As millions of American homeowners know, the housing market crash was fueled by inflated home values and bank loans that were high above the equity or actual value of “underwater” homes. According to Trisha Lotzer, JD., health-care attorney and CEO of Physis, Inc., a similar threat for banks, borrowers and owners of many of the nation’s medical, dental, optometry and veterinary practices must be averted.
Like residential real estate, medical practices may be marketed and sold by brokers. Brokers in the business of selling medical practices commonly charge 7-12% commission. The commission alone can add $80,000 to $2,000,000 to the purchase price, depending on the size of the facility–and drive up the bank note accordingly.
Like real estate agents, the job of the practice broker is to get the seller the highest selling price possible. Unlike real estate agents, however, brokers are often the only ones who value the practices they have for sale–giving them a built in incentive to inflate the value of practices and increase their commission. Ross Landreth, MBA, explains that the problem occurs when a practice is arbitrarily valued, purchased and financed at $1,500,000, but only has an actual fair market value (per USPAP approved valuation standards) of $850,000. This could mean that the practice does not cash-flow at $1,500,00 and that the new purchasers would have to raise the price of services in order to maintain profitability and pay back the bank note. This increase in the cost of health care does not increase the earnings of the practice owners or physicians but is passed along to patients and insurance providers.
Practice brokers often rely on the recent sale price of one practice in a particular speciality or location as the basis for assigning a value for other practices in that area. So, even if the broker resists the temptation to increase the selling price to increase the commission, the inflated value of one practice perpetuates the cycle. Thus, eventually, higher health care costs are necessary in all practices in the region in order to make them profitable enough to enable the owners to pay back the bank loans on the collectively inflated prices.
Changes quietly went into effect this month that may require those applying for SBA loans to submit an independent valuation.