Enterprises, Assets, and Services With the emergence of value-based reimbursement, such as accountable care organizations (ACOs), clinically integrated networks (CINs), and bundled payment models, which rely on achieving the “Triple Aim” of healthcare at lower cost, U.S. hospitals are increasingly looking to change how services are being delivered by seeking more collaborative relationships with physicians, including vertical integration strategies such as the acquisition of healthcare-related enterprises, assets, and services (e.g., physician practices), direct employment, co-management, and joint venture arrangements with physicians and other providers. This abridged article was the first in a series of articles that appear in The Value…
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CBO: Partial Repeal of ACA Could Lead to 18M People Losing Insurance Some 18 million people could lose health insurance in the first year after a partial repeal of the Affordable Care Act, and the number could grow to 32 million by 2026, according to a Congressional Budget Office report. However, Sen. Orrin Hatch, R-Utah, said the analysis represented “a one-sided hypothetical scenario” that did not account for reforms lawmakers could implement. To read the full article in The New York Times, click: Health Law Repeal Could Cost 18 Million Their Insurance, Study Finds.
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Why it Shouldn’t be A Dirty Word in the Valuation of Physician Practices The topic of goodwill in a physician practice acquisition continues to be hotly debated. There are very different viewpoints from reputable appraisers on how to value physician practices and whether hospitals can pay for goodwill in an acquisition. I often hear healthcare professionals involved in acquisitions say, “Hospitals can’t pay for goodwill.” However, there is no legal or financial reason why goodwill cannot be considered in a physician practice acquisition. This article discusses the merits of considering and including goodwill in the valuation of a physician practice.
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An Era of Reform—The Four Pillars, Volumes I and II Since 1950, the U.S. population has doubled from just more than 152 million to an estimated 320 million. In this same period, the average life expectancy has increased from approximately 68 years to over 78 years. This increased life expectancy and accompanying rise in the incidence and prevalence of diseases, conditions, and injuries is driving demand for healthcare services. Cost concerns and a rapidly evolving regulatory and legal environment have created new opportunities in healthcare consultancy for large and small firms. This two-volume set is designed to serve as a…
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Healthcare Costs for Large Companies Rose Slowly in 2015 Healthcare costs for large companies rose 3.2% in 2015, research by Aon Hewitt has found. It is the smallest increase since 1996, when Aon began tracking the data. However, the company predicts a 4.1% increase in 2016. David McCann discusses the findings. To find out more on this CFO article, click: Hike in Healthcare Costs Sinks to 20-Year Low.
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In Appraising Outpatient Enterprises Healthcare related outpatient enterprises provide services that do not require hospital admission and may be performed outside the premises of a hospital. Similar to valuation of any business, valuations of outpatient enterprises should include consideration of the three general approaches to valuation (i.e., the income approach, the market approach, and the asset/cost approach). The specific valuation methods selected under each engagement will be guided by the facts and circumstances surrounding the hypothetical transaction of the subject property interest (e.g., availability of data, nature of the current transactional marketplace). This article focuses on utilizing a market approach…
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An In-Depth Series on Healthcare Valuation This first installment will discuss Fair Market Value, the most prevalent standard of value in the healthcare industry, and why this is the required standard of value for most healthcare transactions. This article will also discuss the premise of value, which further defines the circumstances of the transaction, and how to determine which methods may be applicable to valuing an outpatient enterprise.
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Five Remaining Leading Misconceptions (Part II of II) The following discussion summarizes and responds to common misconceptions many analysts have with regard to the valuation of healthcare entity property and/or services transfers. These analyst misconceptions typically involve a misunderstanding of one or more of the relevant regulatory provisions. These analyst misconceptions typically relate to an erroneous understanding that “the Service only accepts this” or “the Office of Inspector General doesn’t accept that.” These analyst common misconceptions are addressed from the perspective of the regulatory compliance of the valuation analysis. In Part II of II, the article covers the remaining five…
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Five of the 10 Leading Misconceptions (Part I of II) The following discussion summarizes and responds to common misconceptions that many analysts have with regard to the valuation of healthcare entity property and/or services transfers. These analyst misconceptions typically involve a misunderstanding of one or more of the relevant regulatory provisions. These analyst misconceptions typically relate to an erroneous understanding that “the Service only accepts this” or “the Office of Inspector General doesn’t accept that.” These analyst common misconceptions are addressed from the perspective of the regulatory compliance of the valuation analysis. In Part I of II, the article covers…
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Healthcare Valuation Considerations when Valuing Outpatient Services With healthcare evolving, how can practitioners project the future benefit stream related to outpatient services? In this article, the authors discuss the use of hypothetical and extraordinary assumptions. They argue that use of these assumptions requires careful consideration as they can have a significant effect on value. In addition, the valuation analyst must adhere to the disclosure requirements set forth in USPAP which requires the valuation analyst to clearly and accurately disclose all assumptions used in the assignment
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The Structure of Physician Compensation The structure of compensation for hospital/health-system employed physicians is a constant struggle for administrators with the rise of physician practice acquisitions and subsequent employment of these physicians. Based on estimates from Jackson Healthcare1, approximately 35 percent of all physicians are employed by a hospital/health-system. As a result, the issue of how to structure and benchmark physician compensation has emerged as a leading topic among both valuators and hospital/health-system administrators. In this article, the author discusses the pros and cons of the work RVU compensation model, the most popular model.
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In this second part of a two-part series, the authors discuss why and when the highest and best use standard should apply.
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Traditional valuation methodologies have relied upon the analysis of historical accounting and other data as predictive of future performance and value. However, this may not hold true with every economy, industry, or even every enterprise within an industry, over time. For example, the turbulent status of the healthcare industry over the last five decades, since the passage of Medicare in the 1960s, has introduced intervening events and circumstances that have had a dramatic effect on the revenue, expense, and subsequent net economic benefit stream of enterprises operating in the healthcare marketplace. Accordingly, the “road map of historical performance” of healthcare…
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Merger and acquisition activity in the healthcare industry has increased over the past few years. The playbook used in the past has shifted. In this article the authors share their views on whether and when to announce the deal, the importance of conducting pre-deal due diligence, appearing before the Board of Directors, understanding the constituents that are needed to succeed, and conducting pre-market due diligence in anticipation of Federal Trade Commission scrutiny.
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Valuators Take Note Fair market value is key to compliance with both the Stark Law and the Anti-Kickback Statue. Solid, well-reasoned valuations can be essential in establishing compliant arrangements, and these must consider practice losses as applicable. In this article, Lynn Gordon, Esq., states that it is “prudent to have a valuation in place that supports compensation as fair market value,” especially if the practice area incurs losses. Gordon adds this is especially important in “high-stakes transactions likely to draw attention (e.g., transactions with significant inpatient care reimbursement such as cardiology and orthopedic surgery).” Gordon advises, “valuator[s] should work together…
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Insights from the Analysis of Mega Transactions By scrutinizing data from large transactions, valuation experts can glean important information and insights into current healthcare valuations. In this article, Collin McDermott and Bridget Triepke summarize SEC filings, review the implied valuation of large healthcare mergers—based on the purchase price—and provide a detailed review of the fairness opinions provided by investment banks to both Vanguard’s and Health Management Associates board of directors and shareholders. Specifically, the authors detail the results and key assumptions utilized by the investment banks for the GPCM, M&A Method, and Discounted Cash Flow Method.
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On September 18, 2014, the Internal Revenue Service (IRS) issued two new notices—one proposing changes for when a taxpayer can revoke healthcare coverage in a cafeteria plan and enroll in a plan on the health insurance marketplace exchanges; the second notice proposes an approach for how to measure the lookback period for determining who is a fulltime employee when an employee changes positions within the same employer group. Cafeteria Plan Elections In Notice 2014-55, the IRS proposed amendments to Regs. Sec. 1.125-4 to permit employees to revoke their election of employer-sponsored healthcare coverage under a cafeteria plan and purchase…
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Approaches and Methods Used to Realize Income from Licensing IP Assets This article discusses valuation topics related to a subset of intangible assets which are most applicable to healthcare businesses. Business valuation professionals are often engaged to value specific intangible assets, either as part of a detailed business valuation or after a transaction has been completed. When valuing healthcare-oriented service businesses, it is common for a business’s intangible value to be far greater than the value of its fixed tangible assets. Intellectual property (IP) can be licensed and provide a source of income.
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A standard distinct from the fair market value standard The fair market value is distinct from the commercial reasonableness standard. The article highlights how these standards are applied in a healthcare transaction and why it is important to distinguish these standards.
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Compensation for PCPs is increasing The increasing supply shortage of primary care physicians (PCPs) will have a significant impact on physician compensation. In turn; this will have an equally powerful effect on the valuation of PCP practices.