Using financial ratios to assess physician practices

Purchasing physician practices has become commonplace in the health care environment today. The most commonly used method to evaluate a physician's practice is the medical practice assessment. Although assessments include examining revenues, expenses, staffing ratios, collection ratios and other pertinent statistics, one of the often overlooked financial areas is the balance sheet. Evaluating a business, such as a medical practice, requires a thorough examination of the total financial picture including assets, liabilities, owner's equity or net worth, and the relationship of all the variables to each other. Ratios put the numbers into perspective by creating relationships between the balance sheet variables of assets, liabilities and owner's equity, and key income statement components of revenues, expenses and net income. As a result, ratios provide a unique perspective to the assessment process and enable a more complete analysis. This article examines the types and uses of ratios to assist physicians, managers, and hospital executives to better evaluate the financial viability of a physician's solo or group practice.