The Effective Use of Valuations for FMV Compliance HCCA 2013 Compliance Institute April 24, 2013 Speaker Information: Timothy Smith o Over 18 years of experience in the healthcare industry, including more than 14 years at Hospital Corporation of America, Inc. (HCA). o Developed and administrated HCA s FMV compliance program for third party appraisals from 2004 08. o Reviewed hundreds of third party appraisals from a wide range of firms. o Lead developer and analyst on hundreds of physician practice transactions. o Practicing appraiser since 2008, focusing on the valuation of physician compensation arrangements. o Extensively published author on the newly emerging appraisal discipline of compensation valuation (CV) in the healthcare industry. o Major contributing author and co editor of the first systematic account of the theory and practice of CV in the BVR/AHLA Guide to Healthcare Industry Compensation and Valuation. o Accredited in Business Valuation (ABV) certification from the American Institute of Certified Public Accountants (AICPA) and a licensed CPA in two states. Presentation Outline ooverview of issues in FMV compliance for healthcare regulatory purposes o See handout: Chapter 7. Complying with the Healthcare Definition of FMV in Appraisal Practice. orange of options for establishing FMV for compliance purposes oevaluating the use of FMV options o Best practices for valuations in a FMV compliance program 1
Regulatory Definition of FMV Stark Definition ovalue in arm s length transactions oprice resulting from bona fide bargaining between parties who are: owell informed onot in a position to generate business for the other party oon the date of the transaction or agreement Regulatory Definition of FMV Stark Definition ousually based on market data obona fide sales for assets of like type, quality, and quantity in a particular market at time of deal obona fide service agreements with comparable terms at the time of deal oprice or compensation not determined based on the volume or value of referrals Regulatory Definition of FMV Stark Definition for Rentals and Leases ovalue for general commercial purposes and not intended use ospace lease cannot reflect proximity of parties where lessor is potential referral source 2
Regulatory Definition of FMV Anti Kickback Statute (AKS) Definition ostatute not directly address FMV ooig added FMV in AKS regulations opart of criteria in assessing AKS compliance orequirement in various safe harbors odefinition given for leases only osome commentary in various publications FMV Methodology ostark Commentary ofmv based on facts and circumstances ousing any commercially reasonable method obut, little guidance on what is commercially reasonable ovaluation method depends on 3 key factors: onature or type of transaction olocation of the transaction oother factors FMV Methodology ostark Commentary o Moreover, the definition of fair market value in the statute and regulation is qualified in ways that do not necessarily comport with the usage of the term in standard 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. (69 F.R. 16107) 3
FMV Methodology ostark Commentary oprohibition on use of market data from parties in a position to refer osee handout for quotations in context oreferral related parties are not independent and at arm s length odata from such parties does not reflect arm s length transactions omany participants in the healthcare marketplace appear not to be aware of this prohibition FMV Methodology ostark Commentary ono single universal method for determining FMV o Reference to multiple, objective, independently published salary surveys remains a prudent practice for evaluating fair market value (72 F.R. 51015) oskepticism towards internally generated market surveys due to potential for manipulation FMV Methodology ostark Commentary ocms took a neutral position on using IRS guidelines for determining FMV ouse of independent valuation consultants, while recognized as one method for establishing FMV, does not guarantee FMV compliance 4
FMV Methodology ooig Commentary on FMV for AKS o Rejected calls for uniformity between IRS guidelines for determining FMV and AKS FMV in 1991 safe harbor regulations o Noted common methods of valuation do not comport with the prescriptions of the [AKS] in 1992 letter to IRS o 2005 compliance guide for hospitals o Linked FMV with arm s length transactions o Cautioned against use of market data from referral related parties Appraisal Methodology ooig Commentary on FMV for AKS oadvisory opinions comment on various valuation methods used in business valuation (BV) ofocus on inclusion of referrals in the method onote: advisory opinions are statutorily prohibited from addressing FMV directly ooig, however, will sometimes comment on factors considered in valuations as part of the advisory opinions Regulatory Definition of FMV Summary of Guidance o Exclude the volume or value of referrals o Use pricing from parties at arm s length, without referral relationships o Comparability of subject to market data o Based on location o Based on facts and circumstances o Based on type of transaction o Departs from standard valuation methods o External appraisals not guarantee FMV compliance o Specialized definitions for leases and rentals 5
Options for Establishing FMV oexternally prepared valuations ointernally prepared valuations ohybrid: mixture of external and internal development or preparation Options for External Valuations oprofessional appraisers oreal estate omachinery and equipment (M&E) obusiness valuation (BV) ocompensation valuation (CV) ocompensation and other consultants oattorneys Standards for Professional Appraisers o Credentialed by an appraisal organization o Real estate: MAI, ASA o M&E: ASA o BV: ASA, AICPA, NACVA, IBA o CV: no specific credential, but BV credentialed o Meets standards of appraisal organization o Education / training o Experience o Technical skills exams and/or peer review o Must comply with organization s standards and ethics code o Independent opinions not advocacy work 6
Appraisal Definition of FMV Appraisal Profession s Definition ohypothetical buyer and seller oneither party under compulsion oboth have reasonable knowledge of the facts oopen and unrestricted market Definition of FMV Reconciliation of Appraisal and Healthcare Regulatory FMV: okey issue: are the hypothetical buyer and seller parties in a position to refer? oif not, then Healthcare Regulatory and Appraisal FMV appear to converge oif yes, exclude the impact of referrals from the valuation analysis Standard Appraisal Methodology o Consideration of three approaches to value o Market o Cost o Income o Multiple methods often available under an approach o Apply relevant approaches o Available data o Applicable to key economics of subject o Synthesis of approaches/methods used o Conclusion of value 7
Healthcare FMV Conundrum Healthcare regulations appear to: orecognize and reference standard appraisal methodology ocall for a departure from standard appraisal methodology oprovide little systematic guidance on a substitute methodology for compliance purposes Resolving the Conundrum Case for Standard Appraisal Methodology o Readily adapted to exclude the volume or value of referrals o Consideration of multiple approaches/methods is more likely to exclude the value of referrals o Single factor or single method valuations are more susceptible to manipulation or cherry picking o Objectivity: professional standards and literature guide the use and application of methods o Adjust standard methods as needed for healthcare regulatory compliance ( jurisdictional exception ) Selecting a Third Party Valuator otype of appraisal oknowledge of healthcare industry oknowledge of healthcare regulations oexperience and expertise related to the type of transaction or arrangement osize or complexity of transaction / arrangement oturnaround time opricing/value ocustomer service 8
Defining the Scope of the Engagement o Purpose of valuation o Definition of value o Intended users of report o Subject of the valuation assignment o Transaction subject or arrangement type o Elements of the price or compensation to be valued o Data made available o Expected reliance on valuations of others o Valuation date and shelf life o Deliverables: letter or report (detailed or summary) o Scope limitations or directives Independence of the Valuator otechnical oapproaches and methods odata sources otransactional oorganizational ofinancial osee handout with recommended certifications the appraiser should make relative to the engagement Independence of the Valuator oscope items with limited or neutral impact olevel of detail in the report ocontent and organization of report ospecific elements of value oselected assets ospecific elements of the compensation structure oreliance on valuations of others oadditional scope requirements for specialized analysis and information 9
Independence of the Valuator oscope items reducing or undermining engagement independence odirectives to use certain methods and techniques in the development of a conclusion of value odirectives to use specific data in the development of a conclusion of value orestricting knowledge of facts and circumstances odirectives to use specific assumptions in the valuation analysis obut, valuation may otherwise be independent Content of Valuation Reports o Content required by appraiser s credentialing organization o Exception: CV reports, noncredentialed valuators o See handout: Chapter 5. Elements of a Compensation Valuation Report for suggestions o Critical information areas o Assumptions o Background facts and circumstances o Transaction or arrangement contract terms o Data sources used o Approaches / methods used o Basis for the conclusion of value o Limiting conditions o Valuation date and shelf life Review of Valuation Reports odo the facts and circumstances match those reported and assumed in the report? odo the deal terms match those in the report? ohow realistic and valid are the assumptions on which the conclusion of value is based? ohow reliable and comparable are the data sources used? odoes the valuator provide support and defense for the conclusion of value? 10
Review of Valuation Reports oto what extent is the valuation and the conclusion of value based on quantitative vs. qualitative analysis? ocan you understand the valuator s work and the justifications for the work and conclusion? odoes the valuator follow professional standards and guidance from professional appraisal literature? ocritical review issue: To rely or not to rely, that is the question Options for Internally Established FMV ocommonly used approaches ovaluation method or technique ouse of published survey data ointernally prepared surveys ofacts and circumstances onegotiations between parties Internally Established FMV ousing a valuation method ois the method commercially reasonable? ois the method applicable based on the type of transaction? oevaluation of data sources for method oindependence and credibility of method selection osources for valuation methods oappraisal literature oappraisers and consultants 11
Internally Established FMV ouse of published survey data osurveys for various types of compensation: oclinical oexecutive/administrative ocall coverage: hospital vs. practice call oacademic omedical director oplacement / newly hired ospecialty group specific Internally Established FMV ouse of published survey data o Is the survey data taken solely or predominately from referral related parties? o How comparable is the subject transaction to the survey data? o Type and scope of services o Local market conditions, especially reimbursement o Physician qualifications o Workload and work hours o Operating context o Does the survey provide sufficient information for evaluating comparability? Internally Established FMV ouse of published survey data ohow will you apply the survey data to the subject to establish FMV? oneed a basis for applying the data to the subject and determining a value olook for various measures of comparability oavoid overuse of the median as FMV oavoid categorical selection of percentiles as FMV olearn from professional literature on use of market approach and published survey data 12
Internally Prepared Surveys ostark commentary: internally prepared surveys do not have strong evidentiary value due potential for manipulation (66 F.R. 945) oare data sources at arm s length and without referral relationships? osufficient detail? odocumentation? obona fide transactions or arrangements? odifferences in conditions between subject and market reference points? Internally Established FMV ofacts and circumstances based FMV opro: based on facts and circumstances ocon: based on judgmental or subjective analysis onegotiations between the parties ohealthcare regulations do not consider the parties to be at arm s length onegotiations are not considered to be reliable for compliance purposes Hybrid Valuations ohybrid valuation models ocombination of internal and external valuation analysis oexternally created valuation tool that is used and applied internally oexternal valuation or valuation tool that is developed based on internal specifications ofacilitate timely and cost effective valuations 13
Types of Hybrid Valuations ocalculation of Value engagement oclient and appraiser agree on approaches and/or methods used for valuation oautomated valuation models or calculators omarket studies oprovide a general range of FMV oprovide a formula or method to determine FMV osurvey data aggregation with preselected ranges Use of Hybrid Valuations o Read and study the opinion language that comes with the hybrid valuation! o Is your organization comfortable relying on this language? o Read and study how the valuation model determines FMV! o For proprietary or black box models, ask the valuator to step you through the calculations at a general level. o How analytical and rigorous is the computation of value? o What level of facts and circumstances are accounted for in the valuation? o Comparability to the subject? o Local market conditions? Use of Hybrid Valuations ohow susceptible is the model to manipulation or erroneous use based in inputs and application? odoes the tool have limitations and boundaries on its use and outcomes? oconsider limitations on use and reliance based on benchmarking, e.g., comp below the 75 th percentile. odevelop internal controls and reviews around the use and application. 14
Factors in Selecting Valuation Options ogeneral factors oavailable internal resources otime oexperience / expertise ovolume of valuations needed oexisting infrastructure for FMV compliance oorganizational compliance goals and objectives obudget considerations Factors in Selecting Valuation Options orisk assessment approach o Higher risk transactions and arrangements receive greater valuation attention than lower risk orisk factors to consider o Benchmarking of compensation or price o Higher compensation levels may present more risk o But, risk may depend on matching of compensation to services provided o Total dollars involved o Complexity of transaction Factors in Selecting Valuation Options orisk factors (continued) otype of arrangement oif it s new, it s probably higher risk oregulatory guidance and pronouncements olegal guidance orecent cases and investigations o Bad facts ocompliance history of the organization orelationship and history of parties 15
Compliance Officer Considerations ostay up to date on FMV compliance issues odevelop a general understanding in key areas: oregulatory guidance on FMV ostandard appraisal methodology ovaluation issues by type of arrangement oavailable surveys and data sources osee FMV compliance resources handout Questions. 16