Given the continued flurry of activity in hospital-physician financial arrangements and increased enforcement activity, hospital system CEOs and in-house and outside counsel all have a vested interest in getting optimal value from the working relationship between the health care valuation analyst and legal counsel.
The attorney and valuation firm must work together efficiently and effectively to get the deal completed timely and within applicable regulatory restrictions. To maximize the value of this relationship, communication and setting reasonable expectations is almost always the key to ensure the work product and conclusions are accurate and compliant.
Therefore, the initial planning stage of the transaction—during the process of engaging the valuation firm—is an important time to minimize confusion and regulatory risk by effectively communicating on several key decision points. It is important that key parties involved in the valuation—C-level executive of the party securing the valuation (client), attorney and valuation analyst—come together on the front end in an initial conversation to address critical items including:
- Purpose and scope of the valuation
- Standard of value to be used during the valuation process
- How to structure and preserve attorney/client privilege if necessary
- Clarification of the deal structure
Purpose and Scope of the Valuation
Determining whether a valuation is necessary and how and by whom it will be used is the vital first step to ensuring your business transaction or arrangement will be supportable by a competent work product. Many think of the valuation as support for fair market value of a transaction for regulatory compliance purposes. There are other reasons for conducting a valuation, including the following:
- Determine what may or may not be included as part of the transaction or arrangement
- Establish parameters in negotiating a possible transaction or arrangement
- Provide pre-transaction due diligence analysis for one or more parties
In establishing the scope of the project, the client, legal counsel, and the valuation analyst may agree to an appraisal, an engagement that yields an opinion of value. Alternatively, something less in scope, such as a calculation of value, based on agreed-upon valuation approaches and methods, yields a calculated value bearing less assurance by the valuation firm.
Ensuring that client, counsel, and valuation analyst are on the same page with respect to the purpose and scope of the valuation helps avoid misunderstandings that could lead to later problems.
Standard of Value
The all-important standard of value is generally the Stark law definition of fair market value in transactions involving physicians with the ability to refer Stark-proscribed services, while Internal Revenue Service requirements for FMV and reasonable compensation are also in play with tax-exempt organizations. Nevertheless, coming to consensus on the applicable definition(s) of fair market value during the engagement of the valuation firm is better done at the outset to minimize the chance of disagreement further into the process.
Structure and Preserve Attorney-client Privilege
During early conversations involving executives, counsel, and the analyst, it's important to determine if the engagement of the valuation firm will be subject to attorney-client privilege. Communicating counsel’s preferences and procedures necessary to preserve the privilege are essential at this point, and making clear this distinction on the front end will mitigate confusion and reduce risk.
Clarification of Deal Structure
Determining the structure of the deal is a complex exercise and benefits greatly from clear and open communication among client, valuation analyst, and attorney. Accurate and detailed information about the parties involved; how patient care fees will be billed and the flow of funds among the entities; and assets or transaction components necessary to facilitate a complete understanding will aid in the valuation analyst's effectiveness. The analyst can also serve a role in deal planning, such as when ancillary service lines are purchased from a physician group practice.
Scrutiny of hospital-physician financial relationships is on the rise, and establishing effective ongoing communications between attorney, valuation firm, and client at the beginning and throughout the course of the valuation engagement will help ensure the project stays on track, minimize misunderstandings, and manage expectations, yielding the best value from the relationship between lawyer and appraiser.
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