VALUATION OF HOSPITALS AND MEDICAL CLINICS

When evaluating a company using the Discounted Cash Flow methodology, regardless of the sector of activity or size, one of the main challenges is the clear understanding, both from a managerial and accounting point of view, of how its sales are converted into cash inflows and, analogously, how its costs and expenses are converted into cash outflows. For various businesses, such as Information Technology companies that sell their software in the model of Software as a Service (SaaS), cash inflows and outflows are relatively simple. Cash inflows are usually monthly and recurring, accompanied by invoices issued a few days in advance. Its costs and expenses, mainly represented by salaries and the hiring of outsourced services, also have a high recurrence and little volatility. The financial cycle is also predictable, since almost all receipts and payments occur within 30 days after the event. Other segments are more complex, such as the Hospitals and Medical Clinics segment. In these cases, where the operating and financial cycles are not recurring and have a certain volatility, before the drafting of Valuation or even the analysis of accounting information, a deep immersion in the company's management and operational information is necessary. Although each business is unique and has its own rules and peculiarities, some practices are common in small and medium-sized companies in the Hospitals and Medical Clinics segment. For having already participated in the preparation of several Valuations for the segment, it was possible to highlight the most common:

• Production Base: the Production Base represents the sum of all the procedures performed in a given time interval. The Production Base must include, at least, real data from the last twelve months of operation. Analyzing it, it is possible to identify the main procedures performed by the institution and estimate, for each of them, indicators such as: average price, fees paid to doctors, disbursements applied, etc.

The Production Base is obtained by crossing several management reports, issued by the management software used internally and through parallel controls carried out on Excel spreadsheets. Especially in less organized companies, without a structured controlling area, obtaining the Production Base is laborious and requires a lot of time from the managers of the evaluated company.

• Billing: Hospitals and Medical Clinics have, for the most part, contracts with Health Plans and Insurance Plans. They are responsible for originating most of the patients, their associates or associates, and then remunerating the companies. Each of these partners has an extensive list of protocols that must be followed for the invoicing of the procedures and for the subsequent issuance of the Service Invoice (NFS). These protocols are intended to guarantee Health Plans and Agreements that the procedures are being performed in accordance with the contract signed between the parties and in accordance with the Federal Council of Medicine (CFM). Billing, which generally comprises a set of procedures performed within a certain period, is sent to each partner. After verifying that all procedures comply with the protocols, the authorization to issue the NFS is released.
• Operational Glossaries: If the procedures performed by the Hospitals or Medical Clinics have not followed the protocols established by the partners, they are “summarized”. In other words, the company does not obtain authorization to issue the NFS and, consequently, will not receive payment for a procedure that has already been carried out. The reasons that originate the Glosas vary from internal errors in filling out and submitting forms to the absence of control at some stages of the procedures. The complexity and bureaucracy in the Billing and Prevention process of Glosas explains, in part, the large volume of employees in the areas of back office of companies in the health segment.
• Issuance of the Services Invoice: Hospitals and Medical Clinics issue the NFS only after reviewing the Billing by the Insurance Plan or Health Plan. Therefore, it is common to not have the Sales Returns rubric in the Income Statement for the Year (DRE) of companies in this segment. This peculiarity, resulting from the fact that the NFS was issued after Glosa, can lead to errors during the analyses and, consequently, in the financial projections.
• Receipt: once the NFS has been submitted, the Health Insurance Plans and Plans have a pre-established deadline to make the payment. This deadline, which depends on the negotiation of each company with its partner, varies between 30 and 120 days.
• Property Rental: it is very common that the properties where the Hospitals and Medical Clinics are located are owned by the company's partners and that there is no rental payment for the partners by the institution. In this situation, these “rental expenses” are not recorded with the DRE. Therefore, it is necessary to add a Rental Expenses heading to the company's Management DRE, the amount of which must be estimated based on market information. This adjustment is essential to obtain the real profitability of the business.
• Members' Medical Fees: in the Hospitals and Medical Clinics segment, it is common for investment partners to be the doctors responsible for carrying out most of the procedures. These medical partners, although managerially compensated for their productivity, like any other professional in the segment, are not remunerated through service fees, but through Profit Distribution. Accounting, therefore, these costs are not found in the DRE.

It is essential that an adjustment be made to the Medical Fees rubric in the Management Income Statement, based on information collected in the Production Base, which is compared with the company's Profit Distribution.

• Individual Health Plans: there are some Health Plans and Agreements that directly remunerate professionals, and not companies, for carrying out the procedures. Thus, part of the procedures determined at the Hospital or Medical Clinic Production Base are not transformed into Billing for these companies. Since these procedures are carried out within institutions and they hold a percentage of the procedures performed, adjustments are made in order to incorporate non-accounting results into the Management Income Statement.

As it is not possible to find this billing in DRE accounting, much less the payment of these medical fees, there is a false impression that the institution is billing lower than expected, given the number of procedures performed. Therefore, in order to have the actual revenue of this Business, it is essential that there be a managerial adjustment in the Accounting Invoicing in order to incorporate this remunerated production by Health Plans for Individuals, as well as the inclusion of the payment of Medical Fees.

Article written by Henrique Porto - Partner of FC Partners

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