United Health Services Corporation (UHSC) has been in an attempt to grow its market share in the Northern and Central Oklahoma health services market with its main strategy being the acquisition of geographically well-placed primary care practices. After a few not so-successful acquisitions of small one-physician clinics and a financially successful but unfulfilling acquisition of a large practice, UHSC changed its acquisition strategy to multi-physician clinics that were not so large but also not small and in this line is where the corporation considered the takeover of Sooner Clinics which will be analyzed in this study.
For UHSC to acquire Sooner Clinics it will be analyzing data from the clinics in the following criteria; adequate patient volume for the physicians in the clinics, a viable payer mix from the clinic’s customers, and the productivity of physicians. In addition to this, UHSC will evaluate the clinics’ financial performance and also other qualitative factors such as customer service levels, customer loyalty, community relations, quality improvement and even the organization’s culture.
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To begin the evaluation, UHSC can look at the patient volume for the physicians at Sooner Clinics and compare them to data from other primary care practices in the region. Looking at Exhibit 4.1, one can easily note that the number of patients visiting the clinics per FTE physicians was the lowest among the five primary care practices evaluated. Sooner Clinics’ physicians had a patient volume of 15 nearly equivalent to that of Alvarez Family Health which is a one-physician practice and much less than the 21 patients seen by doctors at the Wilson Internal Medicine practice. This means that there is more room for growth and additional patient visits at Sooner Clinics which is a positive thing for UHSC as they consider the acquisition. It has also been established that Sooner Clinic’s patient volume can grow by more than 50% without the addition of any extra personnel or facilities making it an even more attractive acquisition.
The payer mix at Sooner Clinics seems favorable for UHSC with the less profitable Medicare and Medicaid accounting for only 30% of the payer mix. Insurance and out-of-pocket cover the bulk of the payer mix at 70% (Exhibit 4.2). Insurance, which has been determined to be a more favorable payment option for most healthcare providers accounted for 52% from this 70% figure ( Paolucci, 2010). This means UHSC is assured of a good revenue stream from the insurance companies in addition to the out-of-pocket revenues they get which sometimes help in the daily operations of the practice.
The productivity of the physicians is also a matter of importance for UHSC since practices with less productive physicians usually present more room for improvement and therefore growth which is what the acquiring corporation would desire ( Marcinko, 2010). The fact that two of the physicians at Sooner Clinics are the founders who are keener on retiring in the near future means that their productivity has limiting the growth of the clinics. This could be also be an incentive for UHSC to complete the acquisition knowing that in a few years these two physicians will retire making room for younger more productive physicians which is good for business.
The financial performance of Sooner Clinics would also have to be evaluated to validate its acquisition. As estimated by Heidi, the expected growth rate for the long term would be the same as that of the other practices evaluated in the same area at 2%. The short term growth rate would however differ depending on productivity of the physicians. Sooner Clinics had a low level of productivity compared to the other clinics but very similar to Alvarez Family Health and it would be okay to assume that their growth rates would also be similar given their levels of productivity therefore a short term growth rate of 5% could also be applied on Sooner Clinics. This is an attractive growth rate to UHSC considering that Heidi also believed there was room for better coding and documentation, improved revenue cycle management and an updated chargemaster.
For the discounted cash flow approach, one would first have to find the estimated required rate of return. Also referred to as the discount rate, it is usually calculated as the sum of the safe rate, the equity risk premium, the risk premium attached to size of company and the premium for the amount of risk that is associated with the investment ( Cleverly W. & Cleverly J, 2017). Safe rate would be equal to the yield on long term-treasury bonds which stood at 4% while the equity risk premium stood at 5% and represented the premium on the average-risk common stock investment. Discount rate would be 4% plus 5% multiplied by a factor of 2.1 derived from a similar factor used to get the price for the Alvarez Family Health Practice. Discount rate would be (5+4)*2 = 18. Through Exhibit 4.6 we see that UHSC should pay a figure in the range of $5,407,465.05 for Sooner Clinics.
References
Cleverly W. & Cleverly J. (2017). Essentials of Health Care Finance, Jones & Bartlett Learning,
Marcinko D. (2010). The Business of Medical Practice: Transformational Health 2.0 Skills for Doctors, Third Edition, Springer Publishing Company,
Paolucci, F. (2010). Health Care Financing and Insurance: Options for Design, Springer Science & Business Media,
