Looking beneath the Surface: Valuing Health Care Intangible Assets

By Rabe, James G.; Reilly, Robert F. | The National Public Accountant, March 1996 | Go to article overview

Looking beneath the Surface: Valuing Health Care Intangible Assets


Rabe, James G., Reilly, Robert F., The National Public Accountant


Using the appropriate methodology for estimating the value of intangible assets for medical practices is especially important in the current health care environment. Transactions between not-for-profit health care organizations and physicians have been the subject of considerable regulatory scrutiny over the past year. The Internal Revenue Service closely examines valuations of intangible assets of health care entities, since the Service regards these assets as a potential area for private inurement.

In addition, the Office of the Inspector General (OIG), U.S. Department of Health & Human Services, has emphasized that payment for goodwill as part of the purchase price of a physician practice could be a disguise for payment for anticipated referrals, which would violate federal anti-kickback statutes.

This article presents several acceptable methods for the identification, valuation and remaining useful life analysis of the typical intangible assets of physician practices (and other health care organizations).

Identification of Health Care Intangible Assets

The Definition of an Intangible Asset in a Health Care Environment

There are numerous legal-, accounting-, or taxation-related definitions of the term "intangible asset." The analyst should perform adequate research to ascertain if a particular definition is appropriate to the subject health care-related intangible asset analysis, given:

* the particular purpose and objective of the medical practice appraisal; and

* the particular jurisdiction or venue in which the health care intangible assets exist.

Appropriate professional advisors (e.g., lawyers, accountants, etc.) may have to be consulted in this research. For purposes of this article, we will focus on the definitional questions that are relevant to the economic analysis and to the valuation of intangible assets. Accordingly, from this economic valuation perspective, there are two definitional questions that the analyst should consider:

1. What economic phenomenon qualifies as a medical practice intangible asset?

2. What economic phenomenon manifests or is indicative of value in a medical practice intangible asset?

Economic Phenomena That Qualify as an Intangible Asset

For a health care-related intangible asset to exist from a valuation or economic perspective (and to withstand a regulatory challenge), typically it must possess certain attributes. Some of the more common attributes include the following:

* It must be subject to specific identification and recognizable description.

* It must be subject to legal existence and protection.

* It must be subject to the right of private ownership, and this private ownership must be legally transferable.

* There must be some tangible evidence or manifestation of the existence of the intangible asset (e.g., a contract, a license, a registration document, a computer diskette, a set of procedural documentation, a listing of patients, a set of financial statements, etc.).

* It must have been created or have come into existence at an identifiable time or as the result of an identifiable event.

* It must be subject to being destroyed or to a termination of existence at an identifiable time or as the result of an identifiable event.

In other words, there must be a specific bundle of legal rights (and other natural properties) associated with the existence of any health care-related intangible asset.

Economic Phenomena That Indicate Value in an Intangible Asset

For a health care-related intangible asset to have a quantifiable value from an economic analysis or appraisal perspective, it must possess certain additional attributes. Some of these additional requisite attributes include the following:

* It must generate some measurable amount of economic benefit to its owner; this economic benefit could be in the form of an income increment or of a cost decrement. …

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