As a healthcare appraiser, one question I have heard many times over the years is “do I need to get a valuation?” Typically, the primary goal of a healthcare appraisal is to demonstrate due diligence around fair market value (FMV), so the question may be better stated as “what constitutes adequate FMV due diligence when contracting with physicians?”. While there is no universal answer to this question, there are some points worth considering that should factor into the decision.
Flying “Under the Radar” is Not a Good Plan
One thing is clear to me, even in this day and age of aggressive regulatory enforcement, some organizations continue to fly under the radar regarding FMV. By that I mean they don’t perform any real due diligence relative to payments to physicians. To be fair, due diligence can take many forms and not all require a FMV appraisal, but on the other hand some approaches that are passed off as due diligence probably aren’t.
Arm’s Length Negotiation
I have seen some hospitals take the approach that if they “negotiate” with a physician or physician group a price for assets or services they have “negotiated an arm’s length transaction”…and thus arrived at fair market value. Maybe, but maybe not - at least probably not according to the Stark Law’s definition of an arm’s length transaction. Why? Primarily because there is generally a referral relationship that “taints” the transaction. Additionally, a single transacted price does not, in and of itself, support FMV.
Using a Survey Percentile
Some hospitals and legal counsel take the position that if compensation falls below a specified survey number then FMV is satisfied. Again maybe, maybe not. The percentile I hear used most often is MGMA’s 75th percentile (surprisingly, I have even heard of using the 90th!). There are problems with this logic, most notably that there is no statutory or market support for it. It simply defies basic statistics that paying a physician 75th percentile - which results in paying that physician an amount in excess of 75% of his or her peers - can always reflect FMV. If one has to rely on a survey percentile then the median probably makes more sense and may even have some basis in statutory logic if you look back at the now eliminated Stark Phase II FMV Safe Harbor. However, a much better analysis tries to match physician production with survey compensation. A “compensation calculator” type tool can be used internally for this purpose and can also act as a “trigger” mechanism to signal the need for an outside appraisal in situations that require further analysis.
Asset, Equity and Lease Transactions
In my opinion, few if any hospitals should ever attempt to internally determine the value of an operating business. First, buying another business (such as an ASC or physician practice) usually involves determining intangible value and/or the value of equipment. Few if any hospitals have the internal expertise to ascertain intangible value or assign fair market value to tangible assets. The same thing goes for arrangements that require determining the value of leases and management-type services (examples: block leases, per clicks and clinical co-management). To do so requires specific market knowledge regarding rates of return, real estate leasing rates, equipment appraisal, staffing costs and work flow allocation that few hospitals have the internal expertise to pull off. The risk of a misstep here is great. In these cases the risk typically outweighs the cost of a quality appraisal.
So do you need to get a third-party appraisal every time you contract with a physician? Probably not. However, “winging-it” won’t work either in the long run. The best approach usually involves a documented process that is followed for each contract. Using survey benchmarks is a good plan, but can also be a trap for the unwary and probably won’t work on complex comp deals. Use of compensation calculators can be cost effective and good first line tools, but don’t necessarily address all situations either. Some contracts are simply too complicated to tackle in-house and should always require third-party expertise. Knowing the correct balance is part of any good compliance plan.