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Healthcare Compensation Valuation

Service, rental, and resource usage arrangements between various types of healthcare providers are common in the healthcare industry. Providers involved in these arrangements include:

  • Physicians
  • Hospitals
  • Health systems
  • Life sciences companies (pharmaceutical companies, medical device manufacturers, etc. 

In most of these arrangements, physicians provide services to corporate healthcare providers.  Sometimes, a hospital/health system or life sciences company provides goods or services to a physician or physician group.  These arrangements are commonly described as compensation arrangements, since they involve payment of compensation over time in exchange for services, rentals, or other forms of resource utilization. 

Healthcare regulations generally require this compensation to be consistent with fair market value (FMV), since physicians represent referral sources for these types of healthcare providers.  Currently, a common industry practice is for independent appraisers to provide valuations of these arrangements based on FMV as defined by healthcare regulations.  As a result, a new appraisal discipline is emerging: compensation valuation, or CV.

Compensation valuation focuses on the appraisal of compensation arrangements – specifically, the compensation paid by one party to another for the services or resource usage provided by a seller to a buyer over a set time period.  While many think of CV as limited to service arrangements, this thinking ignores the various other types of compensation arrangements between healthcare industry participants.  Categories of compensation arrangements in healthcare include:

  • Services
  • Rentals of real estate and equipment
  • Services included with the rental of real estate and/or equipment
  • Services provided together with the sale or usage of goods
  • Services provided together with rentals or estate and/or equipment and with the sale or usage of goods
  • Licensing of assets, such as intangible assets

Compensation arrangements also can involve the sale of services that require the utilization of personnel, space, equipment, goods or supplies, services and other resources.  These services are not provided by a healthcare professional, but by a fully operating business.

The Need for a Rigorous Approach to CV

Many of the recent regulatory enforcement actions against healthcare providers have related to compensation arrangements.  The Tuomey and Halifax cases, among others, revolved around compensation arrangements that were found to violate federal fraud and abuse laws.  Front and center in these cases was the structure and amount of compensation paid to physicians for their clinical services.  FMV opinions from outside consultants were obtained by both health systems as part of pre-deal due diligence or litigation support.  These FMV opinions were ultimately not persuasive in a court of law when placed under scrutiny.  The judgments and/or settlement amounts in both cases range from the tens of millions to the hundreds of millions.  The cost of noncompliance is high!

Complying with the regulatory definition of FMV can be challenging.  The complexity of compensation arrangements can contribute to this challenge, as they often include multiple elements that can appear to overlap and accumulate to significant amounts.  In addition, compensation terms may provide for variable pay based on levels of production or clinical outcomes.  Another challenge arises when a service provider such as a physician may have more than one service agreement with a healthcare entity.  Multiple elements and multiple agreements create a “stacking” issue.  The critical question in such circumstances is whether the services and compensation terms, when combined, create duplicate payments for the same services or require total services that are unreasonable for a single physician to provide in a given period of time. 

Why American Appraisal?
The unique definitions of FMV and the complex regulations surrounding them require specialized valuation skills. A rigorous approach to valuation is needed to address the challenges posed by both regulatory compliance and the complex nature of compensation arrangements.   These skills include an in-depth knowledge of the regulations and regulatory guidance and careful analysis to ensure compliance in the preparation of valuations.  Because the penalties for failure to comply with these regulations are acute, rigorous work and expertise are required to appraise compensation at FMV for healthcare regulatory compliance purposes.

American Appraisal consultants have studied the regulatory guidance on FMV methodology in the Stark, AKS and tax-exempt regulations.  Our methodology is based on an in-depth analysis of the regulatory commentary, and our reports include a critical discussion of FMV methodology from a regulatory perspective.

Our valuation work focuses on the application of critical thinking skills, and involves:

  • Rigorous and robust methodologies
    • We analyze the key economics of any subject compensation arrangement.
    • We consider and use multiple approaches and methods to value.  Using a single method may not capture all the key economics in an arrangement.
    • We base our valuation methodology on appraisal knowledge and peer-reviewed literature.
    • We explore value from every angle, and treat each engagement as unique. We do not subscribe to one-dimensional thinking or one-size-fits-all models. 
  • Data-driven and evidence-based analyses
    • We focus on data-driven and evidence-based analyses, rather than assumptions that may or may not reflect local market conditions or relevant facts and circumstances. Our valuation work reflects in-depth analysis of these factors.
    • We study the structure and terms of the compensation arrangement and incorporate their impact into our work.
    • Our opinions go where the evidence takes us.  We are not tied to a single model or method to arrive at an opinion of FMV.
  • Informative and usable reports
    • Our reports provide a clear picture of the work we performed to arrive at an opinion of FMV.
    • We detail the key data used in the valuation, discuss the subject compensation structure and terms, and provide comprehensive support and defense for the data and methods used in our analyses.
  • Distinctive client service
    • We are proactive in our data-gathering processes, enabling us to begin engagements quickly and work efficiently toward completion.
    • We remain in constant communication with our clients, providing weekly updates and identifying and addressing roadblocks when they occur.
    • We strive to streamline our deliverables and work within our clients’ processes and systems.

Compensation Valuation Services
We value all types of compensation arrangements in the healthcare provider marketplace.  Examples of the types of arrangements we value include:

  • Physician clinical compensation
  • Call coverage
  • Medical directorships
  • Hospital-based coverage arrangements
  • Clinical comanagement arrangements
  • Management services arrangements
  • Physician administrative, academic and executive compensation
  • Physician office time-share arrangements
  • Wound care services arrangements
  • Sleep center service arrangements
  • Other service and resource-usage arrangements

 

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