The Role of Fixed Asset Appraisals in Healthcare Valuations

The Role of Fixed Asset Appraisals

In Healthcare Valuations

Page 2April 1, 2014

The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities

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© 2014 National Association of Certified Valuators and Analysts

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Page 4April 1, 2014


Agenda

Current Trends in Healthcare

Purpose of Fixed Asset Appraisals

The Appraisal Process

Agenda

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• Consolidation and integration

• Hospital/physician alignment

• Mergers and acquisitions

• Cost reduction

• Quality initiatives

• Technology improvements

• Compliance focus

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Hospitals

Imaging Centers

Ambulatory Surgery Centers

Specialty Practices

Physical Therapy

Primary Care

Home Health

High

Low

Capital Intensity

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Purpose of Fixed Asset AppraisalsPrimary M&E engagements in Healthcare:

Transactional: Identify, inventory, appraise assets

Compliance: Determine Fair Market Value for Stark / Anti-Kickback compliance

Financial Reporting: Fair Value to calculate impairments/recording of acquired assets/liab

Other Purposes of Fixed Asset Appraisals:

Bankruptcy

Condemnation

Dissolution of corporations, partnerships, and marriages

Taxation (income tax, property tax, charitable contributions)

Financing

Leasing

Management Decisions

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Purpose of Fixed Asset AppraisalsCompliance: Stark Law

• Also called the “physician self-referral law”

• Prohibits a physician from making referrals for designated health services to entities in which the physician (or a family member) has a financial relationship

• Designated Health Services (DHS)

- Currently 12 health services

- Includes hospital inpatient and outpatient services, as well as clinical lab, physical and occupational therapy, radiology, certain imaging, DME, home health and various other servicesand supplies

• Is a “strict liability” law

• Contains various “safe harbors”

• Provisions enforced by the Centers for Medicare & Medicaid Services (CMS), although Department of Justice adjudicates false claims arising from violations of the Stark Law

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Purpose of Fixed Asset AppraisalsCompliance: Stark Law

Stark Law Definition of Fair Market Value:

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 a 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. Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated referrals.

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Purpose of Fixed Asset AppraisalsCompliance: Anti-Kickback Statute (AKS)

• Anti-Kickback Law prohibits the payment or receipt of remuneration to induce or reward referrals for Medicare or Medicaid services

• Criminal statute that requires proof of “intent”, i.e., knowingly and willfully paying for referrals

• If one purpose of the payment is to induce referrals, then the AKS is violated, even if there are other legitimate business reasons for the payment

• Contains various “safe harbors”

• Enforced by the Office of Inspector General (OIG) and the Department of Justice (DOJ)




Step 1Define the problem and scope of work

Step 2Collect relevant data

Step 3Apply appropriate valuation methodologies and analytical techniques

Step 4Formulate value (or other conclusions)

Step 5Prepare report




1. Define the Engagement• Property to be Appraised

• Purpose of Appraisal

• Intended Use(s) of Appraisal

• Definition of Value

• Effective Date

• Limiting Conditions



The Appraisal ProcessSTANDARDS OF VALUEFair Market Value or Fair Value

PREMISE OF VALUEPremise of value is an assumption about the likely set of transactional circumstances that can be applicable in the valuation process.

1. Sale for Removal - for a similar or alternate use

•Fair Market Value

•Fair Market Value – Removed

2. Continued (or As Installed) - use of the asset for the purpose for which it was designed and acquired

• Fair Market Value In Continued Use

• Fair Market Value Installed

3. Liquidation

• Orderly Liquidation Value

• Forced Liquidation Value

• Liquidation Value in Place



The Appraisal Process: Data Collection

2. Data CollectionINVENTORY: Asset identification - item, make, model, date of manufacture (DOM), size, condition

Know what to look for:

• Bio Med tags

• Different components of equipment

• Removable components

• DOM







DATA REQUEST:

• Invoices

• Maintenance agreements

• Photos (if performing a desk appraisal)

• Depreciation schedule

• Balance sheet

• Identification of leased items (and copy of lease agreements – operating versus capital lease)

• Identification of personal or excluded items

• Identification of grant Items




Depreciation Schedules:

Not typically used as the basis for the valuation asset list.

• Insufficient asset descriptions

- Condition

- Purchase date vs. DOM (or new/used)

- Grouped assets

- Upgrades, maintenance agreements

- Smaller items

• Disposals, acquisitions, and items not in use

• Cross reference



The Appraisal Process: Analysis

3. Apply Appropriate Valuation Methodology & Analytical TechniquesThe appraiser must consider all three approaches:

Cost Approach

Market Approach

Income Approach




COST APPROACH

Reproduction Cost New or Replacement Cost NewLess

All forms of DepreciationPhysical Deterioration

Functional ObsolescenceEconomic Obsolescence

Note: Appraisal depreciation is defined as “the difference in value between an existing old asset and a new asset taken as a standard of comparison. Appraisal depreciation should measure value inferiority.”




Determining Replacement Cost New & Reproduction Cost New

• Detail Method (includes all direct & indirect costs)

- Direct Costs include: Materials/equipment, labor, installation, etc.

- Indirect Costs include: Professional fees, administrative fees, temporary insurance, licenses/permits, typical finance charges (during construction), equipment rental, etc.

• Trending

• Cost-to-Capacity




Methods for Determining DepreciationDepreciation Methods

Physical Depreciation Age/Life AnalysisDirect Dollar Measurement (curable vs. incurable depreciation)

Functional Obsolescence(Operating Obsolescence)

Excess CapitalExcess Operating Expenses

Economic Obsolescence(External Obsolescence)

Inutility (Cost-to-Capacity Concept)Analysis of Industry TermsSupply/Demand RelationshipsSales Transactions Etc.




MARKET APPROACH

Indication of value by analyzing recent sales (or offerings) or properties that are similar to the subject property.

Where data comes from:

• Online Used Marketplace (e.g., ebay, Dotmed, MedWow)

• Online Dealers (e.g., Block Imaging, Alarka Medical, Office Pros)

• Manufacturers

• Internal Databases



The Appraisal Process: AnalysisElement of Comparability: Direct Match or Comparable Match

Factors to consider

If the item is a comparable match, then the appraiser will make adjustments when necessary to account for any differences. The appraiser may also make adjustments based on the definition of value being used in the appraisal.

Age or Effective Age Manufacturer Type of Sale

Condition Motivation Time of Sale

Capacity Price

Features Location




INCOME APPROACH

• Rarely used in M&E appraisals

• Used to determine the present value of the future economic benefits of owning an asset

• Difficult or impossible to identify an income stream of an individual item



The Appraisal Process: Formulate Values

4. Formulate Values or Other ConclusionsUse the data collected and the appropriate methodologies to determine the conclusion of value.



The Appraisal Process: Report

5. Report• Must be one of the following:

- Appraisal Report

- Restricted Appraisal Report

Note: Verbal reports are also acceptable, provided the information communicated is that which would be contained in one of the above reports and is reflected appropriately in work papers.

• Follow USPAP Standard 8

- Include an Appraisers Certification

- Statement of Assumptions and Limiting Conditions



Certification: ASA, AMEA

Follow USPAP Standard 7 & 8 (Personal Property)

M&E Appraisals



Contact

Darcy E. Devine, MBA, CVAEmma Miller, CVA, AM

Monarch Tower, Suite 700 3424 Peachtree Road, NE

Atlanta GA 30326

404-266-9876

www.pyapc.com

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