American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)

Multidisciplinary Advanced Education in Healthcare Valuation Program

Business Valuation of
Healthcare Enterprises and
Services (and Interests Therein)
Presenters
Jason Ruchaber, CFA, ASA
BERKELEY RESEARCH GROUP, LLC

Todd A. Zigrang, MBA, MHA, FACHE, ASA

HEALTH CAPITAL CONSULTANTS, LLC

Thursday, March 10, 2016

1 to 3 PM EST
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Presenter Bio
Jason Ruchaber, CFA, ASA, is a Managing Director in Berkeley Research
Group’s Health Analytics Practice, where he provides analysis and
consultation to health lawyers, health systems, physicians, and other
healthcare investors regarding the valuation of healthcare related business
enterprises and intangible assets. His practice is primarily focused on the
determination of fair market value to support healthcare related transactions
and affiliations, intellectual property licensing, and shareholder
transactions. Jason has also been engaged to provide strategic value
consulting and to serve as an expert witness in commercial litigation and
marital dissolution.
Mr. Ruchaber has valued hundreds of entities throughout the U.S., including
hospitals, surgery centers, physician practices, imaging centers, pathology
labs, oncology centers, and home health agencies, among others. A
frequent speaker and author on healthcare valuation topics, Jason was a
contributor to the BVR/AHLA Guides to Healthcare Valuation and Healthcare
Industry Compensation and Valuation, and is a faculty member of the
Healthcare Special Interest Group of the American Society of Appraisers.

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Presenter Bio
Todd A. Zigrang, MBA, MHA, FACHE, ASA is the President of HEALTH CAPITAL
CONSULTANTS (HCC), where he focuses on the areas of valuation and financial analysis for
hospitals, physician practices, and other healthcare enterprises. Mr. Zigrang has over 20
years of experience providing valuation, financial, transaction and strategic advisory
services nationwide in over 1,000 transactions and joint ventures involving acute care
hospitals and health systems; physician practices; ambulatory surgery centers; diagnostic
imaging centers; accountable care organizations, managed care organizations, and other
third-party payors; dialysis centers; home health agencies; long-term care facilities; and,
numerous other ancillary healthcare service businesses. Mr. Zigrang is also considered an
expert in the field of healthcare compensation for physicians, executives and other
professionals.
Mr. Zigrang is the co-author of “The Adviser’s Guide to Healthcare – 2nd Edition” (AICPA,
2014), numerous chapters in legal treatises and anthologies, and peer-reviewed and
industry articles such as: The Accountant’s Business Manual (AICPA); Valuing Professional
Practices and Licenses (Aspen Publishers); Valuation Strategies; Business Appraisal
Practice; and, NACVA QuickRead. Additionally, Mr. Zigrang has served as faculty before
professional and trade associations such as the American Bar Association (ABA); the
National Association of Certified Valuators and Analysts (NACVA); the Physician Hospitals
of America (PHA); the Institute of Business Appraisers (IBA); the Healthcare Financial
Management Association (HFMA); and, the CPA Leadership Institute.

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

About the American Society of Appraisers

The American Society of Appraisers is an international organization of
appraisal professionals founded in 1952 to provide a comprehensive,
profession-wide organization for appraisers and valuation engineers.

As a comprehensive body, the ASA pursues accurate valuation for all

classes of property and hence examines multiple levels of economic
activity. As such, the ASA seeks to foster cooperation between
professionals of several valuation disciplines, and this spirit of
cooperation may help engender multidisciplinary approaches to the art
and science of valuation.

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Mission of the
Healthcare Special Interest Group (HSIG)
The Healthcare Special Interest Group (HSIG) is a Subcommittee of the
ASA’s International Education Committee and dedicated to the
advancement of multidisciplinary education in healthcare valuation.

HSIG views the field of healthcare valuation as a complex area affecting

multiple disciplines and requiring unique approaches for study and
solutions. At the same time, the field also holds much promise for those
willing to pursue new, multidisciplinary answers an this ever-changing
healthcare market environment.

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

ASA HSIG Members

Robert James Cimasi (Chair Emeritus) Edward G. Detwiler, ASA Claire H. Donias, FASA, PE
MHA, ASA, FRICS, MCBA, CVA, CM&AA President Palos Verdes, CA
Chief Executive Officer Edward G Detwiler & Associates Ltd.
HEALTH CAPITAL CONSULTANTS Park Ridge, IL Raymond D. Rath, ASA, CFA
St. Louis, MO Globalview Advisors
Charles Wilhoite, CPA, ASA, CMA Irvine, CA
Todd A. Zigrang (Chair) Managing Director
MBA, MHA, FACHE, ASA Willamette Management Associates Bridget Bourgeois
President Portland, OR Partner
HEALTH CAPITAL CONSULTANTS Ernst & Young
St. Louis, MO Atlanta, GA
Analee McClellan, ASA
Michael Baldwin, MAI, ASA Acanthus Appraisals and Consultation Services LLC
Executive Vice President Hacienda Heights, CA
Salus Valuation Group
Miami, FL Lez A. McKenzie, ASA
Director of Healthcare Valuations & Remarketing Services
Jason L. Ruchaber, CFA, ASA VCG Companies
Managing Director Scottsdale, AZ
Berkley Research Group
Denver, CO

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Multidisciplinary Advanced Education in

Healthcare Valuation Program Sponsors*

Additional sponsorship opportunities are available

Please visit the ASA HSIG webpage, or call (800) 272-8258

*Any opinions presented are those of the instructor(s) and do not represent the official position of the firms the individual
instructors represent, sponsors of the ASA Healthcare Special Interest Group’s Multidisciplinary Advanced Education in 7
Healthcare Program or the American Society of Appraisers.
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Overview of Presentation
• Healthcare Industry Overview
• Basic Valuation Tenets
• Valuation Approaches & Methods
• Inpatient Enterprises
• Outpatient Enterprises
• Other Healthcare Related Enterprises
• Healthcare Services
• Threshold of Commercial Reasonableness
• Concluding Remarks

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Section One
HEALTHCARE INDUSTRY OVERVIEW

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Four Pillars of the Healthcare Industry

• A useful conceptual framework for analyzing risk is the
“Four Pillars”
• Financial performance and economic condition of subject
enterprise should be carefully considered when
determining risk involved in investing in the enterprise
• Benchmarking is among the most useful tool in
determining the relative attributes of success/failure of
an enterprise
• Successful benchmarking will reveal both favorable and
unfavorable areas of an enterprises’ operations

“BV 201: Introduction to Business Valuation Part 1 Student Manual” By ASA, Reston, VA; 07/2010, p. 25.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Four Pillars of the Healthcare Industry

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 2. 11
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

The Four Pillars of the Healthcare Industry -

Regulatory
The ever-changing healthcare regulatory environment produces
uncertainty which increases the perception of risk to potential
healthcare investors
• For example, with the passage of the 2010 Patient Protection and Affordable
Care Act (ACA), i.e., “Obamacare,” providers are facing even more
extensive regulatory scrutiny
Among the valuation issues arising from these regulatory
concerns are:
• Establishing existence of certain tangible and intangible assets within a
healthcare enterprise
• Legal permissibility of acquiring healthcare assets
• Selection of applicable valuation methodologies, approaches and techniques
related to establishing Fair Market Value

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 262-264. 12
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

The Four Pillars of the Healthcare Industry

Reimbursement
• Most providers will receive reimbursements for their services
from third parties, including, but not limited to:
• Government agencies
• Commercial payors and insurance companies
• Employers
• Patients and their families
• The reimbursement levels set by federal and state government
payors often act as benchmarks for all reimbursement schemes
• Due to the volatile nature of reimbursement, there is an
increased level of perceived risk in healthcare investments

“Healthcare Valuation: Volume 1” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014,
pgs. 85-86. 13
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Annual Updates to the MPFS CF (CMS Final

Rule v Congressional Action), 1998-2014
A B C D
Physician Fee Schedule
Physician Fee Schedule Update
Year SGR Update After Congressional
Under CMS Final Rule
Actions
1998 1.50% 2.3% N/A
1999 0.00% 2.3% N/A
2000 3.00% 5.5% N/A
2001 5.60% 5.0% N/A
2002 5.60% -4.8% N/A
2003 7.60% -4.4% 1.6%
2004 7.40% -4.5% 1.5%
2005 4.30% 1.5% 1.5%
2006 1.70% -4.4% 0.0%
2007 2.00% -5.0% 0.0%
2008 -0.10% -10.1% 0.5%
2009 7.40% 1.1% 1.1%
2010 (Jan - May) 0.0%
-8.80% -21.2%
2010 (June-Dec) 2.2%
2011 -13.40% -24.9% 0.0%
2012 -16.90% -27.4% 0.0%
2013 -18.90% -27.0% 0.0%
2014 -16.7% -20.1% 0.5%
Of note is that the SGR (Column B) is used to determine the conversion factor, which is then used in the calculation of the
physician fee schedule update under the CMS Final Rule (Column C), however congressional action forgo these calculations
and simply established a physician fee schedule update (Column D).
MPFS CF = Medicare Physician Fee Schedule Conversion Factor

Sources: For all years, Federal Register, Medicare Program; Revisions to Payment Policies Under the Physician Fee Schedule,
Clinical Laboratory Fee Schedule & Other Revisions to part B for CY, Final Rule. “Protecting Access to Medicare Act of 2014”
National Conference of State Legislatures, April 15, 2014, http://www.ncsl.org/research/health/protecting-access-to-medicare-act-of-
2014.aspx (Accessed 10/14/14). Importantly, this law extends the 0.5% payment update until March 31, 2015.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

The Two Revenue Streams of Healthcare

Ancillary Services
Professional Component
& Technical Component
(wRVU)
(ASTC)

Medicare reimbursement for wRVUs has

Professional practice physician owners
been stagnant or decreasing for
have pursued supplementary profits via
physician professional fees since the
the ASTC revenue stream
1990s

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“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 87.
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

The Four Pillars of the Healthcare Industry

Competition
• The dynamic nature of the healthcare industry competitive
landscape leads to perceived investor uncertainty and risk
• For example:
• The ACA has several provisions that will likely affect competition
including:
• Establishing health insurance exchanges
• Average Whole Sale Price initiatives
• Competition between mid-level providers and physicians is likely to
increase, especially given that the growth in the supply of mid-level
providers has outpaced physician supply over the last 20 years

“Healthcare Valuation: Volume 1” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, pgs. 498-
499.
“
“The Complexities of Physician Supply and Demand: Projections Through 2025,” By Michael J. Dill and Edward S. Salsberg, Center for 16
Workforce Studies, Association of American Medical Colleges, November 2008, p. 65.
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

The Four Pillars of the Healthcare Industry

Technology
• Technology has a broad meaning when applied to
healthcare and can include the following:
• Tangible tools
• Pharmaceuticals
• Software that providers utilize during the provision of clinical
services and the management of patient records
• Procedures that constitute the standardized course of care

• Continuing technological advances may result in investor

uncertainty related to the level of economic benefit that
can be derived from the subject property

“Healthcare Valuation: Volume 1” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, pg. 531. 17
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

The Growing Importance of the

Healthcare Industry
$6,000

$5,000

$4,000
Dollars in Billions

$3,000

$2,000

$1,000

$0

National Health Expenditures as a Share of GDP

“National Health Expenditure Projections 2010-2020,” By Center for Medicare and Medicaid Services, June 29, 2009,
https://www.cms.gov/NationalHealthExpendData/downloads/proj2010.pdf (Accessed 10/27/2011). “National Health Expenditure Projections
2006-2021,” By Center for Medicare and Medicaid Services, https://www.cms.gov/NationalHealthExpendData/downloads/proj2010.pdf
(Accessed 9/17/2013).
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Illustrative Summary of Healthcare Transactions

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Subject Property Interest

Assets

Tangible Assets Intangible Assets

Tangible Tangible Intangible Intangible Personal Property

Real Personal Real
Property Property Property Payor or Client Intellectual Governance or
Regulatory or Technology- Goodwill
Related Property-Related Legal Structure
Legal-Related Related Intangible
Buildings Cash and Easements Intangible Assets Related Intangible Professional
Managed Care Intangible Assets Assets
Investments Assets /Personal
Agreements and
Land and Permits Clinical Goodwill
Provider Service Provider or
Land Accounts Practice Organizational Computerized Practice/
Agreements Medical Licenses
Improvements Receivable Leasehold Protocols and Documents Management Commercial
HMO Enrollment Treatment Plans Information Goodwill
Interests Income Certificates of
Lists Systems
Supplies & Copyrights Distribution Need
In-Place Plans
Drugs – Leases Human Capital- Medicare
Electronic
Trademarks and Medical Records
Consumables Related Intangible Right of First Certification
Zoning Trade names
and Inventory Assets Refusal Maintenance and
Held for Sale Waivers/ Patents Other
Covenants-Not- Support
Variances Employee and Certifications and
Trade Secrets or To-Compete Relationships
Provider Accreditations
Furniture, Use Rights Employee Other Know
How
Marketing and Financial or Patient-Related
Fixtures, and Agreements
Business Revenue Stream- Intangible Assets
Equipment Operations and Development
Trained and Related Intangible
Assembled Location Related Related Intangible Custodial
Intangible Assets Assets Rights to the
Leasehold Workforce In- Assets
Improvements Place Historical Patient Medical
Office Share
Information and Advertising Charts and
Non-Copyrighted Arrangements
Documentation Records
Litigation Policies and Franchise/
Procedures Supplier Licensing Management Patient Recall
Awards and
Contracts Agreements Service Lists
Liquidated Depth of Agreements
Damages Management Asset Joint Venture
Assemblage Alliances Financing
Factors and Agreements
Going Concern Financial
Value Derivatives

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Allocation of Healthcare Expenditures

Other
Physician/ Other Health Personal Rx Home
Hospital Care Clinical Health Drugs Health
Spending
31.6% Services Care 9.4% 2.8%
25.6%
20.2% 10.4%

*Note: Other Health Care Spending includes: dental services, other professional services, non-durable medical products, durable
medical equipment, research, public health activity, structures and equipment, administration and health insurance. Other Personal
Health Care includes: other health, residential and personal care, nursing care facilities and continuing care retirement communities.

Calculations using NHE data from Centers for Medicare and Medicaid Services, Office of the Actuary, National Health Statistics
Group, at http://www.cms.hhs.gov/NationalHealthExpendData/ (see Historical; National Health Expenditures by type of service and
source of funds, CY 1960-2012; file nhe2012.zip).
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Section Two
BASIC VALUATION TENETS

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Basic Valuation Tenets

Economic Principles
• Scarcity
• Our inability to satisfy all our wants
• Utility Theory
• Representation of a consumer’s ordinal preferences
• Principle of Substitution
• Individuals are willing to substitute goods of equal utility
• Principle of Diminishing Returns
• Utility increases with each additional unit of good consumed
at a decreasing rate

“Economics” By Michael Parkin, Pearson Addison Wellesly, 2008, p. 2.

“Microeconomics with Calculus, Second Edition” By Brian R. Binger and Elizabeth Hoffman, Addison Wesley Longman, Inc. 1998, p. 109.
“Appraisal and Valuation: An Interdisciplinary Approach.” Richard Rickert, Ph.D. (1987), American Society of Appraisers, International
Valuation Sciences Institute, Washington, D.C.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Basic Valuation Tenets

Economic Principles
• Expected Utility
• Ability to optimize utility is limited by access to pertinent information
• Principle of Anticipation
• Economic actors make their decisions based on future expectations
• Forward Looking Value and Discounting
• All value can be concluded as a forward looking expectation of utility
• Future expected benefits are discounted to reflect the relative
uncertainty of actually receiving the benefit

“Economics” By Michael Parkin, Pearson Addison Wellesly, 2008, p. 2.

“Microeconomics with Calculus, Second Edition” By Brian R. Binger and Elizabeth Hoffman, Addison Wesley Longman, Inc. 1998, p. 109.
“Appraisal and Valuation: An Interdisciplinary Approach.” Richard Rickert, Ph.D. (1987), American Society of Appraisers, International Valuation
Sciences Institute, Washington, D.C.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

The Value Pyramid

““Healthcare Valuation: Volume 2” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc.,
2014, p. 15-16. 28
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Buy or Build – Value as “Incremental Benefit”

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“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014.
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Standard of Value vs. Premise of Value

Standard of Value Premise of Value
“Value to Whom?” “Value Under What Further
Defining Circumstances?”
• Outlines the type of value to be • Further defines the Standard of
determined Value to be used and under
which a valuation is conducted
• Standards of Value include: • Defines the hypothetical terms of
• Fair Market Value (FMV) the sale
• Fair Value • Value in Use
• Investment (Strategic) Value • Value in Exchange
• Value as a mass assemblage of
• Intrinsic (Fundamental)
assets in place
Value • Value as an orderly disposition
• Value as a forced liquidation

“BV 201: Introduction to Business Valuation Part 1 Student Manual” By ASA, Reston, VA; 07/2010, p. 15 -18.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Definitions of Fair Market Value

IRS
The IRS regulations define reasonable compensation as "…amount that would ordinarily be paid for like services
by the enterprises (Whether taxable or tax-exempt) under like circumstances."
And defines the standard of Fair Market Value as the "…price at which property or the right to use property would
change hands between a willing buyer and a willing seller, neither being under any compulsion to buy, sell, or
transfer property or the right to use property, and both having reasonable knowledge of relevant facts."
Anti-Kickback Statute
"…fair market value in arms-length transactions…not determined in a manner that takes into account the volume
or value of any referrals or business otherwise generated between the parties for which payment may be made in
whole or in part under Medicare or a State health care program."
Stark Law
"Fair market value means the value in arm's-length transactions, consistent with the general market value.
General market value' means the price that an asset would bring as the result of bona fide bargaining between
well-informed buyers and sellers who are not otherwise in a position to generate business for the other party, or
the compensation that would be included in a service agreement as the result of bona fide bargaining between
well-informed parties to the agreement who are not otherwise in a position to generate business for the other
party, on the date of acquisition of the asset or at the time of the service agreement." [emphasis added]

“Excess Benefit Transaction” 26 CFR 53.4958-4 (April 1, 2012). "Program Integrity; Medicare and State Health Care Programs; Permissive
Exclusions," 42 C.F.R. §1001.952(b)(5), (2009), p. 735. "Medicare and Medicaid Programs; Physicians' Referrals to Health Care Entities with
Which They Have Financial Relationships (Phase III): Final Rule" Federal Register Vol. 72, No. 171 (September 5, 2007), p. 51081. The Stark
Law (as stated in the U.S. code) also equates the terms Fair Market Value and General Market Value, to wit: “The term ‘fair market value’ means
the value in arms length transactions, consistent with the general market value.” From “Limitation on Certain Physician Referrals” 42 U.S.C.
§1395nn (April 4, 2012).
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Fair Market Value

IRS Exempt Organizations Law & Regulations

• “Three Legged Stool” – if one leg falls, the stool
collapses
• Community Benefit/Charitable Purpose
• Legally Permissible Enterprise
• No Inurement of Benefit or Excess Benefit

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Premise of Value - Distinctions

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Highest and Best Use

• Each premise of value may apply under the same standard,
or definition, of value
• For example, FMV calls for a ‘willing buyer’ and a ‘willing seller,’ yet
these willing buyers and sellers have to make an informed economic
decision as to how they will transact with each other with regard to the
subject business
• Is subject business worth more to buyer and seller as
• A going concern that will continue to operate as such
• A collection of individual assets
• Either case, the buyer and seller are still willing
• In both cases, they have concluded a set of transactional
circumstances that will maximize the value of the collective assets of
the subject business enterprise

“Appraisal and Valuation: An Interdisciplinary Approach“, By Richard Rickert, Ph.D. (1987), American Society of Appraisers, International
Valuation Sciences Institute, Washington, D.C., Ch. 3, p. 55.
“Valuing a Business: The Analysis and Appraisal of Closely Held Companies”, By Pratt, Shannon P., Niculita, Alina V., Fifth Edition, McGraw Hill, 34
New York, NY,(2008), p. 47-48.
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Highest and Best Use

• That use among possible alternatives:
• Legally permissible
• Socially acceptable
• Physically possible
• Financially feasible
• Results in the highest economic return
• In a controlling interest valuation, the selection of the
appropriate premise of value is a function of the highest
and best use of the collective assets of the subject
business enterprise

“Appraisal and Valuation: An Interdisciplinary Approach“, By Richard Rickert, Ph.D. (1987), American Society of Appraisers, International
Valuation Sciences Institute, Washington, D.C., Ch. 3, p. 55. “Valuing a Business: The Analysis and Appraisal of Closely Held Companies”,
By Pratt, Shannon P., Niculita, Alina V., Fifth Edition, McGraw Hill, New York, NY,(2008), p. 47-48.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Highest and Best Use

• A business enterprise may fail to generate sufficient

economic benefit to support the invested capital
utilized to generate the revenue stream of the
enterprise
• Cannot support a valuation premise of Value-in-
Use as a Going Concern
• The “Value-in-Exchange” premise of value is adopted

“Appraisal and Valuation: An Interdisciplinary Approach“, By Richard Rickert, Ph.D. (1987), American Society of Appraisers, International
Valuation Sciences Institute, Washington, D.C., Ch. 3, p. 55. 36
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Valuation Date

• The specific point in time as of which the valuator’s

opinion of value applies
• Information that was not known or knowable as of the
valuation date should not be considered in
developing the indication of value
• The selection of valuation date is often times driven
by the availability of the data necessary to support
the indication of value

“BV 203 Business Valuation Case Study Student Manual” By ASA, Reston, VA; 2009, p. 32
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Marketability Basis
• Refers to the ability to readily convert the interest in the
firm into cash or its equivalent
• Freely Traded Basis
• Equivalent marketability to publicly traded equities
• “Deep” pool of potential purchasers
• Most easily converted to cash
• Closely Held Basis
• Less marketable than publicly traded equities
• May have a more limited pool of potential purchasers
• May require applying a discount for lack of marketability

“BV 203 Business Valuation Case Study Student Manual” By ASA, Reston, VA; 2009, p. 26. “Discount for Lack of Marketability: An
Empirical Analysis,” By Ashok B. Abbott, Ph.D., Business Valuation Review, Vol. 22, no. 4 (December 2003), p. 172-178.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Polling Question 1

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Section Three
VALUATION APPROACHES AND METHODS

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Valuation Approaches & Methods

“The Adviser's Guide to Health Care: Consulting With Professional Practices” By Robert James Cimasi, Durham, NC: American
Institute of Certified Public Accountants, Inc., 2011, p. 171-177.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Typical Valuation Considerations for

Income Approach Based Methods
• Projection of Revenue
• Projection of Economic Costs
• Both Operating and Capital
• Risk Adjusted Required Rate of Return

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Income Approach
• Measures the present value of anticipated future economic
benefits that will accrue to the owner of the property interest to be
appraised
• Economic benefit of ownership has several potential measures,
including:
• Net operating income
• Net Income
• Cash Flow
• Dividend Payouts
• A risk-adjusted required rate of return, matched to the level of
economic benefit employed (e.g., pre-tax/after-tax), by which the
benefits are discounted, must be developed

“BV 201: Introduction to Business Valuation” By ASA, Reston, VA; 07/2010, p. 2.

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Market Approach
Guideline Public Company Methods
• Based upon valuation of the freely traded, minority interest registered
shares of publicly traded companies
• Guideline public companies are typically significantly larger than
closely-held healthcare enterprises requiring an adjustment to reflect
the size difference
Guideline Transaction / Merger and Acquisition Method
• Based Upon Principle of Substitution
• Requires a relatively efficient and unrestricted secondary market for
comparable properties

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Market Approach
• Premised upon the concept that actual transactions of
comparable property provide guidance about indications of value
• “Comparables” selected must exhibit “homogenous badges of
comparability”:
• Type of services and enterprises
• Market Service Area with Geographic Variations
• Payor Mix
• Provider (Specialty and Subspecialty) Mix/Case Mix
• Revenue Size and Profitability
• Asset Size and Capital Structure
• Investment Time Horizon
• Market Entrance Barriers, e.g., Certificate of Need

“BV 201: Introduction to Business Valuation Part 1 Student Manual” By ASA, Reston, VA; 07/2010, p. 1.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Asset/Cost Approach

Asset/Cost Approach Based Valuation Methods

• Separately identify and appraise each tangible and
intangible asset of the enterprise
• Aggregate the separately appraised indications of
value into an accumulated value of the enterprise in
its entirety

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 105-106. 46
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Typical Valuation Considerations for

Asset/Cost Approach Based Method
• Based on the Principle of Substitution, which states that a
purchaser would likely pay no more, and the seller could
likely accept no less, than the cost of producing an equally
desirable substitute or a substitute of the same utility
• Cost based methods are often utilized (as are market and
income based methods) under the Asset Approach

“BV 201: Introduction to Business Valuation Part 1 Student Manual” By ASA, Reston, VA; 07/2010, p. 1.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Typical Valuation Considerations for

Asset/Cost Approach Based Method
• Utilizing the cost based methods of the Asset Approach,
value is determined by establishing the current cost of
reproducing or replacing an asset, less applicable
elements of depreciation:
• Economic obsolescence
• Technical obsolescence
• Functional obsolescence
• Physical deterioration

“BV 201: Introduction to Business Valuation Part 1 Student Manual” By ASA, Reston, VA; 07/2010, p. 1.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Alternative Valuation Techniques

• Techniques that do not neatly fit into any above

approach used to arrive at value may include:
• Certainty Equivalent Valuation (CEV)
• Monte Carlo Simulation Analysis
• Economic Value Added Analysis
• Real Options Analysis
• Net Present Value Analysis (NPV)
• With and Without Analysis

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 108-117.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Risk Assessment
• It is of paramount importance, when utilizing any of the valuation
methods, to accurately and precisely determine the risk factors
involved in the projection related to future expected economic
benefit
• The assessment of risk by investors is related to both the
actualities and perceptions of the market
• Benchmarking is a technique that can be used to assess the level
of risk associated with an investment in the subject property
interest

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 117.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Benchmarking

Internal Benchmarking
• Compares the current or most recently reported performance of
an enterprise or property to its past performance
• The adjustment of past data may be necessary to allow for a
similar basis upon which to make comparisons

External Benchmarking
• The comparison of the subject enterprise or property to various
benchmark metrics derived from data sources outside of the
subject entity

“In Search of a Benchmarking Theory for the Public Sector”, G. Jan van Helden and Sandra Tillema, Financial Accountability &
Management, Vol. 21, No. 3 (August 2005), p. 341.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Benchmarking
Subject Enterprise
Performance Metric
Determine type of performance metric being
accessed and utilize comparable data

Clinical Financial

Compare to metrics from

similar industry
enterprises
Prior Historical
Current Metrics
External Metrics
Benchmarking
Compare to historical
metrics from the
Subject Enterprise
Utilize survey data from Utilize economic
similar enterprises for principals to generate
comparison data for comparison

Benchmarking to Economic Internal

Industry Norms Benchmarking Benchmarking

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“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 243.
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Reliance on Historical Data

PAST “AS OF” DATE FUTURE
(5) (4) (3) (2) (1) (1) (2) (3) (4) (5)
Reimbursement Regulatory Barriers to entry Increased
Traditional Fee For Service Increased for reporting Established for Demand for Health care
Health care requirements New agencies
Provider Delivery System reduced

Reimbursement Patient data CON laws Increased

Relatively Stable Risk Environment Cut for Reporting Eliminated Requirements
Health care Requirements For For health care
increased Health care eligibility

Price to Earnings

Q: HOW USEFUL IS THE PAST IN DETERMINING VALUE?

“Whistling Past the Graveyard: The Impact of Regulation on Healthcare Valuation” By Robert James Cimasi, Valuation Strategies, 53
Vol. 12, No. 1, September/October 2008.
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Discounts and Premiums

Typically Two Types of Discounts & Premiums:

• Entity Level Discounts and Premiums –

Discounts and Premiums that apply to the entity as
a whole
• Shareholder Level Discounts and Premiums –
Discounts and Premiums that reflect the
characteristics of ownership

“Business Valuation Discounts and Premiums: Second Edition” S.P. Pratt, John Wiley & Sons, Inc., (2009), p. 1-8. 54
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Discounts and Premiums

Entity Level Discounts and Premiums

• Examples:
• Key Person Discount/Premium
• Discount for Pending Litigation
• Discount for Environmental Liability
• Discount for Trapped-In Capital Gains

• Entity Level Discounts and Premiums are typically applied

before Shareholder Level Discounts and Premiums

“Business Valuation Discounts and Premiums: Second Edition” S.P. Pratt, John Wiley & Sons, Inc., (2009), p. 1-8. 55
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Discounts and Premiums

Shareholder Level Discounts and Premiums
Typically Two Categories of Shareholder Level Discounts and Premiums:
• Degree of Control Related:
• Discount for Lack of Control (DLOC) – discount which reflects the
prerogatives of control (or lack thereof) inherent in a property interest
• Control Premium – premium that reflects the prerogatives of control
inherent in a property interest

• Degree of Marketability Related:

• Discount for Lack of Marketability (DLOM)- discount which reflects the
lack of liquidity and/or costs incurred to transfer a property interest
• Blockage – discount for a publicly traded security which reflects the difficulty
in transacting the interest due to its size relative to trading volume

“Business Valuation Discounts and Premiums: Second Edition” S.P. Pratt, John Wiley & Sons, Inc., (2009), p. 1–8.,118–126. 56
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Discounts and Premiums

Discounts for Lack of Marketability (DLOM)

• DLOM for minority interests are different than the DLOM for controlling
interests
• DLOM for controlling interests should not be based on studies of the
public stock market, which report data for minority interests
• DLOM for controlling interests are typically based on factors such as:
• Uncertain Time Horizon to complete transaction
• Transaction costs incurred to execute the transaction
• Transaction costs incurred to prepare the property for transfer
• Risk related to the eventual sale price
• Inability to hypothecate private company interest

“Business Valuation Discounts and Premiums: Second Edition” S.P. Pratt, John Wiley & Sons, Inc., (2009), p. 200–211. 57
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Polling Question 2

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Section Four
INPATIENT ENTERPRISES

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Valuation of Inpatient Enterprises

Inpatient Enterprises include:

• Hospitals
• Short Term Acute
• Sub-Acute Care
• Specialty Hospitals
• Long Term Care Facilities

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Types of Hospital Ownership

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Determination of IPPS Capital and Operating

Payments for Hospital Reimbursement

“Acute Care Hospital Inpatient Prospective Payment System” Centers for Medicare and Medicaid Services, Payment System Fact
Sheet Series February 2012, p. 3-4; “Hospital Acute Inpatient Services Payment System” Medicare Payment Advisory Commission, 62
Payment Basics, October 2012, p. 2.
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Examples of Normalizing and Controlling

Adjustments for Inpatient Enterprises

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“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 388.
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Variables to Consider for Benchmarking

Inpatient Enterprises
Profitability Liquidity Operating Efficiency Leverage Quality Other Ratios
Days in Accounts Mortality and Morbidity
Operating Profit Margin Current Ratio Debt to Equity Ratio Revenue per Bed Day
Receivable Rates
Interest Bearing
EBITDA Margin Quick Ratio Inventory Turnover Readmission Rates Average Length of Stay
Debt/Assets
Working Capital to % of Procedures with
EBITDAR Margin Net Asset Turnover Endowment to Debt Beds per Square Foot
Revenue Complications
Free Cash Flow to Equity Net Property and Hospital Acquired Capital Expenditures to
Interest Coverage Ratio Altman Z-score
Margin Equipment to Revenue Infection Rate Revenue
Free Cash Flow to Firm
Days of Working Capital Revenue to Fixed Costs Interest Coverage Ratio Specialist Staff Mix Depreciation to Revenue
Margin
Working Capital
Degree of Operating
Return on Sales Excluding Interest Bearing Patients per Hospitalist Average Wait Times Occupancy Rate
Leverage
Debt
Patient Ratings of
Profit per Admitted Non-medical Staff to Degree of Financial
Endowment to Assets Physicians Encounters per Physician
Patient Medical Staff Ratio Leverage
Communication
Patient Survey Ratings of
Medical Supplies per Bad Debt Expense to
Cash to Current Assets Degree of Total Leverage Health Promotion and DRG Case Mix
Adjusted Bed Day Revenue
Education
Patient Ratings of
Salary/Benefits Expenses Cash to Current Liabilities Revenue per Square Foot Fixed Assets to Equity % of Medicaid Revenue
Medical Staff

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 389. 64
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Variables to Consider for Hospital

Revenue Projections
Type of Variable Examples found in Hospitals
Changes in the Regulatory
New Licensing Restrictions; Changes to CON laws; Moratoriums of Facilities
Environment
Changes in per diem rates; changes in DRGs; Changes in CPT Codes;
Changes in Reimbursement Yield
Changes to Conversion Factor; Incentives, quality factors

Changes in the Competitive Changes in Skilled Nursing Facility Services; Change in Ambulatory Centers;
Environment Changes in Surgical and Specialty Hospitals
EHR; Minimally Invasive Surgery; Improvements to Medical Devices; New
Changes in Technology
Pharmaceutical Products

Shifts in Population Demographics; Growth in Population; Increase in Market

Changes in Demand for Services Service Area Wages; Improvements in Transportation; Changes in
Employment; Changes in Population; Changes in Demographics

Opening/Closing of Rival Hospitals; Acquisitions by Rival Hospitals; Changes

Changes in Rivalry and Market Share
in ER Department Size
Changes in Out of Pocket Expenses; Changes to Medicare Rates; Changes
Changes in Payor Mix
in Commercial Payor Coverage

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 332.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Variables to Consider for Hospital

Expense Projections
Type of Variable Examples Impacting Hospitals
Changes to Safety Protocols; Changes in Licensing
Changes in the Regulatory Environment
Requirements; Ownership Restrictions
Changes in the Reimbursement Changes in Covered Services; Changes in Hospital Status
Environment (e.g., CAH, etc.)
Changes to Surgical Hospitals; Changes to Ambulatory Surgery
Changes in the Competitive Environment Centers; Changes to Services by Skilled Nursing Facilities;
Talent Poaching
Acquisition of New Technology; Rapid obsolescence of Existing
Changes in Technology
Equipment
Changes in Capital Expenditures to Meet Demand Shifts;
Changes in Demand for Services
Expansion of Inpatient Beds; Changes in Swing Beds
Changes in Awareness of Services; Joint-PR Efforts; Changes
Changes in Rivalry and Market Share
in Employed Physicians
Just in Time (JIT) Inventories; Group Purchasing Organizations
Changes in Suppliers
(GPOs); Ability to Obtain from Other Hospital Departments

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 341.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Other Pertinent Considerations in the

Valuation of Hospitals
• Trauma Certification Level
• General vs. Specialty Hospital
• For Profit vs. Not-for-Profit
• Critical Access Hospital Designation
• Sole Community Hospital Designation
• Governance
• Membership in Health System

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Pertinent Considerations in the Valuation of

Long-Term Care Enterprises
• Occupancy Rates
• Payor Mix
• Ancillary Services and Technical Component
Service Lines
• Membership in a Long-Term Care System

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Other Pertinent Considerations in the Valuation of

Long-Term Care Enterprises

• Medicare Reimburses Nursing Homes Based on a

Resource Utilization Group (RUG) system

• Short term revenue forecasts should consider anticipated

changes in RUGs utilized by the enterprise

• Wage Indices for the market service area of the subject

enterprise should be incorporated in the short term
revenue forecast

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Polling Question 3

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Section Five
OUTPATIENT ENTERPRISES

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Valuation of Outpatient Enterprises

Outpatient Enterprises Include:

• Physician Professional Practices
• Allied Health Practices
• Freestanding Outpatient Ambulatory Enterprises
• Hospital Outpatient Departments
• Home Health and Hospice Enterprises

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Variables to Consider for Benchmarking

Outpatient Enterprises
Operating
Profitability Liquidity Leverage Quality Other Ratios
Efficiency
Operating Profit Days in Accounts Revenue per
Current Ratio Debt to Equity Ratio Mortality
Margin Receivable Outpatient Procedure
Interest Bearing % of Procedures with % of Medicaid
EBITDA Margin Quick Ratio Inventory Turnover
Debt/Assets Complications Revenue
Working Capital to Patient Satisfaction % of Medicare
EBITDAR Margin Net Asset Turnover Endowment to Debt
Revenue Surveys Revenue
Net Property and % of Procedures
Free Cash Flow to Days of Working Capital Expenditures
Equipment to Altman Z-score Requiring Hospital
Equity Margin Capital to Revenue
Revenue Transfer
Working Capital Patient Rating of
Free Cash Flow to Revenue to Fixed Interest Coverage Depreciation to
Excluding Interest Physician
Firm Margin Costs Ratio Revenue
Bearing Debt Communication
Patient Survey Rating
Patients per FTE Degree of Operating Encounters per
Return on Sales Endowment to Assets of Health Promotion
Provider Leverage Provider
and Education
Profit per Outpatient Cash to Current Non-medical Staff to Degree of Financial Patient Rating of
Case Mix
Procedure Assets Medical Staff Ratio Leverage Medical Staff
Cash to Current Bad Debt Expense to Degree of Total Average Waiting Revenue per Square
Return on Assets
Liabilities Revenue Leverage Times Foot

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 407. 73
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Determination of OPPS Payments for Hospital

Outpatient Department (HOPD) Reimbursement

“Hospital Outpatient Prospective Payment System: Payment System Fact Sheet Series,” Department of Health and 74
Human Services, Centers for Medicare & Medicaid Services, December 2012, p. 4-6.
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Pertinent Valuation Considerations –

Hospital Outpatient Departments
• Conversion Factor - The main distinguishing component between
freestanding ASC payments and HOPD payments
• Established from different indexes
• Freestanding ASCs - Consumer price index for all urban consumers
(CPI-U) (based on prices for energy & housing)
• The only healthcare entity where the conversion factor is
dictated by the CPI-U
• HOPDs – Hospital market basket (driven by goods and services
purchased by healthcare facilities)
• Beginning in 2008, new, office-based procedures performed in
ASCs are covered by Medicare Part B, but are not reimbursed at
OPPS percentage

Chapter XII: Outpatient Enterprises in “Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA,
John Wiley & Sons Inc., 2014.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Normalizing Adjustment Considerations

Pertinent to Professional Practices
• Level of Interest Normalizing Adjustments: Revenues and expenses
are to be reflective of what the typical buyer (i.e., buyer of a controlling
or a minority interest) should expect to realize
• Specific Examples for Physician Professional Practices:
• Typical expenses requiring Normalizing Adjustments for purposes of
deriving cash flow related to a control/minority interest in a physician
professional practice may include:
• Owner's Discretionary Expenses (e.g., family members on a
payroll, automobiles)
• Office Rent Expense (if office space is leased from an entity with
common ownership as the practice)
• Gifts/charitable donations, or other non-operating expenses

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 473. 76
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Normalizing Adjustment Considerations

Pertinent to Professional Practices
• Adjustment of Owner-Provider Compensation to Fair Market Value - As
required by Revenue Rulings 59-60 and 68-609, as well as set forth under the
definition of FMV, which assumes a "hypothetical willing" buyer of the subject
enterprise should be adjusted to a "reasonable amount for the services performed
by the owner or partners engaged in the business.”
• Specific Examples of Normalizing Adjustments for Physician Professional
Practices
• Typical steps for adjusting owner-provider's compensation to Fair Market Value
should include the following:
• Identifying the specific tasks, duties, responsibilities, and accountabilities
(TDRAs) of the owner-provider
• Determining the range of industry compensation for the owner-provider's
production/inputs based on TDRAs of the owner-provider
• Selecting FMV cost to replicate or replace the owner-provider's services

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 473. 77
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Normalizing Adjustment Considerations

Pertinent to Professional Practices
• Adjustment for Non-Recurring and Extraordinary Revenue and
Expenses - Revenue and expenses that are non-recurring and/or
extraordinary should be identified and adjusted appropriately to reflect
the ongoing operations of the subject professional practice
• Typically non-recurring and/or extraordinary revenues and
expenses in a physician professional practice include:
• Medicare payment settlements
• Legal expenses related to the defense of medical malpractice
• Certain furniture and equipment purchases
• Gains or losses on asset sales
• Consulting expenses related to non-recurring projects

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 473. 78
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Normalizing Adjustment Considerations

Pertinent to Professional Practices
Specific Examples for Physician Professional Practices
• In addition to the typical accrual adjustments required to convert cash
basis financial statements to accrual basis (e.g., timing of revenue and
estimating the practice’s accounts receivable and accounts payable)
other revenue, expenses, assets, and liabilities that may require
adjustment for timing recognition may include:
• Medicare payment settlements
• Consideration of capitation and co-pay reimbursement
• Value of medical supply an other inventory on-hand
• Contingent liabilities (e.g., pending medical malpractice claims)
• Incurred But Not Reported (IBNR) liabilities
• FMV of key person life insurance policies

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 473. 79
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Revenue Stream Considerations Pertinent

to Professional Practices
• Traditionally, revenue for physician professional practices has been based
on the Fee-for-Service convention, which is driven by patient volume, based
on changes in the utilization demand/market share for services provided
• Typical steps for projecting patient volume of a professional practice include:
• Review and analyze historical patient volume trends and compare to
industry benchmarks
• Obtain demographic projections of the subject practice's market service
area
• Research new technologies and treatments for the injuries, ailments, or
diseases treated by the providers of the subject enterprise, and assess
their impact on future patient volume

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 473. 80
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Revenue Stream Considerations Pertinent

to Professional Practices
• Typical steps for projecting patient volume of a professional practice
include (cont’d):
• Obtain projected incidence and prevalence of specific injuries,
ailments, or diseases treated by the subject enterprise
• Review the payor contracts of the subject professional practice
and determine likeliness of renewal and impact of non-renewal
• Assess the patient volume capacity of the subject practice;
• Assess the competitive landscape of the market service area
• Conduct management interviews and assess the achievability of
revenue projections

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 473. 81
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Revenue Stream Considerations Pertinent

to Professional Practices
Typical steps for projecting reimbursement yield of a physician
professional practice include:
1. Review and analyze historical trends in the subject professional
practice's payor mix
2. Review payor contracts of the subject enterprise, and determine
reimbursement methodologies of each payor (e.g., % of
Medicare, discounted fee-for-service, capitation, shared savings)
3. Research historical (and projected if available) trends in
government payor reimbursement for the services provided at
the subject enterprise

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 473. 82
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Revenue Stream Considerations Pertinent

to Professional Practices
Typical steps for projecting reimbursement yield of a physician professional
practice include (cont’d):
(4) Research historical (and projected if available) trends in commercial and
other payor reimbursement for the services provided at the subject enterprise
(5) Review changes in CMS coding procedures for the services rendered by
the providers of the subject enterprise, i.e., CMS annually updates the
Physician Fee Schedule, and periodically bundles, or rolls-up, CPT codes.
For example, in 2010 three former SPECT related CPT codes (i.e., 78465 -
SPECT myocardial perfusion imaging multiple study, 78480, and 78478 - add
on codes for wall motion and ejection fraction) were combined into one new
CPT code (i.e., 78452)

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 473. 83
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Pertinent Valuation Considerations –

Freestanding Outpatient Enterprises
Scope of Services
• Performance of higher yield procedures
• May produce more net economic benefit
• Performance of more procedures
• May yield economies of scale that increase the amount of
net economic benefit generated
• Performance of different types of procedures
• May diversify reimbursement risk and thereby decrease the
required return on investment in the subject freestanding
outpatient facility

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 473. 84
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Pertinent Valuation Considerations –

Freestanding Outpatient Enterprises
Payor Mix
• Commercial payors typically pay higher rates than
government payors
• Out-of-Network reimbursement is generally higher than in-
network reimbursement
• Declining reimbursement of out-of-network charges

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 473. 85
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Pertinent Valuation Considerations –

Freestanding Outpatient Enterprises
Capacity for Freestanding Outpatient Enterprises
• May retrain an enterprise
• Inquire as to the enterprise’s maximum capacity
• Different metrics of growth
• Capital expense burden
• Must be projected to accommodate increases in volume
• Operating expense burden
• Must be projected to accommodate increases in volume

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 559. 86
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Pertinent Valuation Considerations –

Home Health Enterprises
Scope of Services
• Chronic conditions generate steadier revenue streams
Payor Mix
• Medicare is the largest payor for Home Health Enterprises
Capacity
• Labor based metrics are utilized since physical space metrics not
pertinent
Operating Expenses
• Labor cost is the largest expense and benchmarking this cost often
yields valuable insights into the subject home health enterprise

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p.
577-580.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
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Polling Question 4

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Section Six
OTHER HEALTHCARE ENTERPRISES

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Valuation of Other
Healthcare Related Enterprises
Other Healthcare Related Enterprises Include:
• Management Services Enterprises
• Third Party Payors
• Supply Side Enterprises

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Pertinent Considerations to Valuation of

Management Service Organizations (MSOs)

Operating Expenses and Capital Requirements

• Economies of scale exist for many management
services enterprises
Intangible Assets
• May comprise a significant portion of the value of an
management services organization

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Pertinent Considerations Related to the

Valuation of Third Party Payors
• Economies of Scale
• Adverse Selection
• Moral Hazard: An individual may be more likely to engage in
riskier behavior as a result of receiving coverage from a
healthcare payor and the anticipated expenses related to the
beneficiary may be greater after coverage is extended
• Affordable Care Act (ACA): Changes to the minimum MLR
may have material impacts on the profitability of healthcare
payors, and may affect the value indication determined by the
valuation analyst

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014. 92
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Valuation Considerations Pertinent to

Supply Side Enterprises
• Economies of Scale
• Intangible Assets:
• Current on-going contracts
• Established client relationships
• Additional Risk Considerations: Supply side enterprises may need to
expend time and capital in insuring that their product offerings include the
most up to date technologically advanced products
• Capital Considerations: Continued restrictions on supply side enterprises
access to capital markets may constrain their ability to take advantage of
strategic opportunities

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“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014.
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Polling Question 5

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Section Seven
HEALTHCARE SERVICES

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Valuation of Healthcare Services

In healthcare, the type of definition of value is typically FMV

• Healthcare transactions are subject to regulatory scrutiny:
• Anti-kickback Statute – Prohibition against referrals
• No consideration in valuation of the “volume or value of
referrals”
• Stark Law – Prohibition against physician self-referrals of
DHS if physician has a financial relationship
• IRC 501(c)(3) – Law of tax-exempt organizations
• No inurement of private benefit

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Valuation of Physician Compensation

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Classification of Clinical Related Services

• The provision of professional medical services related to

the diagnosis and treatment of patients who present with
various injuries, diseases and ailments

• May include coverage and call, research, medical

outreach and public health

• Coverage and call has been increasingly demanded

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Classification of Non-Clinical Related Services

• TDRAs associated with the position are not directly related

to the treatment of patients
• Roles: CEO, CFO, CIO, Chief Legal Counsel
• Practice Admin, Billing Managers, Support Staff
• Successful hospital enterprises have understood
• “To effectively respond to the economic incentives of reform, a
hospital should achieve a deeper level of integration with the
physicians that practice there.”

“Achieving Physician Integration with the Co-Management Model” Healthcare Financial Management Association, 99
http://www.hfma.org/Templates/Print.aspx?id=20619 (Accessed 7/19/2010).
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Examples of Healthcare Services Positions

Classification (i.e., Clinical
Professional Titles Description of Typical TDRAs Related, Non-Clinical
Related, Both)
Provide professional medical services related to the diagnosis and treatment of patients who present with various
Staff Physician Clinical
injuries, diseases & ailments
Service Line Medical
Similar to "Medical Director, General" but specific to a particular clinical service line, e.g., cardiology, surgery Both
Director
Responsible for research design, methodology, data collection, analysis, & summation of outcomes; grant proposal
Medical Director of Clinical
preparation; research conferences; compliance with protocols, regulations, and research objectives; liaison between Both
Research
finding agencies & the organization
Monitor day-to-day operations; develops, implements, & monitors policies/ procedures; oversees non-physician
Medical Director of Clinical
technical and records staff; Responsible for: improving quality and reducing cost by streamlining workforce & Both
Operations
technology
Medical Director of Quality Responsible for developing and implementing programs to ensure compliance with internal & external quality goals &
Both
Management benchmark
Responsible for organizational policy and compliance, strategic planning, marketing, physician compensation,
Residency/ Fellowship
reimbursement, oversees clinical research, teaching, supervises residents & fellows, & overall medical education Both
Program Director
curriculum
Duties generally include: liaison among/between physicians, management, governing boards, organizations, and the
President of Medical Staff Both
community; setting medical staff policies, procedures, and credentialing
Consults, advises, and assists the CEO and/or practice administer in providing
Chief Operating Officer Both
leadership and direction in planning, directing, and coordinating both patient and non-patient care activities
Generally responsible for all activities related to the delivery of medical care and clinical services such as cost,
management, utilization review, quality assurance, and medical protocol development as well as overseeing the
Medical Director, General activities of group physicians, including recruiting and credentialing; larger organizations may contain more than of the Both
these positions; It should be noted that these roles may be performed for various types of entities including: hospitals,
HMO/PPO/Health Plan, PHO, MSO, Academic Medical Center, Group Practices, etc.
Associate/Assistant Assist the Medical Director in all respects, including: clinical services, utilization review, medical protocol development;
Both
Medical Director these positions are found in the same type of entities as Medical Directors
Chief Medical Information Similar to "Chief Information Officer" but performed by a licensed physician with more of a focus on leveraging clinical
Both
Officer data to reduce to variance in care processes & quality & achieving "process agility"

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 868-871.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Examples of Healthcare Services Positions

Classification
( i.e., Clinical
Professional Titles Description of Typical TDRAs
Related, Non-Clinical
Related, or Both)

Responsible for all human resource management and development programs and procedures including:
Chief Human Resources Officer employment, compensation and benefits, employee/labor relations, education and training, health and Both
safety, and compliance with employment laws and regulations.

Develops and monitors organizational policy with other management personnel and board of directors;
responsible for the overall operation of the organization, including patient care and contract relations;
Physician Chief Executive Officer Both
oversees activities related to growth and expansion of the organization; typically serves as liaison
between the organization, the community, and the board of directors.

Develops financial policies and oversees their implementation; typically monitors a variety of financial
activities including: budgeting, accounting, bulling, payer contracting, collections and preparation of tax
Chief Financial Officer Non-Clinical
returns; may obtain funds for capital development; usually prepares annual reports and long-term
projections.

Maintains broad responsibilities for all administrative positions of the medical group; typically oversees
Chief Executive Officer Non-Clinical
management personnel with direct responsibilities for the specific functional areas of the organization.

Contributes to general business planning regarding technology; accountable for directing data integrity
Chief Information Officer and confidentiality of patient care information; identifies new developments in information system Non-Clinical
technology and strategizes organizational modifications.

Responsible for planning, managing and coordinating the legal affairs of the medical group; directs and
Chief Legal Counsel coordinates activities of outside counsel; responsible for ensuring organizational activities meet legal Non-Clinical
and regulatory requirements; provides legal guidance with the goal of reducing risk to the medical group.

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 868-871. 101
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Valuation of Clinical Related Services

• Principles of substitution and utility are determinants

of the economic value that is inherent in
compensation arrangements
• Types of compensation plans:
• Tiered Compensation
• POD Compensation Plan
• Value Drivers

“Measuring Physician Work and Effort,” in “Physician Compensation Plans: State-of-the-Art Strategies,” by Bruce A. Johnson, JD, MPA and
Deborah Walker Keegan, PhD, FACMPE, Medical Group Management Association, 2006.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
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Valuation of Non-Clinical Related Services

• FMV of administrative, management, and executive
services falls under principles of utility and substitution
• May be based on past clinical practice earnings
• Should be compared to applicable, external benchmarking
sources reflecting similar TDRAs
• All non-clinical related TDRAs should be surveyed for
redundancies

“The Managed Health Care Handbook, 3rd ed., By: Peter R. Kongstvedt, MD, FACP, Aspens Publishers, Inc., Gaithersburg, MD, (1996), p. 159. 103
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Industry Benchmark Sources for

Physician Services Production and Compensation

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
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Polling Question 6

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Establishing FMV and

Commercial Reasonableness
• With more physicians working in hospitals, there is more
regulation and legal permissibility of arrangements under state
and federal laws
• Physician compensation arrangements are scrutinized
• FMV examines the range of dollars
• Commercial reasonableness examines the reasonableness of
the business arrangement
• “…a sensible, prudent business agreement, from the
perspective of the particular parties involved, even in the
absence of any potential referrals.”

“Tread Carefully When Setting Fair Market Value: Stark Law Must Be Considered,” Joyce Frieden, Nov. 1, 2003,
http://findarticles.com/p/articles/mi_m0CYD/is_/ai_110804605 (Accessed 9/26/08).
“Medicare and Medicaid Programs; Physician’s Referrals to Health Care Entities With Which they Have Financial Relationships: Proposed Rule”
Federal Register, Vol. 63, No. 6, January 9, 1998, p. 1700.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
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Commercial Reasonableness

• Arrangement appears to be “a sensible, prudent

business agreement, from the perspective of the
particular parties involved, even in the absence of
any potential referrals.”
• Both services and payments should be considered
commercial reasonable for the arrangement to
survive scrutiny

“Medicare and Medicaid Programs: Physicians’ Referrals to Health Care Entities with which They Have Financial Relationships”,
63 Fed. Reg. 1700 (1/9/98).
“Fair Market Value: Analysis and Tools to Comply with Stark and Anti-Kickback Rules,” Audioconference, By Robert A. Wade and 107
Marci Rose Levine, HCPro, Inc., March 19, 2008, http://content.hcpro.com/pdf/content/207583.pdf (Accessed 10/8/08).
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Threshold of Commercial Reasonableness

• The development and rendering of commercial

reasonableness opinions is an increasingly important
service offered
• Similar to a fairness opinion
• Related to FMV
• Commercial reasonableness thresholds
• Individual parts of a transaction
• Entire transaction

“Medicare and State Health Care Programs: Fraud and Abuse: Clarifications of the Initial OIG Safe Harbor Provisions and Establishment of 108
Additional Safe Harbor Provisions Under the Anti-Kickback Statue”, 64 Federal Register 63526, (11/19/99).
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 939. 109
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Commercial Reasonableness Analysis

• Should contain both qualitative and quantitative analysis
• Should consider the factors within the analysis not in
isolation
• Qualitative Analysis
• Undertaken to better understand the facts and circumstances
pertinent to the anticipated transaction
• Quantitative Analysis
• Takes into account all consideration to be paid by purchasers
and lessees to sellers and lessors

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Steps in Determining Commercial Reasonableness

“Healthcare Valuation” By Robert James Cimasi, MHA, ASA, FRICS, MCBA, AVA, CM&AA, John Wiley & Sons Inc., 2014, p. 941. 111
 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Purchase Price Allocation

• Identifying and measuring the specific assets

(tangible and intangible) and assigning a portion
of purchase price to each
• “…the ability at which an orderly transaction to
sell the asset or to transfer the liability would take
place between market participants at the
measurement date under current market
conditions.”

“Fair Value Measurement” FASB ASC 820-10-05-1B (May 2011) formerly SFAS 157, paragraph 5.
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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
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Concluding Remarks

Pursuing Interdisciplinary Collaboration

Healthcare Industry Specific Appraisal Assignments
Real Estate Appraisal • Machinery & Technical Specialties
Personal Property • Business Valuation • Intangible Assets/IP
Separate and Distinct Disciplines in the Same Profession
• Similar Tools to Solve Similar Problems
• Shared Clients
• Interdisciplinary Approach Yields Significant Benefit
to Both Clients and Appraisers

We CAN Work Together!

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Concluding Remarks
We Can (and should) All Work Together!
• To obtain the requisite background for forecasting the future
performance of healthcare enterprises, assets, and services in the
current dynamic era of healthcare reform, valuation professionals
should develop and maintain an in-depth understanding of the history
and the development of healthcare delivery, as well as, the unique
dynamics of those often complex business arrangements that
comprise newly emerging healthcare organizations and the various
elements of property value involved in each.

• A multidisciplinary project team of appraisers has the potential to

provide an enhanced scope and diversity of knowledge and breadth of
experience to the benefit of both the appraisers and the client.

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
Multidisciplinary Advanced Education in Healthcare Valuation Program

Concluding Remarks
We Can (and should) All Work Together!
• When developing an understanding of the forces and stakeholders
that have the potential to drive healthcare markets, valuation
professionals must examine the subject enterprises, assets, and
services as they relate to and within the context of:
• “The Four Pillars of the Healthcare Industry”
• Reimbursement
• Regulatory
• Competition
• Technology
• These four elements serve as a conceptual framework for analyzing
the viability, efficiency, efficacy, and productivity of the subject
property interest(s)

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 American Society of Appraisers Healthcare Special Interest Group’s (ASA HSIG)
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Concluding Remarks

We Can All Work Together!

• More informed and uniform valuation practice would benefit the users
of healthcare valuations and improve public confidence in appraisers
• To enhance competency, significant specialized education and
training is an important benefit for healthcare appraisers and clients
• Given these issues, a multidisciplinary approach toward advanced
education related to healthcare industry valuation is an important
initiative of the ASA, as the premier multidisciplinary valuation society
of professional appraisers

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