Consider a small U.S. town that doesn't have local access to a cardiologist. The community can't support one on a full-time basis, so the hospital brings in a cardiologist twice a month. The physician pays to use the hospital's facilities, equipment, support staff and nurses during those two days. Patients are able to access the specialized care they need without having to travel, and the physician pays only for the space and support that he or she needs.
Sounds straightforward, doesn't it. Now tell me—is this a lease or a timeshare arrangement?
In this example, the physician and the hospital have entered into a timeshare arrangement. While some might mistakenly consider it a lease, a lease transfers dominion and control of the property to the lessee for at least a continuous one-year term. A timeshare does not transfer dominion or control, but grants a privilege to use space, equipment and staff during the allotted time schedule under the agreement.
Timeshare arrangements often involve physicians or physician organizations. One of the keys to satisfying government regulations and making such timeshare arrangements work is the ability to assess the fair market value of the agreement. Generally, there are three approaches to determining fair market value:
- Cost-based approach
- Market-based approach
- Income-based approach
However, the cost-based and market-based approaches are most commonly relied upon in reaching a conclusion. The income-based approach is used more to evaluate the reasonableness of each party's return on the arrangement rather than as the primary approach to determine value.
The market-based approach compares the subject arrangement to similar arrangements in the market. One common method of obtaining market data for physician arrangements is referencing market surveys. Data of this type, however, is not always readily available for timeshares. Unlike compensation for physician services, no surveys report market rates or arrangement details for timeshare arrangements.
In the cardiology example above, you will likely be unable to locate information on comparable arrangements, as this information is not publicly reported. However, you may be able to obtain market rates for similar arrangements, such as a timeshare arrangement for use of a CT and related space, personnel, and supplies.
Locating market data for similar timeshare arrangements is not the only challenge to applying a market-based approach. While the fee associated with a timeshare arrangement may be available, details concerning time blocks, personnel and supplies provided may not be reported. When details are available, they may highlight differences in the arrangements, such as the make and model of equipment. You must account for all differences in market arrangements when using the market data to determine FMV for a timeshare arrangement.
The cost-based approach determines the value for the arrangement based on the cost to replace or replicate the arrangement with a similar arrangement. As with the market-based approach, you must identify the specifics of the arrangement. Considerations in this approach may include:
- Services and assets provided
- Applicable overhead
- Personnel qualifications
- Type, make, model and capabilities of specialized equipment
- Supplies required
- Total operating hours
- Service capacity
You can obtain data on the cost of each component from various sources, including market surveys, equipment vendors, financial statements, and other appraisers. In addition, you must consider the rate of return that should be generated by each component as well as by the arrangement in total.
As you determine FMV, you may find one method is more relevant and reliable than others. The market-based approach reflects a return expected in the market for similar arrangements, but you may be unable to find data for comparison. The cost-based approach considers all the specific costs required to replace the subject arrangement with a similar arrangement, but it may be difficult to estimate the return for specific components or services provided.
The HORNE Healthcare team is ready to answer questions or help you with these valuations. Just give us a call to start the conversation.
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