How Today’s Inflationary Environment Impacts Practice Valuations

Today’s operating environment has never been more difficult for healthcare practice owners. Inflation can lower the value of a healthcare practice when operating costs rise faster than the fees, reimbursement, and patient spending that cover them. Buyers value a practice on its trailing earnings, so every month that gap persists shows up in your valuation, whether or not you plan to sell.

Where the United States economy stands today:

• The Federal Reserve raised interest rates on September 16 for the first time since 2023, to a range of 3.75% to 4.00%
• Headline inflation ran 3.4% in August
• Energy prices were up 16.3% from a year earlier
• Consumers expect prices to rise 4.6% over the next twelve months

Healthcare holds up well in a downturn, oftentimes being quoted as “recession resistant.” Inflation is a different kind of pressure. For practices that have navigated the squeeze well, you’re positioned to benefit from your practice’s performance, if it can be sustained through a sale/partnership process. 

Your Costs Move Faster Than Your Fees

Every medical specialty feels this differently. Let’s take dentistry as an example: According to the ADA Health Policy Institute, dental staff wages and dental supply prices have each climbed 23% since January 2021, while reimbursement averaged across payers rose just 19%. Reimbursement-based practices can’t simply raise prices to keep pace.

Cash-pay practices have more pricing flexibility but a different exposure. With the personal savings rate at 3.0% and consumer sentiment at a four-month low, elective treatment is often the first thing a patient postpones. A med spa or cosmetic practice may not see cancellations right away. It sees longer gaps between visits and smaller treatment plans.   Insurance-based practices (dental or otherwise) are at a disadvantage because they don’t have the ability to simply raise fees; rather, they are subject to trying to negotiate higher reimbursement, which is no easy task.  

How Inflation Can Impact the Value of Your Medical Practice 

Buyers value your practice on a multiple of trailing earnings, or EBITDA. Inflation has the ability to pressure every part of that equation.

• Earnings: For illustration, on a practice producing $3 million in revenue, a two-point margin drop removes $60,000 of EBITDA, and that loss is multiplied at the closing table.
• The multiple: Most buyers finance acquisitions with debt. Higher interest rates and wider lending spreads raise their cost of capital, which limits the percent of cash a seller will receive at close.
• The structure: When capital gets expensive, buyers lean on earnouts, rollover equity, and seller notes to bridge the gap. The headline enterprise value number may look similar on paper, but more risk shifts to you.

The Good News for Strong Practices

If your practice has held steady or kept growing through the last few years, you’re in rare air. Protecting margins while costs climbed is incredibly difficult, and buyers notice and reward those businesses.

Capital hasn’t left healthcare. It has become more selective, and buyers are actively looking for great assets: practices with stable margins, diversified revenue, and dependable staffing. When fewer practices clear that bar, the ones that do stand out to owners in a strong position to negotiate.

The key is using that position while you have it.

The Comfort Trap

My colleague Alex Cherniavsky wrote recently about sale timing, and one line stuck with me: “The trap is comfort, not crisis. Owners rarely wait to sell because things are bad. They wait because last year was strong and next year feels like it could be better.”

Inflation makes that instinct expensive. A strong trailing year is exactly what buyers pay for, and by the time a margin squeeze is obvious in your financials, it’s already in the buyer’s model and negatively impacting your valuation.

The clock matters more than most owners realize. Buyers typically expect a selling doctor to stay on for several years after the transaction, so if you want to be done at 62, the decision point arrives well before 62. Wait too long and, as Alex puts it, you get less money, more years required post sale, and worse terms.

Deciding to sell doesn’t stop the clock, either. Once you go to market, you still have to run the practice at peak performance. Before closing, buyers will ask you to “roll your financials forward” (use a more recent trailing 12 months) so they’re underwriting a recent snapshot of the business. If performance has slipped, then you should expect a re-trade. Some buyers will hold the difference in escrow and give you a set window to recover. Others will re-rack the numbers entirely. Either way, the deal you agreed to at LOI (Letter of Intent) is not the deal you close.

The months after you decide to sell matter as much as the years before. We always encourage our clients to keep producing, keep your team focused, and run the practice as if you’ll own it for another decade.

Waiting Is Still a Decision

None of this means every owner should sell tomorrow, but it does mean you should be informed. A few places to start:

• Know what your healthcare practice is worth today
• Review your margin trend over the last three years, not just revenue
• Identify which service lines rely on discretionary patient spending
• Compare fee schedule and payer contract growth against cost growth
• If you want to keep practicing and retain upside, explore partial-sale options like rollover or joint venture equity

You can’t control the CPI or the Fed. You can control whether this decision gets made on your terms or the market’s. Your life’s work deserves the first option.