Buying a Medical Practice: A Diligence Worked Example

A gastroenterology practice with an ambulatory surgery center attached is a good business: real procedures, real cash flow, defensible demand. This is a worked example on one such target, where the numbers were fine and the risks lived in how they were described.

Finding 1: "diversified" payer mix that is 31% Medicare

The CIM called the payer mix well diversified. The payer schedule put a single government payer at just under a third of revenue. Government reimbursement is not diversification. It is a rate you do not set, exposed to policy you do not control. A third of revenue riding on it is a specific, nameable risk that deserves to be priced, not smoothed over with an adjective.

Finding 2: the comp add-back built on a below-market salary

The adjusted EBITDA leaned on a compensation add-back that normalized the owner-physician's salary down to a level that would not actually replace the work. It flatters EBITDA right up until you have to pay a real doctor to do the procedures. Add back the market cost of the clinical role, not the historical one, and rerun the number.

Finding 3: out-of-network durability

Part of the economics depended on out-of-network billing, whose durability is a bet on payer behavior rather than a given. It can be fine. It can also compress quickly if a payer changes policy. Either way it is an assumption to test, not to inherit.

The pattern

None of these is a reason to walk on its own. Together they move the price, which is what diligence is for: making sure the number reflects the business you are actually buying, not the one in the narrative. Explore this exact worked example, each claim traced to its page, in the sandbox.

Frequently asked questions

What is payer concentration and why does it matter? It is the share of revenue from a single payer, especially a government payer like Medicare. High concentration means your revenue depends on a reimbursement rate you do not control, so it is a specific risk to price rather than a detail to gloss over.

How do you value a doctor-owner's salary add-back? Use the market cost of replacing the clinical work, not the historical salary the owner chose to pay themselves. If the add-back assumes a below-market wage, it overstates the EBITDA you are buying. See quality of earnings vs an audit.

Is out-of-network revenue durable? Treat it as an assumption to test. It depends on payer behavior and policy, which can change, so model the business without relying on it staying flat.

See the cited, cite-or-cut diligence approach at Deal OS.