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Mac Thornton, general counsel to the Department of Health and Human Services’ (HHS) Office of Inspector General (OIG), is warning hospitals that just because they can’t effectively manage the physician practices they acquired in the mid-to-late 1990s does not mean they can simply turn those practices back over to physicians.
A few years ago, hospitals were acquiring physician practices, sometimes with "pumped up valuations for intangibles" such as good will or the value of patient records, Thornton told attorneys at the Practicing Lawyers Institute in New York City April 26. "A lot of them apparently paid too much, and now they want to get out," he adds.
Hospitals should view the risk of getting out of these agreements this way, Thornton says: If you paid X dollars seven years ago, and you sell the practice back for one-tenth of that, or even give it back for free, how is your valuation going to look?
Thornton says the principle here is the same as it was during the acquisition. That is, when you are dealing with a system with referral sources, the dealings must be based on "legitimate fair-market value." The challenge is how to price what the hospital will accept from the doctors to buy the practice back.
Thornton offers a couple of hints. First, hospitals should use the same method that was used in the acquisition and maybe even the same valuation expert. "If you paid a lot seven years ago for patient records or the good will patients have for the physician practice, you are going to have to pay for them now," he warns. "If you don’t, someone like myself is going to ask about the valuation."
Those patient records and the good will of patients still have value, even if the hospital running the practice is losing money, Thornton asserts. "What was good in 1994 has to be good now," he cautions.