The Role of Fixed Asset Appraisals in Healthcare Valuations

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PYA Principal Darcy Devine and Consulting Manager Emma Miller presented “The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities” during NACVA Webinar Week. They provided an …

PYA Principal Darcy Devine and Consulting Manager Emma Miller presented “The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities” during NACVA Webinar Week. They provided an overview of fixed asset appraisals including how they are performed, the definitions of value, and why they are necessary when conducting a business valuation of a healthcare entity. Their presentation also demonstrated how the resulting value from a fixed asset appraisal can vary significantly from simply using depreciated values.

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  • 1. Page 1April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities DISCLAIMER All rights reserved. No part of this work covered by the copyrights herein may be reproduced or copied in any form or by any means—graphically, electronically, or mechanically, including photocopying, audio/video recording, or information storage and retrieval of any kind—without the express written permission of the CTI, NACVA ,and the presenter. The information contained in this presentation is only intended for general purposes. It is designed to provide authoritative and accurate information about the subject covered. It is sold with the understanding that the copyright holder is not engaged in rendering legal, accounting, or other professional service or advice. If legal or other expert advice is required, the services of an appropriate professional person should be sought. The material may not be applicable or suitable for the reader’s specific needs or circumstances. Readers/viewers may not use this information as a substitute for consultation with qualified professionals in the subject matter presented here. Although information contained in this publication has been carefully compiled from sources believed to be reliable, the accuracy of the information is not guaranteed. It is neither intended nor should it be construed as either legal, accounting, and/or tax advice, nor as an opinion provided by the Consultants’ Training Institute (CTI), National Association of Certified Valuators and Analysts (NACVA), the Institute of Business Appraisers (IBA), the presenter, or the presenter’s firm. The authors specifically disclaim any personal liability, loss, or risk incurred as a consequence of the use, either directly or indirectly, of any information or advice given in these materials. The instructor’s opinion may not reflect those of the CTI, NACVA, its policies, other instructors, or materials. Each occurrence and the facts of each occurrence are different. Changes in facts and/or policy terms may result in conclusions different than those stated herein. It is not intended to reflect the opinions or positions of the authors and instructors in relation to any specific case, but rather to be illustrative for educational purposes. The user is cautioned that this course is not all inclusive. © 2014—1997 NACVA • 5217 South State Street, Suite 400 • Salt Lake City, UT, 84107—ALL RIGHTS RESERVED. The Consultants' Training Institute (CTI) is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted through its web site: learningmarket.org.
  • 2. Page 2April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Presentation will include periodic online Polling Questions/Codes to assess continuous participation and to determine the program’s effectiveness. You MUST respond to all polling questions (live) or complete a quiz (recorded) in order to receive CPE credit. If you view the webinar with a Smartphone or Tablet you will NOT be able to answer polling questions that are required for obtaining CPE credit. If you are viewing this presentation as a recorded webinar it will not qualify for NASBA QAS CPE credit. You can however, obtain CPE credit per the instructions included with your recorded webinar purchase. How to obtain CPE credit for this webinar: © 2014 National Association of Certified Valuators and Analysts 2
  • 3. Page 3April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities Agenda Current Trends in Healthcare Purpose of Fixed Asset Appraisals The Appraisal Process Agenda
  • 4. Page 4April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities Current Trends in Healthcare • Consolidation and integration • Hospital/physician alignment • Mergers and acquisitions • Cost reduction • Quality initiatives • Technology improvements • Compliance focus
  • 5. Page 5April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities Current Trends in Healthcare Hospitals Imaging Centers Ambulatory Surgery Centers Specialty Practices Physical Therapy Primary Care Home Health High Low
  • 6. Page 6April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities Purpose of Fixed Asset Appraisals Primary 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
  • 7. Page 7April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities Purpose of Fixed Asset Appraisals Compliance: 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 services and 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
  • 8. Page 8April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities Purpose of Fixed Asset Appraisals Compliance: 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.
  • 9. Page 9April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities Purpose of Fixed Asset Appraisals Compliance: 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)
  • 10. Page 10April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process Step 1 Define the problem and scope of work Step 2 Collect relevant data Step 3 Apply appropriate valuation methodologies and analytical techniques Step 4 Formulate value (or other conclusions) Step 5 Prepare report
  • 11. Page 11April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process 1. Define the Engagement • Property to be Appraised • Purpose of Appraisal • Intended Use(s) of Appraisal • Definition of Value • Effective Date • Limiting Conditions
  • 12. Page 12April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process STANDARDS OF VALUE Fair Market Value or Fair Value PREMISE OF VALUE Premise 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
  • 13. Page 13April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Data Collection 2. Data Collection INVENTORY: 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
  • 14. Page 14April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Data Collection
  • 15. Page 15April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Data Collection 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
  • 16. Page 16April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Data Collection 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
  • 17. Page 17April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Analysis 3. Apply Appropriate Valuation Methodology & Analytical Techniques The appraiser must consider all three approaches: Cost Approach Market Approach Income Approach
  • 18. Page 18April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Analysis COST APPROACH Reproduction Cost New or Replacement Cost New Less All forms of Depreciation Physical Deterioration Functional Obsolescence Economic 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.”
  • 19. Page 19April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Analysis 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
  • 20. Page 20April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Analysis Methods for Determining Depreciation Depreciation Methods Physical Depreciation Age/Life Analysis Direct Dollar Measurement (curable vs. incurable depreciation) Functional Obsolescence (Operating Obsolescence) Excess Capital Excess Operating Expenses Economic Obsolescence (External Obsolescence) Inutility (Cost-to-Capacity Concept) Analysis of Industry Terms Supply/Demand Relationships Sales Transactions Etc.
  • 21. Page 21April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Analysis 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
  • 22. Page 22April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Analysis Element 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
  • 23. Page 23April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Analysis 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
  • 24. Page 24April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities The Appraisal Process: Formulate Values 4. Formulate Values or Other Conclusions Use the data collected and the appropriate methodologies to determine the conclusion of value.
  • 25. Page 25April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities 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
  • 26. Page 26April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities M&E Appraisals
  • 27. Page 27April 1, 2014 The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities Contact Darcy E. Devine, MBA, CVA Emma Miller, CVA, AM Monarch Tower, Suite 700 3424 Peachtree Road, NE Atlanta GA 30326 404-266-9876 www.pyapc.com 27