News Item
"The CPA Journal" featured Pace University’s Lubin School of Business Professor Yigal Rechtman's piece "Understanding Electronic Medical Records"
"The CPA Journal" featured Pace University’s Lubin School of Business Professor Yigal Rechtman's piece "Understanding Electronic Medical Records"
Yigal M. Rechtman, CPA, CFE, CITP, CISM is a partner at RSZ Forensic Associates and an adjunct professor at Pace University’s Lubin School of Business—New York Campus. He is also a member of The CPA Journal Editorial Advisory Board.
Reliability and Integrity as Critical Components of Medical Practice Valuation, Profitability, and Compliance
The sale and merger of medical practices into larger medical groups or hospital networks is an ongoing trend that began almost a decade ago. A key component of these transactions has been the valuation of the target medical practice; the purchase price is often calculated through a combination of the quality of earnings, operational efficiency, and a regulatory compliance risk assessment. All these components are strongly tied to the quality of the electronic medical records (EMR) system, which makes assessing EMR’s reliability critical to proper valuation of the practice and a strong indicator of the degree of risk to the acquirer. Such risk is elevated when the EMR does not comport with acceptable documentation requirements for Medicare, Medicaid, and private payors, as well as for applicable privacy, cybersecurity, and business records requirements. This article provides a framework for analysis of one of the most significant aspects of medical practice value: the practice’s treatment data.
Valuation of Medical Practices
A medical practice is only as valuable as its records say it is. The acquirer’s challenge is how to assess that value during a due diligence process pursuant to a purchase. The common answer is somewhat related to the asking price; more importantly, however, the overall value depends on the EMR. Acquirers should look to their valuation and transaction teams—CPAs, attorneys, medical consultants, and systems analysts—to do a deep dive and provide answers that will yield a transaction in which all these viewpoints are satisfied.
To those unfamiliar with the technical and functional aspects of EMRs as elements of value, valuation can seem like an exercise fraught with peril. Overvaluation is possible because of underrating of risk; such risk is present when EMR quality is excluded from due diligence, and this is increasingly material for the parties to such a transaction. Across the healthcare industry, aggregate impact grows because, for example, the American Medical Association estimates that between 2012 and 2016 the number of doctor-owners has reduced from 53% to 47%, while hospital ownership of medical practices has risen (Carol K. Kane, “Policy Research Perspectives Updated Data on Physician Practice Arrangements: Physician Ownership Drops below 50 Percent,” AMA, 2017, http://bit.ly/2HsMNwM). Although the rate of change from 2012 to 2016 is not fast, the drop of ownership below 50% is notable; in other words, fewer than half of the medical doctor population now owns their own practices. Some statistics put the healthcare market concentration at 90% in 2016, signifying a high acquisition rate of primary care physician and other medical practices (Brent D. Fulton, “Health Care Market Concentration Trends in The United States: Evidence and Policy Responses,” Health Affairs, September 2017, http://bit.ly/2WazAkn).
Mergers and acquisitions are expected to increase even more due to a retiring work force (Robin Brooks, What Will Happen to Financial Markets When the Baby Boomers Retire, IMF working paper, 2000, http://bit.ly/2VCzP32), increasing regulations, and the stagnation of doctors’ salaries and operating expenses. These factors incentivize the integration of medical practices into larger networks in order to increase profitability. While exact statistics on the volume of the most recent sales of medical practices are elusive, anecdotal indicators appear repeatedly as a bellwether of rising sales.
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