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1996 EO CPE Text

Q. VALUATION OF MEDICAL PRACTICES

by Charles F. Kaiser and Amy Henchey

1. Introduction This article updates an article in the 1995 CPE text, at pp. 162-81, on the valuation of medical practices. Part 2 explains why exempt hospitals are acquiring physician practices. Part 3 provides an introduction to methodologies for valuing business enterprises such as physician practices. Part 4 explains the cost approach to the valuation of a medical practice. In Part 5, the market approach is discussed. Finally, Part 6 provides an in-depth discussion of the income approach to valuing a medical practice. Part 6 also discusses an "allocation" method to business enterprise valuations which combines elements of the other approaches and avoids their major drawbacks. 2. Integrated Health Care Structures A. Background The cost of health care affects everyone. Most people in the United States pay a significant amount of their income, directly and indirectly, for health care. Individuals pay directly for physician and hospital services and health care insurance. Indirectly, third parties (such as taxpayers) pay for health care by funding social programs such as Medicare, Medicaid, and medical research. In recent years, health care costs have consumed increasingly greater portions of individual and government wealth. The Health Care Financing Administration (HCFA) estimates that in 1993, national health expenditures were $940 billion, or 14 percent of the gross national product. HCFA projects that if the health care system is not significantly reformed, per capita health expenditures could exceed $4,000 in 1995 and $6,100 in the year 2000. Spiraling increases in health care costs have spawned innovative solutions to reduce the price, increase the quality, enhance the efficiency, and improve the availability of medical services. The integration of hospitals and physicians into single organizations with the common goal of benefiting the community is part of this...

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