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Evaluating the Brand Value of Healthcare Entities

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PYA Principal Jim Lloyd co-presented with PYA colleague Anna Bhat at the NACVA and Consultants Training Institute’s (CTI) Advanced Healthcare Valuation and Consulting Symposium, December 12-13, 2014, on the topic, “Evaluating the Brand Value of Healthcare Entities,” providing a comprehensive overview regarding:

Healthcare affiliations in which “brand” is a key factor.
Detailed discussion regarding healthcare entity brands.
Methodologies commonly used to value brands.
Evaluating a healthcare entity’s brand strength.
Capitalizing on your entity’s brand.

Published in: Healthcare
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Evaluating the Brand Value of Healthcare Entities

  1. 1. Page 0December 13, 2014 Evaluating the Brand Value of Healthcare Entities Evaluating the Brand Value of Healthcare Entities December 13, 2014 W. James Lloyd, CPA/ABV, ASA, CFE Principal, Pershing Yoakley & Associates, P.C. Annapoorani Bhat, MBA, ASA Sr. Manager, Pershing Yoakley & Associates, P.C.
  2. 2. Page 1December 13, 2014 Evaluating the Brand Value of Healthcare Entities Agenda • Healthcare Affiliations • What’s in a Brand Name Anyway? • Why Value Brands of Healthcare Entities? • Brand Valuation Methodologies • Evaluating Brand Strength • Capitalizing on the Brand’s Value
  3. 3. Page 2December 13, 2014 Evaluating the Brand Value of Healthcare Entities Speaker Biography - Jim Lloyd • W. James (Jim) Lloyd is a Principal in the valuation and dispute services practice of Pershing Yoakley & Associates (PYA), an accounting and consulting firm specializing in the healthcare industry. • Senior financial executive experienced in valuation, mergers and acquisitions, litigation, tax, and accounting matters. • Substantial experience with valuing a wide range of privately-held companies, complex business arrangements, and intangible assets. • Litigation and expert testimony experience related to diminution of value, fraud, intellectual property, lost profits, post and failed acquisition transactions, antirust, and shareholder disputes. • Professional credentials include: Certified Public Accountant (CPA), Accredited Senior Appraiser (ASA), Accredited in Business Valuation (ABV), and Certified Fraud Examiner (CFE).
  4. 4. Page 3December 13, 2014 Evaluating the Brand Value of Healthcare Entities Speaker Biography – Anna Bhat • Annapoorani Bhat is a Senior Manager in the Valuation and Litigation Support practice of Pershing Yoakley & Associates, P. C. specializing in valuation and related consulting services for companies in the health sciences sector including providers, pharmaceutical companies, managed care entities, and allied service providers. • Over 20 years of work experience with 11 years in providing valuation-related consulting services. Primary area of expertise is in the valuation of businesses and assets for regulatory compliance, financial reporting, and tax purposes for healthcare and non-healthcare entities. Extensive experience in performing valuations related to fee-for-service agreements for pharmaceutical companies and fair market value analysis of physician compensation. • Accredited Senior Appraiser (ASA) and Moderator at the Women’s Leadership Counsel of the American Health Lawyers Association.
  5. 5. Page 4December 13, 2014 Evaluating the Brand Value of Healthcare Entities Healthcare Affiliations
  6. 6. Page 5December 13, 2014 Evaluating the Brand Value of Healthcare Entities Do you know these names? Giants in Health Care
  7. 7. Page 6December 13, 2014 Evaluating the Brand Value of Healthcare Entities Affiliations Everywhere Cleveland Clinic • Advisory Services - Branded Affiliation • Heart & Vascular • Orthopedic & Spine • Alliances, affiliations, network Duke Medicine • Duke LifePoint – 11 facilities in NC, VA & PA • Cancer programs affiliations • Heart program affiliations • Hospital patient safety and quality affiliations MD Anderson • Partner members: NJ & AZ • Certified members: 13 health systems, 11 states • Affiliates: International Mayo Clinic • Announced first affiliation in September 2011 • Since then approximately 30 health systems have joined the network all over the U.S.
  8. 8. Page 7December 13, 2014 Evaluating the Brand Value of Healthcare Entities Cleveland Clinic - Affiliations
  9. 9. Page 8December 13, 2014 Evaluating the Brand Value of Healthcare Entities Mayo Clinic - Affiliations
  10. 10. Page 9December 13, 2014 Evaluating the Brand Value of Healthcare Entities Healthcare Affiliations “You can tell a lot about a place by the company it keeps. Through affiliations with thought leaders in the medical world like Cleveland Clinic for heart care and medical oncology and Ann & Robert H. Lurie Children’s Hospital of Chicago for pediatric specialty care, Cadence Health connects you with access to expertise and top-ranked healthcare, right in your own backyard.” Cadence Health Website Trusted experts in the field
  11. 11. Page 10December 13, 2014 Evaluating the Brand Value of Healthcare Entities Healthcare Affiliations “… our exclusive local affiliation with MD Anderson Cancer Network® strengthens the Saint Francis Cancer Institute’s commitment to providing exceptional local cancer care. Experts at MD Anderson have developed disease-specific guidelines for cancer treatment, cancer prevention, early detection and follow-up care that allow MD Anderson Cancer Network- certified physicians to bring new hope and knowledge to local cancer patients.” MD Anderson Website Hospital in Dublin, Ireland
  12. 12. Page 11December 13, 2014 Evaluating the Brand Value of Healthcare Entities Healthcare Affiliations • Motivating factors for the local entity:  Associate with high quality services providers  Gain access to knowledge and resources  Learn and develop protocols, skills  Build own reputation for quality • Motivating factors for the “brand name” entity:  Capitalize on the investments made in developing brand and reputation in the market  Expand reach outside of immediate geographic area  Promote further brand awareness
  13. 13. Page 12December 13, 2014 Evaluating the Brand Value of Healthcare Entities What’s in a Brand Name Anyway?
  14. 14. Page 13December 13, 2014 Evaluating the Brand Value of Healthcare Entities What’s in a Brand Name Anyway? “…This is not just a new logo, signage, or new ads. This is about who we are, how we are able to reduce costs while continuously improve quality and where we are going as an organization…” John Fox, CEO of Emory Healthcare, September 2013
  15. 15. Page 14December 13, 2014 Evaluating the Brand Value of Healthcare Entities What’s in a Brand Name Anyway? Reputation & Quality Reputation of the Health System Reputation of Physicians Perception around Safety Reliability of Outcomes Perception around Quality
  16. 16. Page 15December 13, 2014 Evaluating the Brand Value of Healthcare Entities What’s in a Brand Name Anyway? Benefits to Health System Attracting Top Quality Clinicians More Philanthropic Gifts Better Rates with Health Plans Retaining Clinicians/Staff Attracting Patients
  17. 17. Page 16December 13, 2014 Evaluating the Brand Value of Healthcare Entities What’s in a Brand Name Anyway? Brand Strength Affected by Patient Satisfaction Marketing Physician Referral Networks National Rankings Preference and Awareness with Patients and Providers Reputation in the Market & Competition for Services
  18. 18. Page 17December 13, 2014 Evaluating the Brand Value of Healthcare Entities Why Value Healthcare Brands?
  19. 19. Page 18December 13, 2014 Evaluating the Brand Value of Healthcare Entities Why Value Healthcare Brands? “If a measurement matters at all, it is because it must have some conceivable effect on decisions and behavior. If we can't identify a decision that could be affected by a proposed measurement and how it could change those decisions, then the measurement simply has no value” Douglas W. Hubbard, How to Measure Anything: Finding the Value of "Intangibles" in Business
  20. 20. Page 19December 13, 2014 Evaluating the Brand Value of Healthcare Entities Why Value Healthcare Brands? What is my brand worth? How much should I invest in developing my brand name? How much should I pay for an affiliation? Am I allocating my resources appropriately?
  21. 21. Page 20December 13, 2014 Evaluating the Brand Value of Healthcare Entities Why Value Healthcare Brands? • Resource allocation:  Marketing spend – is it effective and having a positive impact on brand strength?  Campaigns to improve brand awareness – Pre- and post-campaign assessment.  Building & maintaining brand equity – Help focus on developing brand awareness on a sustained basis.
  22. 22. Page 21December 13, 2014 Evaluating the Brand Value of Healthcare Entities Why Value Healthcare Brands? • Provides guidance for negotiating affiliation terms:  Should a fee be paid?  If so, how much?  What does the fee cover (just the name, or clinical protocols, administrative support, etc.)?  What form should the payment take? For example: royalty fee, upfront lump sum payment, equity interest, etc.
  23. 23. Page 22December 13, 2014 Evaluating the Brand Value of Healthcare Entities Why Value Healthcare Brands? What did I get? What did I give?
  24. 24. Page 23December 13, 2014 Evaluating the Brand Value of Healthcare Entities Why Value Healthcare Brands? What did I get? What did I give?
  25. 25. Page 24December 13, 2014 Evaluating the Brand Value of Healthcare Entities Valuation Methodologies
  26. 26. Page 25December 13, 2014 Evaluating the Brand Value of Healthcare Entities Valuation Methodologies Brand Value How to value ???? How to value????
  27. 27. Page 26December 13, 2014 Evaluating the Brand Value of Healthcare Entities Brand Value Continuum Valuation Methodologies Business Name Brand
  28. 28. Page 27December 13, 2014 Evaluating the Brand Value of Healthcare Entities Build Credibility Brand Valuation Methodologies Build Awareness Create Emotional Connection Create Loyalty Business Name
  29. 29. Page 28December 13, 2014 Evaluating the Brand Value of Healthcare Entities Brand Value Income Approach Based on the economic benefits anticipated to be derived from the asset. Market Approach Based on transaction data involving similar assets or services Cost Approach Based on the anticipated cost to recreate, replace, or replicate the asset Valuation Methodologies
  30. 30. Page 29December 13, 2014 Evaluating the Brand Value of Healthcare Entities Brand Value Income Approach Based on the economic benefits anticipated to be derived from the asset. Market Approach Based on transaction data involving similar assets or services Cost Approach Based on the anticipated cost to recreate, replace, or replicate the asset Valuation Methodologies Difficult to determine Floor Value
  31. 31. Page 30December 13, 2014 Evaluating the Brand Value of Healthcare Entities Brand Value Income Approach Based on the economic benefits anticipated to be derived from the asset. Market Approach Based on transaction data involving similar assets or services Cost Approach Based on the anticipated cost to recreate, replace, or replicate the asset Valuation Methodologies Difficult to determine Floor Value Adopt a combination of both methods
  32. 32. Page 31December 13, 2014 Evaluating the Brand Value of Healthcare Entities Valuation Methodologies • Commonly used to value intellectual property assets • Based on the theory that owning the asset avoids the cost of licensing it • Value = present value of royalty/licensing costs avoided by owning the asset • Key considerations: 1) royalty rate(s), 2) revenue base and projections, and 3) discount rate Relief from Royalty Method (RFR)
  33. 33. Page 32December 13, 2014 Evaluating the Brand Value of Healthcare Entities • Search public license/royalty rate databases • Review public filing, press releases, disclosures, tax returns, legal filings to identify terms of any existing affiliations • Review research studies on brand licensing Royalty Rate Research Valuation Methodologies
  34. 34. Page 33December 13, 2014 Evaluating the Brand Value of Healthcare Entities Valuation Methodologies • Evaluate comparability – industry/operations • Evaluate profitability – (i.e. evaluate impact on profitability from utilizing the brand). • Qualitative comparison of subject entity with other similar entities. Thoroughly evaluate royalty rate data
  35. 35. Page 34December 13, 2014 Evaluating the Brand Value of Healthcare Entities Step 1 Step 2 Step 3 Step 4 Valuation Methodologies Case Study Selecting Royalty Rate • Researched more than 40 AMC’s to identify agreements where brand name is licensed. • Researched public data for licensing agreements involving brand name in healthcare sector/university names.
  36. 36. Page 35December 13, 2014 Evaluating the Brand Value of Healthcare Entities Step 1 Step 2 Step 3 Step 4 Valuation Methodologies Case Study Selecting Royalty Rate • Evaluated earnings before interest and taxes (EBIT) margins for 14 AMCs indicated to be comparable to subject entity in size and services to determine royalty rate thresholds (based on 25% Rule of Thumb methodology).
  37. 37. Page 36December 13, 2014 Evaluating the Brand Value of Healthcare Entities Step 1 Step 2 Step 3 Step 4 Valuation Methodologies Case Study Selecting Royalty Rate • Qualitative evaluation of brand strength and position • Evaluate rankings for 14 AMCs and compare with subject entity • Interview more than 20 stakeholders to understand brand position for each service line.
  38. 38. Page 37December 13, 2014 Evaluating the Brand Value of Healthcare Entities Step 1 Step 2 Step 3 Step 4 Valuation Methodologies Case Study Selecting Royalty Rate • Test value conclusions using corroborative methods
  39. 39. Page 38December 13, 2014 Evaluating the Brand Value of Healthcare Entities Valuation Methodologies Data Evaluation Internal Data • Revenue and margins of subject entity • Strategic plans for key service lines • Internal Quality & Safety Report • NRC research results External Data • Quality Metrics: US News & World Report, Leapfrog Group, Healthgrades • Financial metrics - Margins for 14 academic medical centers (AMCs) • Franchise/affiliation agreements – financial and other data for more than 45 AMCs and affiliates • General market data on trade names • University/College licensing agreements for consumer products Interviews • Service line and other executive leadership • Marketing team • Chief quality officer
  40. 40. Page 39December 13, 2014 Evaluating the Brand Value of Healthcare Entities Valuation Methodologies Issues with RFR Method • Finding a needle in a haystack • Limitations on ability to appropriately compare entities • Sensitive data points • Qualitative factors can be difficult to assess/estimate impact • Corroborative methods and appraiser judgment is key.
  41. 41. Page 40December 13, 2014 Evaluating the Brand Value of Healthcare Entities Valuation Methodologies Percent of Purchase Consideration Residual Value Calculation Proxy Contract Evaluation – e.g. Duke-LifePoint JV Corroborative Methods
  42. 42. Page 41December 13, 2014 Evaluating the Brand Value of Healthcare Entities Valuation Methodologies Percent of Purchase Consideration • Estimate subject entity’s enterprise value. • Review data on purchase price allocations for hospitals where trade names are identified. • Consider percentage of value allocated to trade name and evaluate in the context of the concluded value indication .
  43. 43. Page 42December 13, 2014 Evaluating the Brand Value of Healthcare Entities Valuation Methodologies Residual Value Calculation • Estimate enterprise value less tangible assets to ensure sufficient balance available for other intangible assets. • Use fair market value of tangible assets if available, if not book value. Estimate value of intangible assets apart from brand name where possible. • Estimate residual value attributable to brand name and goodwill
  44. 44. Page 43December 13, 2014 Evaluating the Brand Value of Healthcare Entities Valuation Methodologies Proxy Contract Evaluation • Research public information on terms of affiliations between health systems and health care entities • Evaluate what the terms of the agreements imply for brand value • e.g. Duke – LifePoint JV, internal contracts, etc.
  45. 45. Page 44December 13, 2014 Evaluating the Brand Value of Healthcare Entities Valuation Methodology Conclusion of Brand Value
  46. 46. Page 45December 13, 2014 Evaluating the Brand Value of Healthcare Entities Evaluating Brand Strength
  47. 47. Page 46December 13, 2014 Evaluating the Brand Value of Healthcare Entities Evaluating Brand Strength Brand strength is generally service line specific: • In a single hospital system, brand strength may be substantially different within various service lines. • Important to evaluate appropriate qualitative factors that drive preference and perception of value. • Many joint ventures are service-line specific (e.g. cancer centers, etc.).
  48. 48. Page 47December 13, 2014 Evaluating the Brand Value of Healthcare Entities Evaluating Brand Strength Factors considered in evaluating brand strength: • Rankings, awards, recognitions – Quality and Safety rankings- e.g. Leapfrog, Healthgrades – Overall ranking: US News & World Report – Patient satisfaction: Healthgrades • Market preference – Internal data • Competition • Strategic Initiatives and affiliations
  49. 49. Page 48December 13, 2014 Evaluating the Brand Value of Healthcare Entities Evaluating Brand Strength Brand Strength Affected by Patient Satisfaction Marketing Physician Referral Networks National Rankings Preference and Awareness with Patients and Providers Reputation in the Market & Competition for Services
  50. 50. Page 49December 13, 2014 Evaluating the Brand Value of Healthcare Entities Applications of Brand Valuation
  51. 51. Page 50December 13, 2014 Evaluating the Brand Value of Healthcare Entities Application of Brand Valuation Applications of Brand Valuation • Structure joint ventures based on value contribution • Allocation of resources related to improving brand awareness, etc.
  52. 52. Page 51December 13, 2014 Evaluating the Brand Value of Healthcare Entities Application of Brand Valuation Examples of joint venture/affiliate contracting terms: • Royalty rate on revenue/gross margin, etc. – Ensure selected royalty rate adequately compensates for all value contributed (brand name, protocols, intellectual property, etc.) – Royalty rate should generally be applied to incremental revenue anticipated to be generated from using the brand
  53. 53. Page 52December 13, 2014 Evaluating the Brand Value of Healthcare Entities Application of Brand Valuation Examples of joint venture/affiliate contracting terms: • Percent of equity – How would the value of the joint venture be measured at the onset of the use of the affiliated brand name? – Consider performing a with-without analysis to understand the value contribution of the affiliation – Consider how the business value will change over time with the use of the brand name and ensure contract terms do not lock you into unfavorable terms
  54. 54. Page 53December 13, 2014 Evaluating the Brand Value of Healthcare Entities Final Thoughts A rose by any other name would not smell as sweet…….
  55. 55. Page 54December 13, 2014 Evaluating the Brand Value of Healthcare Entities Questions

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