Practice Buyouts: What Should a Departing Physician Really Receive?

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The largest asset of a radiology practice is the cash value of its accounts receivable, and that valuation is prominent in the deferred-compensation package for a retiring member. The language in that section of the employment agreement generally stipulates a formula that is based on historic collection ratios taken from the practice’s receivables system in periods just before the separation date of the physician.

Often, these formulae were developed many years ago and can become inaccurate as the reimbursement climate changes. There are many cases where conflicts occur over the valuation method because the departing member considers the result suspect.

It is no longer necessary to estimate the cash value of accounts receivable. The data points that today’s receivables systems can produce enable a practice to pay out the exact contractual cash value over the months following separation. The models portrayed in this article are actual figures from a standard management report that the client receives every month, drawing from information produced by the billing vendor, Affiliated Professional Services, Inc, Wareham, Mass.

Table 1 shows a pattern of charges far enough in the past to help illustrate the concept of liquidation tracking. The lines represent data for a month of service (MOS). The columns portray the month of posting (MOP). For example, the charges attributed to July 2005 dates of service total $735,746, posted over the 12 months ending in June 2006. The charges billed in June 2006, regardless of MOS, totaled $1,066,087. The timetable required to post a month’s transactions is relevant to the valuation of receivables.

Table 2 has an identical format and data flow, depicting the cash receipts attributed to each MOS and when they are physically collected. The cash in each line is directly linked to the charges in Table 1. The largest percentage of cash is collected in the month immediately following the MOS. It takes more than 2 years to liquidate the charges fully for any given month. Table 4 will show the continued collections of cash for each MOS through the September 2007 billing cycle, but first, we need to illustrate some other benefits of receivables-system databases. There are three other data sets attributed to the receivables system; the models will not be illustrated for noncash credits other than bad debt, bad-debt credits, and refunds.

They flow exactly the same way. Knowing that it is possible to isolate all receivables transactions attributed to MOS according to subsequent posting cycles permits the tracking of changes in accounts receivable by MOS. Table 3 illustrates this.

Each line is its own universe, in which the cash and noncash credits are directly attributed to the charges generated by cases performed in the designated month. This simplified model is shown as if a practice had opened for business on July 1, 2005. By the end of June 30, 2006, the gross receivables balance had grown to $1,650,162.

Let us assume that a member of the practice leaves the group as of June 30, 2006, and is entitled to a proportionate interest in the cash value of the receivables. The remaining models will illustrate how to track the liquidation of the balance. Table 4 shows the flow of cash attributed to each MOS from July 2006 to September 2007.

Receipts continue for every MOS, although the trickle is quite small for the oldest cycles. The bottom of the model shows both the totals collected in each billing cycle and the cumulative cash. The ratios are not entirely accurate because there will still be monies collected beyond September 2007, but they will be insignificant. The last line is a suggested computation for those practices that prefer to settle with a former member quickly. The 6-month actual cash is multiplied by a factor intended to simulate the total cash ultimately collected. Universally, practices collect over 90% of receivable cash value in the first 6 months. In this instance the 6-month cash is 93.74% of all cash collected through September 2007; the factor is 1/0.9374=1.0668. The factor would be derived from back testing the patterns of earlier cash flows because the receivables system enables a practice to examine receivables liquidations over any range of time. By agreement of the practice and departing member, the total cash value of the receivables is capped at 100+% of the actual 6-month collections and this figure is used to settle up the remainder of the deferred compensation.