How to Evaluate Clinics with High Dependence on the Public Health System or Insurance Plans: Risks, Strategies, and Impacts on Valuation

Admin
Oct 13
3 min read

A Deep Analysis of How Revenue Concentration in Public Sources and Health Insurance Plans Can Distort a Clinic’s Value — and What to Do to Adjust the Valuation Realistically and Strategically

Introduction: The Real Value Lies in Diversification

Many medical and dental clinics in Brazil operate almost exclusively on revenues coming from the Public Health System (SUS) or private insurance operators. While this model ensures a high volume of appointments, it brings serious risks to the business — especially when it comes to valuation, the assessment of a company’s true market value.

Savvy investors and potential buyers know that revenue concentration equals vulnerability. A single contract change, payment delay, or disaccreditation can cause a clinic’s revenue to drop dramatically within weeks. For this reason, clinics that depend heavily on these sources must undergo a careful valuation adjustment process, taking into account simulations, risk exposure, and corrective measures.

The Risk of Concentration: Why It Devalues the Clinic

Revenue concentration occurs when more than 40% of monthly income comes from a single source. In the case of clinics that operate exclusively with SUS or specific insurance plans, this percentage can exceed 80%.

Example:Clinic X (Ophthalmology) performs 600 consultations per month, with 500 of them coming from the Vale Health Insurance plan. If this contract is suspended, the clinic immediately loses 83% of its revenue.

This kind of risk directly affects two key valuation factors:

Cash flow predictability: Investors value companies with stable and diversified income sources.
Operational risk: The higher the dependence on a single payer or contract, the greater the discount applied to valuation — whether through higher discount rates or lower EBITDA multiples.

Strategies to Adjust for Concentration Risk

The most common method to handle this adjustment is applying a specific risk discount to projected cash flow. Some key strategies include:

Increased discount rate: Raise the discount rate in the discounted cash flow (DCF) analysis by 1 to 3 percentage points to reflect the concentration risk.
More conservative multiples: If the clinic’s EBITDA is US$ 50,000/month and the market uses a 5× multiple, it may be reduced to 3× or 4× due to the high dependency risk.
Sensitivity analysis: Create multiple valuation scenarios to simulate different revenue loss percentages and their impacts on net profit and overall business value.

Valuation Simulation with Different Scenarios

Let’s consider a practical example of a clinic with the following data:

Monthly revenue: US$ 150,000
80% from insurance contracts, 20% from private patients
Average EBITDA: US$ 45,000
Market multiple: 5×

Scenario A – Ideal Situation (No Adjustments):Valuation = US$ 45,000 × 5 = US$ 225,000

Scenario B – 50% Loss of Insurance Contracts:Projected revenue drops to US$ 75,000New estimated EBITDA: US$ 20,000Adjusted multiple: 4×Adjusted Valuation = US$ 80,000

Result: The clinic loses 64% of its market value merely by facing the possibility of partial disaccreditation.

Corrective Actions: How to Prepare the Clinic for a Fair Valuation

1. Revenue Diversification

Develop or strengthen direct-to-patient services by introducing differentiated treatments or membership packages to reduce dependency on insurance operators.

2. Renegotiation with Insurance Providers

Review your portfolio of contracts and terminate or renegotiate less profitable or unstable agreements.

3. Subscription or Membership Models

Dental clinics, for instance, can create loyalty or benefits programs that generate predictable recurring revenue outside the insurance system.

4. Automation of Billing and Denial Management

Reducing claim denials and billing delays improves cash flow predictability and increases the perceived value of the operation.

5. Contractual and Succession Planning

Clinics with weak legal frameworks or informal contracts face higher disaccreditation risks. Strengthen your corporate governance and legal structure to ensure contract stability.

Conclusion: Realistic Valuation with Strategic Vision

The true value of a clinic lies not only in its current earnings but in its ability to sustain and grow profits over time. When a clinic’s revenue base is concentrated in a few contracts or public sources, its valuation must reflect this inherent risk. However, through proper simulations, diversification strategies, and financial restructuring, it’s possible to present a realistic and attractive valuation — for both sellers and investors seeking security and long-term returns.

For more information on how we can help your clinic or medical practice strengthen its financial position and prepare for valuation, get in touch with us today.