SPECIAL EXCERPT FROM THE GUIDE BVR/AHLA Guide to HEALTHCARE INDUSTRY COMPENSATION AND VALUATION First Edition TIMOTHY SMITH MARK O. DIETRICH BVR What It s Worth
...129...130 2.1 The Stark Definition of FMV and FMV Methodology...130 2.2 The OIG s Use of FMV for Compliance With the Anti-Kickback Statute...135 2.3 The Healthcare FMV Conundrum...139...140 3.1 Standard Appraisal Definition of FMV...140 3.2 Focus on the Hypothetical Buyer and Seller...141 3.3 Standard Appraisal Methodology: Three Approaches to Value...141...143 4.1 Synthesizing the Definition of FMV...143 4.2 Reconciling FMV Methodology...145 4.3 The Case for Standard Appraisal Methodology in Healthcare FMV...147...149 5.1 The Synthesized Approach to Healthcare Valuation...149 5.2 The Use of Jurisdictional Exceptions...150 5.3 Issues in the Use and Application of Jurisdictional Exceptions...152 5.4 Practical Tips for Working With Attorneys on Jurisdictional Exceptions...153...155 Phase I Commentary (66 F.R. 944-45, Jan. 4, 2001)...155 3. Fair Market Value...155 Phase II Commentary (69 F.R. 16107, March 26, 2004)...158 3. Fair Market Value...158 Phase III Commentary (72 F.R. 51015-16, Sept. 5, 2007)............................................159 C. Fair Market Value...159 127
In the past decade, it has become common practice for clients, such as health systems, life sciences companies, and attorneys, to engage appraisal professionals to prepare valuations of transactions and compensation arrangements for regulatory compliance - - are tailored to address concerns about payments for referrals. Thus, when the intended use or purpose of an appraisal is healthcare regulatory compliance, the regulatory Use of this standard of value, however, is not straightforward. Healthcare regulations and regulatory pronouncements have indicated that compliance with the regulatory valuations prepared for other government agencies, such as the IRS, the healthcare regu- mon to business valuation or other appraisal disciplines. The problem for professional 129
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation appraisers is that the healthcare regulations do not provide a substitute methodology. aptly described as the healthcare FMV conundrum. sometimes stormy waters of engagements when the standard of value is the health- healthcare FMV conundrum is the use of jurisdictional exceptions, a practice that is well established in appraisal professional standards. 2.1 The Stark Definition of FMV and FMV Methodology bring as the result of 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 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 at which has been included in service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any 1 - well-informed buyers and sellers who do not have a relationship related to referrals. Second, FMV under date of the transaction or service arrange- usually based on comparable the volume or value of referrals between the parties to the transaction or arrangement. 1 42 CFR 411.351. 130
With respect to rentals and leases described in 411.357(a), (b), and (l) (as to equipment - lessee or lessor would attribute to the proximity or convenience to the lessor when the lessor is a potential source of patient referrals to the lessee. For purposes of this account costs incurred by the lessor in developing or upgrading the property or maintaining the property or its improvements. 2 equipment rentals is intended to eliminate any allocation of value to the lease based on referral relationships between the parties to the rental arrangement. 3 This unique excludes the volume or value of referrals for so-called designated healthcare services (DHS). 4 that not only excludes consideration of such referrals, but also requires that valuations be performed in a hypothetical context in which a referral relationship does not exist of the transaction or arrangement. 5 FMV can be determined using any method that is commercially reasonable and provides evidence that the compensation is comparable to what is ordinarily paid for an item or service in the location at issue, by parties in arm s-length transactions who are not in a position to refer to one another. 6 CMS states 7 The method type of transaction; 2) the location of the transaction; and 3) other factors. 8 2 42 CFR 411.351. and equipment rentals. See 42 CFR 1001.952(b)(6) and 42 CFR 1001.952(c)(6). 5 72 F.R. 51015-16 (Sept. 5, 2007). 6 66 F.R. 944 (Jan. 4, 2001) and 72 F.R. 51015. 7 69 F.R. 16107 (March 26, 2004). 8 69 F.R. 16107 and 72 F.R. 51015-16. 131
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation position that FMV can be determined based on consideration of a single method. The three approaches to value and that can sometimes entail the use of multiple methods methodology readily lends itself to the interpretation that a single method is always involves compensation paid for assets or services, we intend to accept any method that is commercially reasonable and provides us with evidence that the compensation is comparable to what is ordinarily paid for an item or service in the location at issue, by parties in arm s-length transactions who are not in a position to refer to one another. 9 [emphasis added] Our Phase I discussion made clear that we will consider a range of methods of deter- the appropriate method will depend on the nature of the transaction, its location, and other factors. 10 [emphasis added] Ultimately, the appropriate method the physician self-referral law will depend on the nature of the transaction, its location, and other factors. 11 [emphasis added] The appropriate method will depend on the nature of the transaction, its location, and other factors. 12 [emphasis added] Certainly, one can interpret these passages broadly and conclude that they do not addressing questions related to the use of a method, not valuation methodology at a systematic level. Yet, omission of the traditional three approaches to value sets the commentary apart from other regulatory agencies, such as the IRS. Indeed, as noted later in this section, CMS passed on incorporating IRS guidelines for FMV methodol- these passages as establishing a single-method standard for healthcare valuation that 9 66 F.R. 944. 10 69 F.R. 16107. 11 72 F.R. 51015. 12 72 F.R. 51015-16. 132
- valuation techniques and methodologies. For example, the methodology must exclude valuations where the parties to the transactions are at arm s length but in a position to refer to one another. 13 The reasoning for such exclusion by CMS is that parties in such a position are not con- the transaction pricing between such parties is not considered to be an indication of 14 CMS has provided one case study with several examples of commercially reasonable or acceptable valuation methods for determining FMV. The case study involved the - documentation of similar public transactions that the parties can use as a basis of comparison. In regions with inadequate direct comparables, such as rural areas, a reasonable alternative may involve comparing institutions or entities located in - transactions between entities that are in a position to refer or generate other business. competitive third-party lessors of similar equipment. In such situations, we would 13 69 F.R. 16107. 14 66 F.R. 876-77, 941, 944. 133
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation reasonable rate of return on investment on leases of comparable medical equipment from disinterested lessors. 15 able method could be as simple as consulting a price list. 16 cates that healthcare industry participants were highly anxious for CMS to establish safe harbor methods for determining FMV hourly rates with its release of the Phase II Regulations in 2004. It later withdrew these methods, however, with the Phase III or 17 In general, however, CMS has resisted calls to sanction methods for determining FMV, noting that no single method 18 The agency further argued that because the statute covers a methodologies. 19 tions, CMS lent credence to independent surveys, while cautioning against the use of internally generated surveys: However, while internally generated surveys can be appropriate as a method of evidentiary value and, therefore, may be subject to more intensive scrutiny than an independent survey. 20 15 66 F.R. 944. 16 66 F.R. 944. 17 72 F.R. 51015. 18 69 F.R. 16107. 19 72 F.R. 51016. 20 66 F.R. 945.
these surveys, positing that reference to multiple, objective, independently published 21 When pressed about the use of national versus regional survey data, however, CMS responded that the appropriate use of such data would depend on the facts and circumstances of the individual case. 22 In other noteworthy commentary, CMS addressed the use of IRS guidelines for deter- - any particular agreement. We do not wish to either mandate their use or rule them 23 establishing FMV. 24-25 Finally, CMS raised the issue that FMV for administrative services may be different from that for clinical services but provided no clear guidance on the difference. 26 2.2 The OIG s Use of FMV for Compliance With the Anti-Kickback Statute Inspector General (OIG) of the Department of Health and Human Services (HHS) promulgated the use of FMV as one of the criteria for assessing compliance with the statute. In particular, the OIG included FMV as one of the conditions for various safe harbors that provide protection from potential violations of the law. The OIG also provided commentary about FMV and its application as part of the review process for proposing compliance guidance publications to healthcare industry providers. Unfortunately, the OIG does not provide any systematic guidance on FMV and valuation methodology in 21 72 F.R. 51015. 22 69 F.R. 16107. 23 66 F.R. 944. 24 66 F.R. 945. 25 69 F.R. 16107. 26 72 F.R. 51016. 135
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation the OIG s understanding of the unique focus of the AKS and the potential for widely divergent facts and circumstances in connection with application of the statute. 27 The safe harbors that list FMV as a condition include ownership of certain investment interests, space rentals, equipment rentals, personal services and management contracts, ship of ASCs, and ambulance replenishing. 28 In the case of rental safe harbors, the OIG means the value of the rental property for general commercial purposes, but shall lessee or lessor) would attribute to the property as a result of its proximity or convenience to sources of referrals or business otherwise generated for which payment may be made in whole or in part under Medicare, Medicaid and all other Federal health care programs. 29 means that the value of the equipment when obtained from a manufacturer or profes- (either the prospective lessee or lessor) would attribute to the equipment as a result of its proximity or convenience to sources of referrals or business otherwise generated for which payment may be made in whole or in part under Medicare, Medicaid or other Federal health care programs. 30 eliminating any value impact related to the volume or value of referrals between the - in a healthcare context between referral-related parties in space and equipment leases. tion for each safe harbor. 27 Since it is a criminal statute, intent scienter is usually required, although the government has attempted to limit that standard to ease prosecution. 28 42 CFR 1001.952. 29 42 CFR 1001.952(b)(6). 30 42 CFR 1001.952(c)(6). 136
now-famous letter to the IRS in 1992 regarding the acquisition of physician practices by hospitals, in which the OIG commented: or common methods of economic valuation do not comport with the prescriptions of ments for referrals. Merely because another buyer may be willing to pay a particular purchase. 31 safe harbor regulations as a clear indication of the OIG s intent to deviate from the traditional concept of FMV. 32 The OIG s position on traditional valuation concepts and methodology was also made in 1991. In response to commenters who sought uniformity between IRS requirements for determining FMV by tax-exempt entities and the FMV requirements under the AKS, the OIG responded: physician arrangements under the Internal Revenue Code are relevant to safe harbor with prohibiting fraud and abuse by individuals and entities participating in the are not undermined by the fact that they do not replicate the requirements under the Internal Revenue Code. 33 In its 2005 Supplemental Compliance Program Guidance for Hospitals, the OIG provided 31 Letter from D. McCarty Thornton (Associate General Counsel, Inspector General Division) to T.J. Sullivan 32 See footnote 3. 33 56 F.R. 35952 et seq. 137
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation idea of arm s-length transactions. 34 providers of the service are controlled by physicians). 35 The OIG also discussed the potential for payments below FMV to be a potential indica- tals and hospital-based physicians, the OIG was concerned about payments below FMV when made by the hospital to physicians, since the reduced amounts could represent a 36 - The OIG appears to be of the view that transactions or arrangements in the healthcare to exclude referrals from the valuation. odology but is reluctant to allow standard practice to operate on its own terms in an of various valuation approaches or methods, since it comments on them in various advisory opinions. 37 traditional valuation methods in terms of whether the particular method directly or 34 70 F.R. 4866-67. 35 70 F.R. 4867. 36 70 F.R. 4867. 37 The BVR/AHLA Guide to Healthcare Valuation, Valuation of Referrals, Chapter 7, pp. 173-81.
calls for departure from standard appraisal methodology, but does not give substan- guidance in terms of valuation methodology for FMV compliance under the AKS than 2.3 The Healthcare FMV Conundrum odology and practice. Regulators seem to be aware of different valuation approaches methods in relation to AKS compliance matters. This minimal recognition, however, does not include validation and incorporation. In other words, aside from the use of the term fair market value, which is decades old and well-understood, the federal healthcare regulations are ambiguous about whether the traditional appraisal body of knowledge is generally applicable for healthcare regulatory purposes. On the other hand, the federal healthcare regulations posit certain departures from standard appraisal methodology and practice with regard to the determination of FMV. appraisal practice in its apparent focus on a single commercially reasonable method as consideration of three approaches to establish value. 38 More importantly, an alternative valuation regulations do not provide any systematic or conceptual guidance that can serve as the ing a valuation method: the nature of the transaction, its location, and other factors. meanings of FMV for regulatory compliance purposes but then provide little guidance on its determination from a methodological standpoint. The question of appraisal methodology, in general, is left unresolved and uncertain. This silence with respect to 38 This issue will be discussed in greater detail later in the chapter. 139
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation as the healthcare FMV conundrum. 3.1 Standard Appraisal Definition of FMV In evaluating the methods and techniques, it is helpful to consider valuation methodol- fact that the regulatory agencies also chose the term. 39 The price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter relevant facts. International Glossary of Business Valuation Terms: 40 The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and the relevant facts. of information that is germane to their transaction. The International Glossary goes further than Revenue Ruling 59-60 by adding the idea of arm s-length transactions 39 40 The International Glossary was developed and adopted by the four major U.S. business appraisal professional counterpart (Canadian Institute of Chartered Business Valuators).
hypothetical buyer and seller as the touchstone parties for establishing the exchange price for the transaction. It should be noted that for compensation valuation purposes, services or resource selling either services or the usage of resources to the buyer, and, conversely, the buyer is buying services or the usage of resources from the seller. 3.2 Focus on the Hypothetical Buyer and Seller thetical buyer and seller. 41 - transaction or arrangement. Business appraisers use the idea of hypothetical parties when applying various valuation methods and techniques to a subject transaction. To the extent that such methods employ data inputs and various assumptions about the operation and the economic capacity of a subject business, the concept of a hypothetical buyer and seller limits the characteristics of these inputs and assumptions to those that - valuation inputs and assumptions are based on what the hypothetical parties could do in operating the subject business. The synergies, competitive advantages, and business in valuation models and techniques. Appraisals prepared using such characteristics are consistent with investment or synergistic value, rather than FMV. In business ap- 42 3.3 Standard Appraisal Methodology: Three Approaches to Value With regard to valuation methodology, the professional practice of appraisal considers these three approaches. Consideration of the three approaches is one of the foundational appraisal. The reason for this commonality is that each approach provides a different, but critical, perspective on the value of a subject entity or service contract. For example, 41 not impacted by any synergies or other advantages that may exist as a result of the transaction. (The CPA s Role in Buying and Selling a Business, AICPA) Prohibited referrals are a form of synergy between hospitals and physicians. 42 The International Glossary investment requirements and expectations.
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation the concept that prudent individuals will not pay more for something than they would pay for an equally desirable substitute. 43 transaction, each party has alternatives to consummating the transaction. 44 Generally, certain instances, application of more than one approach can serve to offset and miti- using the various approaches in valuation assignments. Consideration of the three approaches does not necessitate the application and comple- approach is a function of available and relevant data as well as the capacity of the approach to address the fundamental economics of the subject transaction or arrange- In various appraisal disciplines, one or two approaches may be preferred or held to be the most applicable in determining the value of certain types of property, property interests, or entities. This determination may be a function of data availability in the three approaches to be applied and used to determine the value of a subject business or business interest. 45 a transaction. As a result, an appraiser may not always use an approach in a given engagement after considering all of the facts and circumstances. In addition, multiple appraisal methods may be available for a given approach to value; consideration of an approach may involve use of more than one method. Evaluation of multiple data sources, such as the numerous physician compensation surveys, is another factor in the use of an approach. Similar to assessing the use of the three approaches, evaluating the application of various valuation methods and data sources is based on an analysis of the fundamental economics of a subject transaction or arrangement and the quality and extent of available data. The judgment that is exercised in selecting methods and 43 Gary R. Trugman, Understanding Business Valuation: A Practical Guide to Valuing Small to Medium-Sized Businesses, 2nd edition, p. 55-56. 44 Ibid., p. 55. 45 James R. Hitchner, Financial Valuation: Applications and Models, 3rd Edition (Kindle), Approaches to Value, Chapter 1.
In the professional practice of appraisal, when more than one method is used, the valuation process culminates in the synthesis of the various value indications arising from those methods and techniques used. The appraiser evaluates and assesses each value indication and determines the appropriate indication or range of value that is consistent with the standard of value for the appraisal assignment. In the synthesis process, the methods and value indications relative to the economics of the subject transaction or arrangement. Similar to selecting approaches and methods to use in an appraisal, the synthesis process is a matter of professional judgment. There is no generally accepted Standard appraisal practice can be compared and contrasted with healthcare regula- areas shows matters of agreement and difference between the two concepts of FMV and how to determine it. 4.1 Synthesizing the Definition of FMV While federal healthcare regulatory pronouncements claim departure from traditional of FMV indicates that there are certain areas of agreement in the two standards of value. informed parties. They also both assume independent parties acting in their own selfinterest at arm s length. The behavior and choices of the parties in a FMV transaction are assumed to be consistent with that of well-informed parties, not under compulsion, tiations. The fundamental question for healthcare valuation practice is whether these
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation - a function of whether the hypothetical buyer and seller in a transaction or arrangement are parties in a position to refer to each other. Is the hypothetical buyer in the question, then consideration of referrals would appear to be excluded from the valua- 46 Conceptually, referrals should not - would produce a conclusion of value more consistent with investment value, but not ties in a position to refer, 47 one can attempt to reconcile the regulatory and appraisal to such referrals and exclude the volume or value of referrals from the analysis. In other words, the parties act in accordance with their interests solely with respect to the assets or services that are the subject of the proposed transaction, not including any referrals. The transaction or arrangement must be valued on its separate and distinct economics excluding referrals. With this one adjustment, healthcare and appraisal FMV appear to reconcile and converge. For example, in a hospital call coverage arrangement, the hypothetical hospital buyer hospital s emergency department (ED). Strategic partnerships with physicians who are high admitters to the facility are not considered as a motivation or purpose of the arrangement. The hypothetical hospital buyer will act with economic and operational rationality, prudence, and diligence in obtaining only the level of coverage needed at 46 For example, physician employment arrangements are not necessarily between hospital/health systems and physicians. Despite the trend toward hospital employment, physician-owned practices still employ physicians 47 parties are generally hospitals and physicians, i.e., parties in a position to refer.
the sellers who provide the services, apart from quality and value considerations. Thus, the hypothetical buyer will contract with a high admitter physician and a low admitter physician as long as the two have equal quality and value. In fact, if the low admitter physician is a better value, i.e., agrees to a lower call stipend than the higher admitter, admitter. This buyer will treat the procurement of call coverage no differently than are needed are procured based on the best quality/value combination. Another example of the hypothetical buyer acting apart from referrals can be illustrated for medical directorships. The hypothetical buyer treats a medical directorship no dif- based solely on the characteristics of the services provided by the position, and not One can similarly model the perspective and behavior of the hypothetical seller of services apart from referrals. The hypothetical physician seller of call coverage services arising from ED patients in comparison to compensated care that comes from the physician s practice. Why would the physician displace such compensated care to provide provide some form of compensation for the physician to be motivated to provide call services. A similar analysis can be applied to the availability and telephonic response aspects of hospital call coverage. These aspects can interfere with a physician s normal practice and the generation of income. The hypothetical physician seller will not agree to limitations on income-producing activities without compensation. referral relationships, generally meets the healthcare regulatory requirements for FMV. 4.2 Reconciling FMV Methodology onciliation or synthesis between healthcare regulations and the appraisal profession.
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation cal valuation experience that are found in the appraisal profession s methodological appraisal methods and techniques under three fundamental approaches to value. The problem with the healthcare regulatory approach to valuation stems from its failure tive. Reasonable and generally accepted valuation methods can yield a wide range of value indications. Moreover, any single method can have strengths and limitations in yielding results that encompass all the relevant factors in the value of a subject transaction. Standard appraisal methodology considers multiple approaches and methods as the way to arrive at a conclusion of value that accounts for the broadest scope of factors that can affect value. As a result, the appraisal profession across various disciplines has - In fairness to CMS, the any commercially reasonable method approach appears to have safe harbors for determining FMV. The reluctance on the part of CMS to promulgate such methods is well-founded. The appraisal profession would agree that no singular formula, technique, or method can be said to yield FMV in every context. As Revenue Ruling 59-60 noted in discussing the approach to valuation: circumstances in each case. No formula can be devised that will be generally applicable to the multitude of different valuation issues arising in estate and gift tax cases. attitude in recognition of the fact that valuation is not an exact science. A sound valuation will be based upon all the relevant facts, but the elements of common sense, informed judgment and reasonableness must enter into the process of weighing those transaction, requiring different methods in different contexts. In this sense, the appraisal profession is consistent with the federal healthcare regulations as to the variability of methods needed to determine FMV. Beneath another apparent divergence between healthcare regulations and standard
prime example of the departure of FMV under the healthcare regulations from standard data from transactions between referral-related parties would appear to depart from - companies, most appraisers would exclude, discount, or treat cautiously the use of such data between parties in a position to refer healthcare services is uniformly a departure - 4.3 The Case for Standard Appraisal Methodology in Healthcare FMV conclusions based on the consideration of multiple approaches and methods are more robust and comprehensive and, ultimately, more supportable and defensible. They are produce an opinion of value that is more sustainable and achievable for the buyer of a business or service because it considers a wider array of variables affecting value. As siderations in consummating a transaction. Use of traditional appraisal methodology buyers and sellers acting at arm s length. Because of the analytic rigor involved in their completion, it can be argued that appraisals prepared according to standard appraisal methodology tend to have a higher volume or value of referrals of healthcare services. Valuation conclusions prepared multiple economic factors apart from referrals. As such, there is less ambiguity about the economic reasons and rationale for the consideration paid in a transaction. The
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation value can be associated with a broad base of factors, none of which should include the volume or value of referrals. Excluding the impact of referrals is not always apparent in valuations prepared without due consideration of the available approaches to value and their accompanying methods and techniques. Valuations prepared without analysis of methodology can or data selected. Some methods and data naturally yield higher values than others, and vice versa. These structural problems can cast doubt on the objectivity and independence of FMV opinions that are based on single methods applied without rigorous analysis. Experienced appraisers are all too aware that indications of value can be manipulated through inputs and assumptions or by use of certain methods. A uncertainty. the volume or value of referrals that may exist between the parties to the transaction. one input or assumption can be used to impact the conclusion of value in a material way. Similarly, no one method can materially alter the opinion of value. As a result, economic factors into account. In addition, the apparent objectivity and independence of the appraisal is demonstrated because of the comprehensive nature of the analysis. 48 It can also be argued that appraisals based on standard methodology have a greater propensity for producing a rigorous analysis relative to the commercial reasonableness duce sustainable economic results for a buyer as a result of considering a broad array of economic factors. Sustainable economics, whether from the earnings of a business or the economics of a service contract, can more readily be considered to be commercially reasonable than unsustainable results. A valuation based on a single variable or set of variables has a higher probability or potential to yield an unsustainable price or 48 When an appraisal analysis ignores relevant and available data, assumptions, and methods, it is easy to support a particular conclusion on paper. No other consideration is given to alternative factors or issues; they in a manipulative fashion because many factors are addressed in the analysis. Critical readers can readily identify dubious logic and questionable assumptions when more than a singular view is presented.
compensation level because of its narrow focus. The potential for unsustainable results 5.1 The Synthesized Approach to Healthcare Valuation care valuation is to follow generally accepted practices consistent with the appraisal consideration of three approaches to value and a conclusion based on the synthesis of - In addition, practitioners of healthcare valuation apply the idea that FMV entails a tion but, in fact, helps ensure consistency with the intent of the healthcare regulations referrals, but also produces investment value and not FMV. Even when the hypotheti- using characteristics of such related parties in the valuation inputs and assumptions that would include referrals or give the appearance of including referrals. regulations. In these cases, healthcare laws and regulations clearly supersede and have priority over standard appraisal practices and methodology. The two primary areas
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation such services. In both areas, appraisal professionals avoid using such referral-laden 5.2 The Use of Jurisdictional Exceptions of appraisal. Such concessions have been given a uniform name and description in appraisal professional standards: jurisdictional exceptions. The Uniform Standards of Professional Appraisal Practice (USPAP) even includes a separate Jurisdictional Exception Rule. This rule states that if any applicable law or regulation precludes compliance with any part of USPAP, only that part of USPAP becomes void for that assignment. 49 Accountants (AICPA) provide similar guidance on jurisdictional exceptions to that found in USPAP: If any part of this Statement differs from published governmental, judicial, or ac- or valuation reporting procedures, then the valuation analyst should follow the applicable published authority or stated procedures with respect to that part applicable to the valuation in which the member is engaged. The other parts of this Statement continue in full force and effect (Valuation Services Interpretation No. 1). 50 Analysts (NACVA) and the Institute of Business Appraisers (IBA) provide for similar treatment. In the event published regulatory authorities specify valuation procedures follow the authority in that matter. The remaining standards continue to be in effect for the appraisal. 51 When a jurisdictional exception is made in an appraisal assignment, USPAP calls for the appraiser to do the following: 1. Identify the law or regulation that precludes compliance with USPAP; 2. Comply with that law or regulation; 49 2012-2013 Edition, p. U-15, lines 437-38. 50 Statement on Standards for Valuation Services Number 1: Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, Section 10 (SSVS 1). See also Interpretation No. 1-01, Scope of Applicable Services of Statement on Standards for Valuation Services Number 1: Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, Sections 24 and 25. 51 NACVA and IBA Professional Standards (effective June 1, 2011), Section III.D, Jurisdictional Exception. 150
3. Clearly and conspicuously disclose in the report the part of USPAP that is voided by that law or regulation; and 4. Cite in the report the law or regulation requiring this exception to USPAP compliance. 52 The AICPA, NACVA, and IBA standards require that jurisdictional exceptions be included in the introduction section of a report that provides information on the nature 53, 54 and scope of the engagement. standard appraisal methodology to adjust for the particular requirements of governmental regulations. It would be logical, therefore, to extend the use of jurisdictional exceptions to healthcare valuation, including the practice of compensation valuation, where professional standards for this emerging appraisal discipline do not exist. The concept regulatory compliance. In these engagements, appraisers follow standard practice as ates a potential area that may run afoul of the healthcare regulations, appraisers simply with regulatory requirements. Whether healthcare regulators would accept this approach of using standard appraisal methodology coupled with jurisdictional exceptions is a separate question. 55 Since they have provided little practical or theoretical guidance, it is unclear what their position would be. Certainly, healthcare regulations call for departures and adjustment relative to the unique focus of healthcare FMV in terms of not paying for the volume or value of referrals. Jurisdictional exceptions that are made to exclude or avoid valuing referrals in the appraisal process are consistent with that focus. Moreover, there are important areas of consistency between healthcare FMV and appraisal FMV in terms of both the is good reason to believe that following standard appraisal practice and methodology will further compliance with healthcare FMV. Professional appraisers should also 52 2012-2013 edition, pg. U-15, lines 442-446. 53 See sections 52, 71, and 74 of SSVS1. 54 See section V.C.1 and 2 of the Professional Standards. 55 healthcare regulatory compliance purposes involves jurisdictional exceptions. Unfortunately, professional profession would do well to begin framing the dialogue and the literature within the profession to include jurisdictional exceptions when dealing with healthcare FMV. 151
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation matters, including those with unique priorities, such as healthcare FMV. 5.3 Issues in the Use and Application of Jurisdictional Exceptions forward, its application to real-world engagements is not always so easy. There are certain areas or issues where healthcare regulations related to FMV are not absolutely of the valuation process: 1. 2. Data and data sources; and 3. Assumptions used in the valuation analysis, whether qualitative or quantitative. There are also certain fact patterns in which use of a particular data source, assumption, or valuation technique may appear to be inconsistent with healthcare regulations and FMV. Many gray areas can involve issues related to technical component services or ancillaries included in a business being sold or in the scope of services being provided of a proposed business or service are also the referral base for the business or service. guidance from the client s legal counsel. Legal, regulatory, and investment opinions and advice are not the purview of an appraiser in a transaction or compensation arrangement. The job of the appraiser is to develop a conclusion of value based on the engagement scope given by the client. Since healthcare regulatory compliance is part of that scope and since such compliance involves legal and regulatory matters, legal counsel s expertise and direction may be needed in these areas. Indeed, appraisers and complex regulatory compliance questions. Appraisers are certainly competent to not necessarily competent to provide legal or regulatory opinions and advice to clients. In such cases, appraisers may be given explicit instructions by legal counsel as to the completed by the appraiser. To the extent that such direction is given relative to areas of ambiguity in healthcare regulations and not about matters related to appraisal methodology per 152
se, appraisers would be advised to follow the directions of legal counsel, while bearing in mind that independence requires that the appraiser not cede his or her judgment to a third party. In Consistent with the guidance in valuation standards, jurisdictional exceptions should - ally. The appraiser should not subordinate his or her opinion of what is required for appraising the subject transaction in terms of standard methodology and practice. healthcare regulations in particular fact patterns. To the extent such guidance causes a departure from standard appraisal methodology and practice, it should be treated as a jurisdictional exception. Jurisdictional exceptions should be documented in the appraisal report, with discussion of its impact on the scope of work completed for the assignment. 5.4 Practical Tips for Working With Attorneys on Jurisdictional Exceptions An important point to remember during the review process with legal counsel is that the purpose is not to discuss and debate general or technical issues in standard appraisal methodology and practice. The purpose of the review process is not for the attorney normal selection of data sources, assumptions, approaches to value, individual methods, and synthesis considerations made by the appraiser are not subject to debate and approval by legal counsel. Appraisers need to remain objective and independent in the determination of FMV with regard to these matters. Jurisdictional exceptions only - valuation practices: or the client s legal counsel as part of the engagement process. Include the 153
The BVR/AHLA Guide to Healthcare Industry Compensation and Valuation with legal counsel in the initial stages of the valuation process. Knowing counsel s hot button issues up-front can allow proactive addressing of issues. methods and techniques, to allow for early detection of issues. Early detection that heads in the wrong direction. Be alert to potential issues that might arise during the valuation process. Provide adequate disclosure of data sources, assumptions, and methods so
BVR/AHLA Guide to Healthcare Industry Compensation and Valuation Timothy Smith, CPA/ABV, and Mark O. Dietrich, CPA/ABV Editors 1000 SW Broadway, Suite 1200, Portland, OR 97205
Copyright 2012 by Business Valuation Resources, LLC (BVR). All rights reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise, except as permitted under Sections 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher or authorization through payment of the appropriate per copy fee to the Publisher. Requests for permission should be addressed to the Permissions Department, Business Valuation Resources, LLC, 1000 SW Broadway St., Suite 1200, Portland, OR 97205, (503) 291-7963, fax (503) 291-7955. Information contained in this book has been obtained by Business Valuation Resources from sources believed to be reliable. However, neither Business Valuation Resources nor its authors guarantee the accuracy or completeness of any information published herein and neither Business Valuation Resources nor its authors shall be responsible for any errors, omissions, or damages arising out of use of this information. This work is published with the understanding that Business Valuation Resources and its authors are supplying information but are not attempting to render business valuation or other professional services. If such services are required, the assistance of an appropriate professional should be sought. Publisher: Sarah Andersen Managing Editor: Janice Prescott Chair and CEO: David Foster President: Lucretia Lyons Vice President of Sales: Lexie Gross Customer Service Manager: Retta Dodge ISBN: 978-1-62150-017-9 Library of Congress Control Number: 2012949852
...1...5...7...25...53...65...79...103...109...111 By Mark D. Folk...127...155...163...179 By Mark O. Dietrich, CPA/ABV iii
BVR/AHLA Guide to Healthcare Industry Compensation and Valuation...193 By Martin D. Brown, CPA/ABV, and William Lyle Oelrich Jr., MHA, FACHE, CMPE...209 By Pershing Yoakley & Associates, P.C....213 By Robert F. Reilly, MBA, CPA, CMA, CFA, ASA, CBA...245 By Mark O. Dietrich, CPA/ABV...321 By Mark O. Dietrich, CPA/ABV...329...331...345...371 By Richard Romero, PAHM, CHFP, AVA, and Ryan Harvey...395 By Richard Romero, PAHM, CHFP, AVA; Ryan Harvey; and Timothy Smith, CPA/ABV...409...431 By Mark O. Dietrich, CPA/ABV, and Frank Cohen, CMPA...441 By Mark O. Dietrich, CPA/ABV, and Kathie L. Wilson, CPA, CVA...453 By Alice G. Gosfield, Esq.
...465 By David Fein, MBA...495 By Gregory S. Feltenberger, MBA, FACMPE, FACHE, CPHIMS, and David N. Gans, MSHA, FACMPE...517...519...537...573...611...631 By Carol Carden, CPA/ABV, ASA, CFE...643 By Gregory D. Anderson, CPA/ABV, CVA...667 By Gregory D. Anderson, CPA/ABV, CVA...691 By Andrea M. Ferrari, JD, MPH, and Timothy Smith, CPA/ABV...713 By Gregory D. Anderson, CPA/ABV, CVA, and Scott Safriet, MBA, AVA...741 By William Lyle Oelrich Jr., MHA, FACHE, CMPE
BVR/AHLA Guide to Healthcare Industry Compensation and Valuation...761 By Ann S. Brandt, Ph.D....787 By Jason Ruchaber, CFA, ASA...801 By Robert Mundy, CPA, ABV, CVA, and Tynan P. Olechny, MBA, MPH, AVA...817...819 By Mark Browne, M.D., David McMillan, CPA, and Burl Stamp, FACHE...835 By Mark O. Dietrich, CPA/ABV, and Gregory D. Anderson, CPA/ABV, CVA...843...857...869...891, and Albert D. Hutzler, JD, MBA, AVA...905 By Martin D. Brown, CPA/ABV...915 By Darcy Devine, MBA, AIBA, AVA, and Briana Gordon, MBA...931...933...939