The Crimson Press Curriculum Center

First Page and the Assignment Questions:
Barbara Franklin, the Vice President for Physician Practice Management (PPM) Incorporated, was tasked to evaluate the purchase of a primary care physician practice called Stonehill Family Practice. In evaluating the practice, Barbara has decided to use two valuation approaches: discounted flow approach (DCF) and multiple cash flow approach. When using the DCF approach Barbara plans to use a discount rate of 15%. Exhibit 1 presents the financial and volume assumptions for estimating the two purchase prices under the DCF and multiple approaches. The multiple cash flow will be based on earnings before interest, taxes, and depreciation for the first projected year of operation. Recently in this market area, family practices have been selling at a multiple of fifteen times earnings before interest, taxes, and depreciation. As part of PPM evaluation policy, Barbara will also evaluate other financial and operational factors to assist her evaluating the operation of this practice.

BACKGROUND OF PPM

PPM is a publicly traded company generating over $500 million a year in revenues. Over the past three years it has acquired more than 1,500 practices nationwide ranging from large medical groups to small family practices. When PPM buys a physician practice, it brings in its own management team to perform daily business services, such as staffing, billing, accounting, scheduling and negotiating managed care as well as other insurance contracts. Depending upon the capabilities of a practice’s information system, PPM may be required to install its own information system.

BACKGROUND OF STONEHILL FAMILY PRACTICE

Stonehill Family Practice is a sole proprietorship, established in 1975, by Doctor Robert Gill. The practice treats patients by appointments, walk-in basis, and urgent treatment cases. The practice is conveniently located in a large bedroom community, 30 miles outside a major metropolitan area. The building itself is located off a major thoroughfare and is within easy access to the interstate highway. The building is 4,000 square feet and provides family care and urgent care services. The building is owned by the practice. The practice participates in Medicare but not Medicaid. The hours of operation are Monday through Friday 9:00 a.m. to 5:30 p.m. Specific services include basic x-ray, laboratory, minor emergency treatment, initial splinting and casting, and preventative health maintenance services. The practice does not manage obstetrical patients and refers all newly pregnant women to local obstetricians. Last year, Stonehill entered into an one-year lease agreement with Diagnostic, Inc. Diagnostic, Inc. provides mobile diagnostic testing services, such as EMG’s and nerve conduction studies. Diagnostic pays Stonehill an annual rental fee of $3,000.

Professional Staff

Dr. Gill is 63 years of age and currently works 60 hours per week. He is the sole owner of the practice. Dr. Keller is 40 years of age and currently works 50 hours per week. Both physicians are board-certified. Dr. Keller’s

Assignment

Estimate the value of the practice using both the DCF and multiple approaches. DCF is based on projected values from 1998 to 2002.
Identify other approaches to estimate market value.
Identify other financial factors that potentially may influence the value of practice.
Develop a set of unresolved questions for Dr. Gill that will help assess how the practice operates.
What would you pay for this practice, given the DCF and multiple approaches and the strength and weaknesses of this practice