Assessing Intangible Value in a Physician Practice Acquisition

July 4, 2011

To download the PDF, click hereAssessing Intangible Value in a Physician Practice Acquisition


Introduction

Due in large part to concerns over healthcare reform and declining reimbursement rates, physicians are increasingly looking for opportunities to sell their practices to hospitals and work as employees. Similarly, hospital systems are interested in acquiring key practices to solidify or expand their provider networks. These transactions are clearly subject to the regulatory restrictions of commercial reasonableness and Fair Market Value (“FMV”) imposed by the Stark Law1 and the Anti-Kickback Statute (“AKS”)2, as well as the Internal Revenue Code Section 501(c)(3) regulations if the hospital is a not-for-profit entity.

Many practices have very low or sometimes negative projected posttransaction earnings after adjusting for the physician’s anticipated posttransaction compensation. Accordingly, an Income Approach valuation methodology, such as the Discounted Cash Flow (“DCF”) method, will generally result in zero or a very low value for the practice. In such cases, the Cost Approach will be utilized instead. However, the problem arises when the Cost Approach results in substantial values being attributed to intangible assets,3 such as physician workforce, that are not supported by an appropriate level of net cash flow needed to provide an economic return to the hypothetical buyer.

This paper addresses the appropriateness of assigning substantial value to intangible assets such as physician workforce, under the FMV standard, and going concern premise of value, without such amounts being appropriately supported by net cash flow under the Income Approach. The paper first defines the key terms used and describes typical intangible assets, then looks at the theoretical underpinning of the Cost Approach as described in accepted valuation texts and court cases, then examines, critiques and ultimately dismisses the sole use of the Cost Approach to value physician workforce as both a violation of professional standards and the regulatory structure for FMV.


To continue reading the white paper, download the PDF: Assessing Intangible Value in a Physician Practice Acquisition

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