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4.5 Physician practice management companies
Publication date: 31 Mar 2023
us Health care guide
Physician practice management companies (PPMs) provide non-clinical practice management services to physician practices. In addition to the revenue recognition considerations discussed in HC 4.3.1.2, there are additional accounting considerations that should be considered for PPMs.
4.5.1 Consolidation guidance
Because PPMs are typically prohibited from outright ownership of physician practices, they will normally execute a long-term management services agreement under which the physicians convey rights to effective economic control of their practices to the PPM that are similar to those that would be obtained through outright ownership. When a PPM enters into a long-term management services agreement with a physician practice, the PPM first considers whether the Variable Interest Entities (VIE) subsections of ASC 810, Consolidation, apply. If so, the PPM applies that guidance in evaluating whether it should consolidate the physician practice. If the VIE guidance does not apply, the PPM assesses the need for consolidation in accordance with the provisions of the Consolidation of Entities Controlled by Contract subsections of ASC 810-10. A physician practice that is controlled by contract is typically a VIE. Refer to CG 7.4 for discussion of the control by contract guidance applicable to certain PPM arrangements.
4.5.2 Acquisition accounting considerations
If a PPM has entered into a long-term management services agreement with a physician practice that qualifies as a business under ASC 805-10-55 and under which the PPM is required to consolidate that physician practice, the transaction is a business combination that would be accounted for in accordance with ASC 805, Business Combinations.
If the criteria for consolidation are not met, the transaction is accounted for as an asset acquisition, with a significant portion of the cost of the acquisition likely allocated to intangible assets. In evaluating the appropriate amortization period for the intangible assets, the PPM should use the contract term as a starting point, but also consider factors inherent in the nature of the business that might indicate a shorter economic life. Those factors include:
- the unproven ability of a PPM and its new physician practice to perform under the terms of the services arrangement over an extended period;
- the uncertain continuity of revenues upon departure of key owner/physicians of the practice;
- the existence of short-term employment contracts with key owner/physicians; and
- the uncertain ability to withstand legal challenges related to the corporate practice of medicine.
When these factors are given appropriate consideration, it may be difficult to assert that the management arrangement with the physician practice will survive and provide a competitive advantage throughout the period of time indicated by the contract term. Therefore, use of a relatively short amortization period for the management services agreement intangible is generally appropriate.
4.5.3 Stock-based compensation
ASC 718-10-55-85A provides guidance on whether an employee of a physician practice should be considered an employee of the PPM for purposes of determining the appropriate method of accounting for that employee's stock-based compensation. An employee of a practice that is consolidated by the PPM should be considered an employee of the PPM for stock compensation purposes; an employee of a practice that is not consolidated by the PPM is not considered an employee of the PPM.
PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
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