establishing the pecuniary value of lost time or diminution of earning capacity, for the reasons that a loss of such profits are uncertain and speculative. In such circumstances, loss of profits cannot be considered either as an element or measure of damages. In such a case, the measure of damages is the loss of value of the injured person’s services in the business. ‘Profits’ and ‘earnings’ are not synonymous. Loss of personal earnings is properly considered as an element of damages. [Citations omitted] However, where the business is small and the income which it produces is principally due to the personal services and attention of the owner, the earnings of the business may afford a reasonable criterion to the owner’s earning power.”[2]

Assessing Two Losses

Many medical professionals, while having personal investments for boosting annual income after retirement, look at their practice as a retirement account. The proceeds from the sale of the practice provide a source of retirement funds.

In situations where the professional is injured prior to reaching a planned retirement age, he or she will have lost earnings up to the end of his or her work-life expectancy or anticipated age of retirement and the net value of the practice at the time the individual would have sold the practice, discounted to present value, and then reduced by any proceeds received from the sale of the practice after the professional was injured.

As an example, assume the injured medical professional had planned on working an additional 10 years before selling his or her practice and retiring. This means the first loss calculation will be for lost earning capacity. Using W-2’s for the professional’s work at the practice, lost earning capacity can be calculated due to his or her being unable to work. The expert should review the amount of salary being paid to the professional to determine the amount the average salary for someone working in a practice of that size. If the practice has been profitable but the professional is being paid below the average for his or her specialty, the professional’s wage will need to be adjusted for any valuation analysis. To be consistent, the same adjustment may be made to estimate lost earning capacity. This keeps the professional’s wages consistent in both analyses. There are various sources for such information including data from the Bureau of Labor Statistics and the publication Medical Economics.[3]

After making any needed adjustments to the professional’s annual salary, the projected future salary can be estimated and future losses discounted to present value. Of course, if the injured professional will be able to work full-time or part-time in another job, the lost pre-injury earnings will need to be reduced by the projected annual mitigation (post-injury) earnings. If the professional will not be returning to the workforce, only the annual pre-injury income stream will be considered. This set of calculations provides the estimate of the professional’s first loss, lost earning capacity.

The second calculation shows the loss in value of the practice. With this example, the valuation will be set 10 years in the future when the professional intended to retire. It should be noted that this valuation will show the adjusted salary paid to the professional as a business expense. This is because it is assumed such a salary would be paid by a passive owner to a professional to perform the services provided by the injured professional.

The difference between the revenue generated, business expenses including staff, and the salary paid to the professional should be the profits for the professional’s practice.

Professional medical practices can be valued in several ways. There are numerous sources that can provide data for calculating professional practice values. And there are niche appraisers specializing in valuing medical practices who may be beneficial in valuing unique medical practices.

A review of the 2025 BRG Business Reference Guide showed sections for Chiropractic Practices, Dental Practices, Medical Practices (Physicians), and Optometry Practices. All fit under the umbrella of Medical Practices. All show varying data for solo practices, those with multi professionals, and others specializing in areas of care.

The narrative for Medical Practices (physicians) states, “Prices widely vary depending on the practice specialty type, number of providers, services provided, and profitability. Smaller practices can easily range from 0.5 to 3.5 EBITDA or 15 to 80 percent of gross. A large practice with 5+ physicians can easily sell between 3.0 and 12+ EBITDA.”[4]

The report goes on to say, “Patients are under no obligation to remain with the practice after it is sold, so this can be a negative to a buyer and hurt the sales price/multiples but is alleviated somewhat by the length of time the physician has physically been practicing in that location, and the selling physician’s willingness to help transition practice.”[5]

Finally, the report noted, “For single-physician practices, the discretionary earnings typically must exceed the market wage for a physician with that specialty, or else the practice likely has little value.”[6]

Any expert attempting to calculate two losses must keep this information in mind. It may be the professional believes his or her practice has great value but only has the value of its net assets. Other professionals may be correct and making such an assessment of value is appropriate.

Once the future value of the practice has been determined, the value must be discounted to present value. This shows today’s value and should the defendant be found liable for causing the medical professional’s injury, that amount could be given as part of the economic damages. Any proceeds from the sale of the practice after the professional’s injury must be deducted from the present value of the going concern value. The results from this calculation provide for the second loss, the loss of business value.

Conclusion

Should a medical professional or any professional who owns and operates a business for providing his or her services be injured and unable to return to work in that career, an expert assigned to estimate the professional’s economic damages must determine if the assignment requires one loss calculation or two. If the plaintiff is claiming only lost earning capacity, W-2’s may provide the information needed for calculating the loss. The facts of the case may allow that W-2 wages and non-passive income provide the source for showing the income loss to the professional. Should both the wages and non-passive income be included in the lost earning capacity calculation, a business valuation for the practice should not be calculated as of the day of injury. This is because by including the non-passive income, the calculation included lost profits. In this situation, the professional may have been generating the business’ profits and therefore, the practice itself has little value. A valuation of the practice based on a date in the future (e.g., on the anticipated retirement of the professional) would be acceptable because it is capturing projected future profits for the practice on the date of retirement.

Should there be questions as to how much of the revenue and profits were generated by the professional and how much by his or her staff, separate calculations for wages and profits may be best. This would allow for valuing the business as of the owner’s retirement, determining its current present value and offsetting the present value with any proceeds from the sale of the practice’s assets including its book of business.

This second calculation will allow the injured professional to recoup lost earning capacity through retirement and the net present value for the sale of his practice. This allows an expert to estimate losses based on the professional career and execution of the exit plan anticipated by the professional prior to his or her injury.

[1] Robert Dunn, Recovery of Damages for Lost Profits, 6^th ed., vol. 1 (Westport, CT: Lawpress Corp., 2005), 247.

[2] Smith v. Corsat, 260 N.C. 92,96, 131 S.E.2d, 894, 897-98, (N.C. 1963.)

[3] U.S. Bureau of Labor Statistics, www.bls.gov, Medical Economics, www.medicaleconomics.com.

[4] Medical Practices (Physicians), 2025 BRG Business Reference Guide, 35^th Ed., Business Brokerage Press, 2025, p. 602.

[5] Ibid.

[6] Ibid.

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Allyn Needham, PhD, CEA, is a partner at Shipp Needham Economic Analysis, LLC, a Fort Worth-based litigation support consulting expert services and economic research firm. Prior to joining Shipp Needham Economic Analysis, he was in the banking, finance, and insurance industries for over 20 years. As an expert, he has testified on various matters relating to commercial damages, personal damages, business bankruptcy, and business valuation. Dr. Needham has published articles in the areas of financial and forensic economics, and provided continuing education presentations at professional economic, vocational rehabilitation, and bar association meetings. In 2021, Dr. Needham received a NACVA Outstanding Member Award. He is also a member of NACVA’s QuickRead Editorial Board.

Dr. Needham can be contacted at (817) 348-0213 or by e-mail to aneedham@shippneedham.com.