Rapid Changes in the Healthcare Market Demand Qualified Healthcare Valuation Professionals
With the healthcare industry evolving over the past several decades, particularly in healthcare regulations and reimbursement, the need for qualified valuation professionals has increased.
Above all else, appraisers must have the requisite knowledge in the segments of the healthcare market they work in.
The valuation theories used by general business and healthcare valuations professionals are the same. But let us note that when performing a valuation, the valuator is required to be knowledgeable about the industry in which the business being valued operates.
Altegra Health Managing Director of Transaction Advisory Services Curtis Bernstein said a healthcare valuation expert, typically providing transactional and litigation services, focuses solely in the healthcare industry, thus allowing the expert to ask the right questions necessary to understand the business and appropriately asses the value.
“The experts are also active in the market and understand what market participants are willing to pay for entities and services, and why these payments are warranted,” Bernstein said.
This is a reason why it is important to find an appraiser that has specific experience in which the business being valued operates, said Deloitte Financial Advisory Services Healthcare Valuation Services Director Don Barbo.
“If the business transaction involves the sell of minority units within a joint venture, then I think it’s important that the appraiser they select has healthcare valuation experience in valuing joint ventures on a minority ownership level,” Barbo said.
Healthcare valuators’ transactional services can involve a health system looking to acquire a physician practice, or looking into entering a joint venture arrangement involving physicians, this according to Barbo. He also explained that these services could involve a hospital trying to acquire another hospital, or looking to sell interest within a partnership or joint venture arrangements.
Engaging with Healthcare Valuators
Barbo said his healthcare clients rely on his valuation reports for two reasons: to assist in their transaction negotiations with buyers and sellers, and secondly, to be compliant with various rules and regulations the government imposes on transactions in the healthcare arena.
These are reasons Barbo said hiring a healthcare valuation expert is important. The expert will understand changes in reimbursement, market industry trends, and current transactions multiples, among other factors affecting the business.
“I think it is even more important to pick a healthcare appraiser that is involved with transactions, as opposed to doing a lot of tax related work or litigation,” CliftonLarsonAllen Healthcare Valuation Practice Manager Kevin Cope said.
Buyers and sellers want to make as most informed decisions as possible.
Having a valuator who knows the industry, but also is coming from an independent, objective and unbiased position can help informed buyers or sellers about a range of fair market value issues.
In a healthcare transaction environment, if both parties want an appraisal, it is usually best if they agree on one appraiser and know who the valuator is, Cope said. This helps both parties feel not only comfortable, but also allows for a transparent process for the negotiation decision.
However, instances occur where the seller does not involve the buyer in the process of hiring a valuator.
“It might be that the seller wants to hire someone they believe is going to get them the highest value, but the highest value might not be a legal value. That can be problematic,” CliftonLarsonAllen Healthcare Valuation Practice Principal Alan Simons said. “Sometimes we have to sit down and educate one or both parties on some of the regulatory issues and why they might not be able to pay as much as they might like to in a particular situation because of the potential that it might be illegal. There are just a lot of considerations in healthcare that you just do not find in other types of valuations.”
Bernstein said when a seller does this, they are looking to make a market for the company. The sellers concern is that it is limiting the market because of the valuation. Most healthcare transactions are subject to the anti-kickback statue, so this should not happen. With that noted, in a number of cases, the valuator may be hired strictly to review the assumption of the buyer in determining the fair market value for the business.
“If the buyer is for profit and there is no referral relationship post transaction between the parties, the regulatory risk may be mitigated and a valuation may be unnecessary,” he said.
Bernstein said not to be afraid to ask specific questions before engaging the valuation expert about how situations might affect the valuation opinion.
Upon hiring a healthcare valuator, Bernstein suggests identifying firms that specialize in healthcare. Once those firms have been indentified, he said to make sure to speak to a partner to understand the firm’s experience in different areas, such as ambulatory surgery, urgent care and radiation therapy.
He said the valuation firm will issue an engagement letter outlining the scope of the project, fees and the timing of the project. The valuation experts will charge either an hourly rate or fixed rate depending on the type of services provided.
“Make sure to ask for redacted reports and actually review the reports. If the reports lack detail or analysis on the subject company, it is likely the valuator did not take the time to completely understand the business,” Bernstein said.
The Healthcare Market Trend
Many types of transactions in the healthcare arena can be seen today.
Healthcare valuators are seeing a lot of interest in joint ventures between physician groups and hospitals. Cope said he is seeing a lot of what he describes as a less of a business valuation, but valuations of intangible healthcare assets such as certificate of need.
“As we are going through this consolidation phase, health systems and physician practices are trying to rationalize investments, and so they consolidate to the best of their ability,” Cope said. “They want to make it a ‘win-win’ on both sides. Through our valuation engagements, we [valuators] affect that purpose and try to facilitate that.”
Barbo added that the consolidation trend can be part due to government compliance.
“Healthcare transactions are occurring at a fast paced due to consolidations within the healthcare industry driven by the health reform,” Barbo said.
This is why Simons emphasizes the importance of hiring valuators whose niche is in the healthcare system.
“If you don’t do healthcare valuations, it is almost like if you are walking into the middle of the story,” Simons said. “You don’t know where it’s been, and you don’t know where it’s going, so you try your best to figure it out. It is not that it’s impossible, but it’s very difficult for somebody who hasn’t grown up in the industry.”
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