Identifying Appropriate Business Valuation Approaches Under Stark and The AKS

June 5, 2008

To download the PDF, click here: ABA Health Lawyer Dec 2006


Introduction

One of the most problematic areas for valuation consultants and attorneys is establishing a clear understanding of the relationship between quantitative assumptions in a valuation model of a health care entity and the prohibitions of the Stark laws and Anti-kickback statute (“AKS”). Failure of one advisor or the other to understand both topics can lead to incorrect valuation and the possibility of an inadvertent, catastrophic result for the client and the advisors in legal and financial terms due to civil and criminal penalties that could be incurred. This article explores the problems commonly encountered by the authors in their health care valuation practices and in educating attorneys, providers and valuation analysts, particularly why for health care entities the income approach to valuation is generally preferred over the market approach.

Defining Fair Market Value

Defining the standard of value to be employed in a valuation engagement is critical. There are different standards of value that influence the result of a valuation. Fair market value assumes a hypothetical buyer and seller while investment value, for example, is the value to a specific buyer. Health care transactions are typically subject to a fair market value standard, and that term is used throughout the Stark laws and regulations as well as in the AKS and advisory opinions.1 Thus, it is necessary to understand what that term means and how it affects the determination of value. Here are some common definitions of fair market value and their sources. Note that the Stark regulations contain their own specific requirements for defining “fair market value.”

Internal Revenue Service Revenue Ruling 59-60

“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 is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”


To continue reading this article, download the PDF: ABA Health Lawyer Dec 2006

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