2501 town mountain road asheville, nc 28804 town mountain road asheville, nc 28804 october 16, 2012

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  • 2501 Town Mountain Road

    Asheville, NC 28804

    October 16, 2012 Xxxxxxx Xxxxxx Xxxx Xxxxxxxxx xx Xxxxxxxx Xxxxxxxxxxx Xxxxxxx Xxxxx Xxxxxx xx Xxxxxx xx Xxxxxx X Xxxxxxx, XX xxxxx Dear Xx. Xxxxxx: In accordance with your request, we have reviewed the profit-and-loss statements of Xxxx X. Xxxxxxx, MD (Subject Practice), xxx xx Xxxxxx, Xxxxxxx, XX xxxxx as well as other pertinent statistical data and information in order to determine the enterprise value of the aforementioned internal medical practice. We have given careful consideration to the practice-specific and macroeconomic risk factors that affect value and, it is our opinion that, as of December 31, 2011, the range of the debt-free enterprise value of the Subject Practice is four hundred twenty-five thousand dollars ($425,000) to five hundred ten thousand dollars ($510,000). The former is the most conservative enterprise value; the latter, the most assertive. Four hundred seventy-five thousand dollars ($475,000) is the most realistic. The enterprise value of the Subject Practice does not include the value of the accounts receivable. The accounts receivable should be valued separately. We hereby certify, to the best of our knowledge and belief, that the statements of fact contained in this report are true and correct, and this report has been prepared in conformity with the Uniform Standards of Professional Appraisal Practice of The Appraisal Foundation and the Principles of Appraisal Practice and Code of Ethics of the American Society of Appraisers. Sincerely, Practice Valuation Group, LLC

    David J. Shuffler Vincent M. Brinly Director of Client Services Director of Valuation Services DJS/h

  • Xxxx X. Xxxxxxx, MD

    xxx xx Xxxxxx

    Xxxxxxx, XX xxxxx

    December 31, 2011

  • 1





    Revenue Ruling 59-60 6

    Standard of Value 8

    Method of Appraisal 9



    Fair Market Value 12

    Break Even Point 13




  • 2


    Date of Valuation: December 31, 2011

    Standard of Value: Fair Market Value.

    Purpose of Valuation: Practice Valuation Group, LLC (Appraiser) has been engaged by Xxxxxxx Xxxxx Xxxxxx (Client) to appraise Xxxx X. Xxxxxxx, MD (Subject Practice) for the purpose of the acquisition of the Subject Practice.

    Description of Subject Practice: The Subject Practice is a well established, internal medicine practice whose productivity exceeds comparable practices in the Medical Group Management Association 2011 Report Based on 2010 Data. Fiscal 2010 gross physician charges exceed the median gross fee- for- service charges per full time equivalent (FTE) physician in the MGMA Cost Survey for Single-Specialty Practices with Fewer Than Three FTE (Aggregate MD-Owned and Hospital Owned): 2011 Report Based on 2010 Data. MGMA Primary Care Xxxx X. Xxxxxxx, MD

    1 Median

    Gross Physician Charges per FTE $1,108,047 $1,046,141

    NOTE 1: Fiscal 2010, 1.0 FTE.

    Fiscal 2011 collections exceed the 90

    th percentile of collections for physician charges per

    full time equivalent (FTE) physician in the MGMA Physician Compensation and Production Survey for Internal Medicine-General: 2011 Report Based on 2010 Data. MGMA 2011 Xxxx X. Xxxxxxx, MD

    1 Report

    Collections per Full Time (FTE) Physician $714,514 $584,827 NOTE 1: Clinical focus: Internal Medicine, 80%; Infectious Disease, 20%.

    The following table indicates the mix of services rendered:

    Examination, Re-examination, Office Visits 95% Hospital Admissions, Follow-up Care 4% Hospital Consultations 1%

    At the present time, the active patient population including hospital patients numbers approximately 6,700; the total number of patient charts, 8,031. The ratio of active patients to the total patient population, 83.4%, is strong and exceeds comparable practices.

  • 3

    Form 1065 U.S. Return of Partnership Income for the fiscal years ended December 31, 2009, December 31, 2010, and December 31, 2011 prepared by xxxxxx xxxxxxxx, XXX, xxx Xxxxxx, Xxxxxxxx, XX XXXXX indicates the Subject Practice generated the following collections. Production and Contractual Disallowances were provided by the Subject Practice. CONTRACTUAL YEAR ENDED PRODUCTION DISALLOWANCES COLLECTIONS 12/31/09 NA NA $844,507 12/31/10 NA NA $879,227 12/31/11 $1,108,047 $347,903 $714,514 The following table summarizes fiscal operating performance of the Subject Practice:

    $000s) 12/31/11 % 12/31/111 %

    Production $1,108,047 NA $1,108,047 NA

    Contractual Disallowances $347,903 31.4 $347,903 31.4

    Total Income Collected $714,514 100.0 $714,514 100.0

    Total Practice Expenses $332,599 46.5 $336,346 47.1

    Gross Practice Income $381,915 53.5 $378,168


    EBITDA $396,746 55.5 $161,1372 22.6

    NOTE 1: Normalized Statement of Revenue and Expense. NOTE 2: Normalized EBITDA after Staff Salary: Xxxx X. Xxxxxxx, MD, $213,354.

    Normalized practice overhead expense ratios, in particular Staff Payroll and Rent, lag the MGMA Cost Survey for Single Specialty Practices with Fewer Than Three FTE, (Aggregate MD-Owned and Hospital Owned) Median: 2011 Report based on 2010 data. Professional compensation is on par with the survey median. Normalized fiscal 2011 EBITDA is above average. MGMA Primary Care Xxxx X. Xxxxxxx, MD Median Practice Overhead Expense Ratio 47.1% 55.9% Cost of Clinical Supplies 10.8% 5.1% Staff Payroll 12.0% 24.2% Rent 4.9% 7.9% Insurance 3.3% 2.1% Non-Primary Expenses 16.1% 16.6%

  • 4

    Although the payer profile is not available, management reports indicate the Subject Practice contracts with third party payers such AARP Heath Care Options, AETNA, Bakers Life and Casualty, CIGNA PPO, Horizon, XXXX XX, GHI XXX, XX Blue Shield, Oxford Health PLA, Qualcare, United Healthcare, GEICO et cetera.

    The Subject Practice is an in- network as well as out-of-network provider that does not contract with any capitation MCOs. A current, but undated Accounts Receivable Activity Report indicates that gross accounts receivable were $303,000. The following table compares the accounts receivable aging of the Subject Practice with the MGMA Cost Survey for Single Specialty Practices with Fewer Than Three FTE, (Aggregate MD-Owned and Hospital Owned) Median: 2011 Report based on 2010 data. MGMA Primary Care Xxxx X. Xxxxxxx, MD Median Accounts Receivable Aging


    Current 24.8% 60.8% 30 Days 16.8% 12.0% 60 Days 6.9% 6.0% 90 Days 5.0% 4.6% 120 Days Plus 46.5% 10.8%

    NOTE 1: It is not known whether accounts receivable have been adjusted for non-qualifying charges. The fiscal 2011 gross collection ratio, 64.5%, is on par with MGMA Cost Survey Median of 64.9% while the adjusted collection ratio, 94.0%, lags the survey median of 98.3%. Contractual disallowances, 31.4%, are on par with the MGMA benchmark, 31.9%. Accounts receivable management is sub-par. It is apparent the Subject Practice possesses the internal and external dynamics to drive it to higher levels of production, gross practice income and EBITDA. The socio-economic profile of the primary catchment area, Xxxxxxxx and its Xxxxxx County environs is strong; patient demographics are excellent. The secondary catchment area, which extends into Xxxxxx and Xxxxxxx County as well as Metropolitan Xxx Xxxx and Xxxxxxxx, is wide ranging. Maldistribution is evident. The Xxxxxxx physician to population ratio, 138.6 doctors per 100,000, is at a low level compared to the United States ratio of 220.5 per 100,000. The clinical focus and service mix show the scope of the Subject Practice. The active patient population is sizable. The ratio of active patients to the total population is strong. Referral patterns are robust. Existing patients account for 45% of new patient referrals; internal and external marketing, 35%; MCOs, 15% with the hospital emergency room and area physicians generating the balance, 5%.

  • 5

    Patient service capacity is marked by an outbound specialty referral network, extensive patient services hours and the credentials of Doctor xxxxxxx, which are formidable and also extend the catchment area. Xxxxx Xxxxx, MD, Gastroenterology; Xxxx X. Xxxxxxx, MD et al, OBGYN; Xxxxxxxx X. Xxxxx, MD, Cardiology, Xxxxxxx Xxxxx, MD Oncology/Hematology; Xxxxxx X. Xxxxx, MD, General Surgeon are the five most active doctor referents of the Subject Practice. Malpractice and workers compensation claim history is excellent. However, despite the strong above mentioned practice-specific economic factors, fiscal 2010 collections trend down 18.7% and lag fiscal 2008 collections by 15.3%. A number of practice-specific and macroeconomic risk factors combine to hold back production and challenge the future earning capacity of the Subject Practice: patient load, accounts receivable management, expense management and patient service capacity. Patient load is sluggish. New patient acquisition is stagnant. Hospital in-patient census is on the wane. Accounts receivable management is sub-par and restricts collections. Although practice expe


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