Taking the Temperature of Health Care Valuations

By Garruto, Loren; Loud, Oliver | Journal of Accountancy, October 2001 | Go to article overview

Taking the Temperature of Health Care Valuations


Garruto, Loren, Loud, Oliver, Journal of Accountancy


Valuators must use a broad picture approach.

The health care industry has undergone significant change over the last decade, which has affected delivery of services, payment mechanisms and the organizational structure of providers. It's no secret consolidations and reduced government reimbursements have an ongoing impact on the health care industry. Because of the specific characteristics and unique attributes of each industry segment, CPAs who perform health care valuations have tended to specialize--in physician practices, for example, or not-for-profit hospitals. Health care industry valuation is a growing practice niche that provides an opportunity for CPAs to exercise the communication, research and analytical skills that go beyond traditional accounting. To ensure their clients do not operate in a vacuum in the face of industry trends, CPA valuators need to know the fundamentals in a variety of segments and understand the current demand for services, the forces affecting, reimbursement and opportunities for growth in the health care segment being analyzed.

WHAT PROMPTS AN INDEPENDENT VALUATION?

Throughout a company's lifecycle, certain events or business necessities--such as ownership transition, compliance and strategic planning--may require an independent appraisal of its capital structure. Typically, the business owner's goal is to integrate strategic and financial plans and optimize investments. Companies seek valuation experts to obtain independent opinions of their value, the fairness of certain transactions and the implications of strategic business decisions, such as discontinuing a product line, selling a division or acquiring a competitor. Management also may seek to better understand how its business value is allocated across different business segments and the key determinants, or "drivers," of value. Thus a valuation can provide insight into which segments of the business create larger portions of value within the total operation, which segments are weak or should be divested and whether other segments should be acquired to enhance profitability.

Sometimes the law requires independent valuations. The IRS mandates them for gift and estate tax purposes, such as gifting of shares in a privately held company by the owner to relatives. The Department of Labor requires them for qualified retirement plans, such as employee stock ownership plans, at the time of installation of the plan and then for annual updates. Bankruptcy is yet another situation in which independent valuation work is needed.

PICK THE RIGHT VALUATION APPROACH

In many situations the law or contracts mandate the standard of value for the valuation; sometimes, the parties involved in the transaction stipulate the standard. In a health care valuation, valuators weigh basic operating characteristics: the services provided, how services are reimbursed, patient referral sources, service area covered, regulatory compliance, cost containment and utilization management. They ask the client to provide pertinent information to estimate the value of the provider or its underlying assets (see "Get the Right Data") and then choose one of three traditional valuation approaches--income, market or cost--that works best for a particular assignment. All three approaches use fair market valuation. Mark O. Dietrich, CPA, ABV, of Dietrich & Wilson, PC, an accounting firm specializing in business valuations and health care consulting in Framingham, Massachusetts, says, "In any valuation transaction subject to regulatory review (and most are), fair market value is almost certain to be the required standard of value."

Get The Right Data

Valuators use checklists to ensure
compliance with professional standards
and adequate documentation.
Clients typically supply the following
for a business valuation:

[] Five years of historical financial
statements.

[] Five years of projected financial
statements, with a business plan, if
available. … 

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