The Four Factors That Define IPA Fair Market Value
By Bruce Krider, MHA, American Healthcare Appraisal
Why these metrics provide the clearest, most reliable indication of long‑term economic value
Independent Practice Associations (IPAs) operate in a complex, performance‑sensitive environment. While dozens of variables can influence financial outcomes, only a small set consistently predicts long‑term value. These four factors form the backbone of any defensible Income Approach and explain the majority of variation in IPA fair market value.
1. Future Cash Flow From Capitation
Capitation revenue is the foundation of IPA economics. Because payments are made on a per‑member‑per‑month basis, the combination of membership size, risk score, and PMPM rates determines the scale and stability of future cash flows.
Why It Matters
Predictable, recurring revenue
Directly tied to membership and acuity
Strong indicator of long‑term financial performance
Key Data Sources
Monthly capitation reports
Contracts and rate sheets
RAF/acuity reports
Historical membership files
2. Medical Loss Ratio (MLR) Performance
MLR reflects how effectively the IPA manages medical costs relative to capitation revenue. A stable, favorable MLR signals disciplined utilization management and predictable earnings.
Why It Matters
Determines retained earnings
Indicates strength of care management
Reduces actuarial and financial volatility
Key Data Sources
Payor MLR reports
Risk pool settlement statements
Claims extracts (if delegated)
Actuarial IBNR reports
3. Delegated Function Capability and Efficiency
Delegated functions—utilization management, claims processing, credentialing, quality reporting—are the operational engine of a risk‑bearing organization. Efficient delegation reduces administrative cost, improves compliance, and enhances the IPA’s ability to manage medical risk.
Why It Matters
Direct impact on operating margin
Strong predictor of compliance and stability
Influences both cost structure and quality outcomes
Key Data Sources
Delegation agreements
MSO financial statements
Claims turnaround reports
UM and quality dashboards
4. Surplus and Deficit Patterns
Historical surplus or deficit is the clearest indicator of whether the IPA consistently manages risk. Surpluses support higher valuations; deficits signal structural issues that depress future earnings.
Why It Matters
Reveals true economic performance
Shows how the IPA performs across populations and years
Influences discount rates and valuation confidence
Key Data Sources
Annual risk pool settlement reports
Financial statements
Stop‑loss reports
Why These Four Factors Matter Most
These drivers rise above all others because they are:
Directly tied to future cash flows
Supported by verifiable, auditable data
Predictive of long‑term performance
Central to the Income Approach, the dominant valuation method for IPAs
Together, they provide the clearest, most defensible foundation for determining IPA fair market value.