Independence is a financial decision

Transforming challenges into opportunities

Physician ownership fell from 60.1 percent in 2012 to 42.2 percent in 2024. Most of those practices did not leave independence for clinical reasons. They left because nobody could tell them what independence was worth.

Challenge

Dr. Okafor is the managing partner of a six physician specialty practice. A hospital system offered to acquire it and employ the group. The offer had a headline number and a five year term, and the partners had thirty days.

• No normalized earnings. The practice’s reported profit was whatever remained after partner compensation, which had been set by habit. Nobody knew what the practice earned as a business.
• Ancillary income unpriced. Imaging and in office procedures produced a meaningful share of profit. Under the offer that revenue moved to the system, and nothing in the headline number accounted for it.
• Compensation not compared like for like. The employment salary and the partner draw were being read as the same kind of number. One carries benefits, call obligations and productivity thresholds. The other does not.
• A deadline running. Thirty days to answer a question the partners had never had the reporting to ask.

Strategic response

The work was valuation and modeling. No position was taken on whether to sell.

• Profit by service line and by provider. Twelve months rebuilt so each line carried its own direct cost, and each physician’s contribution was visible against the overhead it consumed.
• Earnings normalized. Partner compensation replaced with market rate physician salaries, so what remained was the practice’s actual operating profit rather than a residual.
• The offer modeled over five years. Total compensation under employment against total partner economics under independence, with the ancillary income the system would absorb counted on the correct side.
• Retirement capacity measured. A cash balance plan modeled for the partner group, available in independence and not under employment, and sized to their ages and incomes.
• Reasonable compensation documented. The S corporation salary split tested and recorded, which the valuation depended on and which had never been substantiated.

Result

The partners made the decision. What changed was that they made it against numbers.

• A $1.9 million five year gap. Once ancillary income and benefits were priced on both sides, independence was worth that much more to the group over the term than the offer.
• $187,000 in deductible contributions. The cash balance plan in its first year, across the partner group, available only while the practice remains independent.
• A defensible compensation position. Salary split documented against comparable data, closing an exposure that had been open for years.
• Monthly reporting that continues. Profit by service line reported every month, so the next offer can be answered in a week rather than in thirty days.

Conclusion

The offer may still be the right answer one day, and if it comes back the group can now price it. What the practice did not do was accept or decline on instinct. This is what CFO work looks like at the moment a practice decides whether to remain a business or become a job.