Practice valuation. Coffee Healthcare Associates (CHA) wants to expand its network of providers in the northwest section of the city to build its referral base for its new ambulatory surgery center. A well-respected group of three pain management physicians and one nurse practitioner have expressed interest in joining forces with CHA, but only if they can get guaranteed salaries for at least three years. Their collections have been dropping recently due to poor follow-up on denials and accounts receivable, the current secretary/ receptionist is retiring, and they are ready to negotiate. The provider group has offered the following information on initial compensation requirements and payor mix and volume:
Variable costs are estimated at $32 per visit, and the practice’s billing expense is 9 percent of collections.
While CHA acknowledgesthe current payor mix, its marketing director feelsthat Medicaid patients will make up a much higher proportion of patients, one more closely matching the network’s payor mix. Those proportions are: commercial, 45%; Medicare, 33%; Medicaid, 20%; and self-pay and other, 1% each. Additionally, due to past experience, CHA believes that overall volume will drop by 10% once the providers receive guaranteed income, despite their insistence otherwise. Last, CHA expects the providers’ compensation to increase by 5 percent per year in accordance with historical network increases.
The table below shows expected reimbursements per visit over the next three years. CHA’s billing expense is 9% of collections. How would CHA fare each year under this acquisition?