Changing Reimbursement Models & Their Impact on Practice Valuation.

By Bruce G. Krider, MHA, American Healthcare Appraisal (ahca.com)

Introduction

The reimbursement environment for medical practices and clinics is undergoing a profound shift. For decades, the dominant model in the United States was fee-for-service (FFS) — providers were paid for each service, procedure or visit. Increasingly, payers (including Centers for Medicare & Medicaid Services / CMS) and private insurers are moving toward value-based payment (VBP) and other alternative reimbursement models that emphasize outcomes, efficiency and cost containment. Commonwealth Fund+2PMC+2

For those charged with valuing medical practices, clinics or hospitals (or advising owners/planners), this shift matters—and can significantly affect how value is determined, the risk profile of future cash flows, exit strategies and market multiples. In short: reimbursement model changes are not just operational—they are valuation drivers.

Reimbursement Models: Key Trends & Drivers

Fee-for-Service (FFS)

Under FFS, providers are reimbursed for each discrete service rendered. The incentive structure emphasizes volume: more visits, more procedures, more reimbursable events. Commonwealth Fund+1
Pros:

· Relatively predictable revenue streams where volumes are stable

· Familiar business model for many practices
Cons:

· Vulnerable to reimbursement cuts, regulatory changes, and payer pressure on “unnecessary” services

· The market is increasingly shifting away from purely volume-based models

Value-Based Payment (VBP) & Alternative Models

VBP encompasses a range of arrangements where reimbursement is tied to quality measures, outcomes, cost efficiency, or shared savings rather than strictly volume. Commonwealth Fund+2McKinsey & Company+2 Examples include bundled payments, shared savings models, risk‐based contracts and capitation.
Key attributes:

· Providers may assume financial risk (e.g., if costs exceed benchmarks)

· Incentive to coordinate care, reduce unnecessary procedures, optimize outcomes PMC+1

· More upfront investment often required (data analytics, care coordination infrastructure, patient-risk stratification) EY
Recent market data suggest the value-based care landscape is expanding rapidly: for example, the global market for value-based health care was estimated at US $12.2 billion in 2023 and projected to reach US $43.4 billion by 2031. Kaufman Rossin Multisite Website
CMS’s value-based programs further reinforce the trend, including the Physician Value‐Based Modifier, Readmissions Reduction Program and others. Centers for Medicare & Medicaid Services

Why This Matters for Practice & Clinic Valuation

When valuing a medical practice, clinic or a hospital outpatient entity, the reimbursement model influences several valuation levers:

1. Predictability of Future Cash Flows:

o Under FFS, future revenues may depend heavily on volume and unit pricing (which can be more volatile).

o Under VBP/risk contracts, cash flows may be less volume‐driven and more outcome/efficiency‐driven—introducing different risk-/reward profiles.

o If a practice has already shifted to or is operating under significant value-based arrangements, its future cash flow forecast may be more stable (if well managed) or more uncertain (if infrastructure is weak).

2. Risk Adjustments / Discount Rates:

o A practice heavily dependent on FFS with minimal risk adjustments might attract a lower discount rate (assuming revenue stability) but is vulnerable to reimbursement reform.

o A practice transitioning into VBP with strong capabilities may warrant a lower risk premium (if the shift is well executed) — but if the shift is incomplete or poorly managed, risk is higher.

3. Growth Potential / Multiple Implications:

o Payers and investors often value practices with robust value-based care capabilities (analytics, care management, coordination) at higher multiples — especially if they are attractive in risk‐based arrangements. For example, one study estimated that value-based care platforms could command enterprise valuations reaching US $1 trillion when scaled. McKinsey & Company

o Conversely, practices that lag in infrastructure, payer alignment or transition readiness may trade at a discount relative to peers.

4. Operational & Investment Considerations:

o As practices shift to VBP models, they may need to invest in infrastructure (EHR/IT, care coordination teams, analytics) — such investments affect near-term cash flow and require evaluation in valuation models.

o The transition period may depress margins (as indicated in recent analyst reports) before benefits accrue. EY

5. Exit Strategy / Buyer Appetite:

o Buyers (e.g., private equity, strategic acquirers, hospital systems) increasingly favour practices with demonstrated value-based care competencies. Evidence suggests capital inflows into value-based care models rose more than four-fold from 2019 to 2021. McKinsey & Company

o For sellers, demonstrating alignment with value-based models may improve buyer interest and valuation outcomes.

Key Valuation Implications & Considerations for Appraisers

When confronting a practice valuation in this environment, consider the following:

1. Understand the Payer/Contract Mix

· What percentage of revenues is derived from traditional FFS vs value-based/risk contracts?

· Are there shared-savings arrangements, downside risk, capitation or bundled payments?

· What is the maturity of those contracts (e.g., early stage vs seasoned)?

· What is the quality of payer relationships and alignment of incentives?

2. Forecasting & Adjustments

· When forecasting future earnings, consider whether the practice is in full FFS mode, in transition, or fully in a value-based model.

· If transitioning, factor in ramp-up costs, potential initial margin compression, and a timeline for normalization.

· Adjust earnings for one-time costs/investments needed to support value-based operations.

3. Risk & Discount Rate/Multiple Adjustments

· Practices exposed to high downside risk (for example in capitation models) may warrant higher discount rates.

· Conversely, practices with strong value-based care infrastructure and payer alignment may justify lower risk premium and higher multiples.

· Consider market comparables: Are other practices in the market being valued at premiums for value-based readiness?

4. Capabilities & Infrastructure Assessment

· Evaluate the organization’s capabilities: care coordination, analytics, quality-measurement, risk stratification.

· Infrastructure deficits may represent a discount factor.

· Owner/physician dependency matters: If value-based care relies heavily on one physician or owner, risk is increased.

5. Transition Risk & Timing

· The timing of adoption matters: if the practice is early in the transition, risk of margin drag is higher.

· Consider scenario modelling: e.g., base case (successful transition), downside (delays/cost overruns), upside (early success).

· Document assumptions clearly for buyers/sellers.

6. Market Demand & Buyer Trends

· Buyer appetite for practices aligned with value-based care is increasing. Practices with scalable value-based models may attract strategic buyers seeking to integrate into risk-bearing platforms.

· Consider exit horizon: Will the buyer accept a transition phase or seek a practice already optimized for value‐based contracting?

Case Example (Illustrative)

Clinic A is a 10-physician primary care group that has historically operated under FFS and managed commercial and Medicare fee schedules. Recently, it has signed a bundled-payment contract covering a defined patient population, with upside and downside risk. The group invested in a care-coordination team and analytics platform.

Valuation implications:

· Forecasted revenue under FFS was $10 M with EBITDA margin 18%.

· Under the new model, near-term margin may dip to 14% for 1–2 years due to investments and risk exposure, then ramp to 20%+ as efficiencies are realized.

· The appraiser may model a transition period, adjust discount rate upward for early-stage risk, then apply a higher multiple or lower discount rate upon stabilization.

· Buyers may value the group at a premium because they see it as future-proofed and well-positioned for risk-based platforms.

Recommendations for Practice Owners & Valuators

· For Owners: Start planning early. Investing in value-based capabilities (analytics, care coordination, quality tracking) can enhance future valuation. Understand your payer contracts and position for risk-based arrangements.

· For Valuators/Appraisers: Ask detailed questions about contract types, risk levels, joint‐venture arrangements, infrastructure investments and transition timelines. Clearly document assumptions around transition risk and multiple-adjustment factors.

· For Both: Monitor the marketplace — buyer preferences are shifting. Practices that align with value‐based care models may gain valuation advantage; those lagging may face discounts or longer hold times.

Conclusion

The shift from fee-for-service toward value-based reimbursement is not a distant future—it is happening now and reshaping the valuation landscape for medical practices, clinics and hospital-affiliated entities. Understanding how reimbursement models affect cash-flow risk, growth potential, buyer demand and valuation multiples is essential for both owners and advisors. Practicing and appraising with insight into these dynamics will lead to more accurate valuations and better strategic positioning.