Medical Practice Valuation Guidebook Availability
There are fewer than 10 copies of my book remaining in inventory - it has been selling very well as of late. I regret that a new edition will not be available any earlier than 2008.
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There are fewer than 10 copies of my book remaining in inventory - it has been selling very well as of late. I regret that a new edition will not be available any earlier than 2008.
CMS has withdrawn the announced changes.
We do not often hear the expression nonoperating liabilities in valuation. When we hear about the concept, it is either nonoperating assets, or excess working capital. A deficiency in working capital, then, is the other side of the equation. Several recent engagements have reminded me of the import of normalizing working capital before using an income approach to valuation, be it a DCF, CCF or excess earnings method.
When the premise of value is that of a going concern, the working capital assumption must be consistent with the industry norm, i.e., what a hypothetical buyer/seller would expect. A particular medical practice being valued may not necessarily have a normal level of working capital. Typical sources of working capital deficiencies include patient prepays or credit balances, accruals in excess of available cash for retirement plan contributions, and accrued vacation time, sick time or "personal time" where the practice permits unlimited or significant carryovers.
Accruals for personal time were long ago identified as an issue for GAAP financial reporting. Given that the typical medical practice sale is structured as an asset sale, the proceeds of that sale must be used to pay off all outstanding liabilities before anything is distributed to equity holders. If the subject practice permits unlimited carryovers of personal time, the magnitude of the liability may be shocking. Sufficient effort must be expended to determine what a normal level of personal time accrual is in order to have an appropriate measure of working capital in the valuation model.
Even in simple buy-in transactions, the valuation analyst or consultant must be certain to inquire as to this liability. Excluding it could result in the younger owners being left "holding the bag" at some point in the future for a large unfunded liability - analogous to those defined benefit obligations of airlines and "old economy" manufacturers.
CMS issued guidance January 26, 2007, that could have a dramatic impact on independent diagnostic testing facilities (IDTFs) and other providers. Although there are a variety of changes scheduled to be implemented at the end of February, the most significant one appears to be that shared facilties - e.g., where a provider group rents the facility for a specified number of days per week - would be prohibited. This change could be aimed at leasing structures intended to nominally fit into the In-Office Ancillary Services exception under the Stark regulations.
This is but one more strategy aimed at reigning in the explosion in high-tech imaging utilization and is another example of what the panel in the BVR February 8 Teleseminar highlighted: the government giveth and taketh away. When valuing any health care provider, rapid increases in utilization should serve as strong evidence that cutbacks are in the offing.
The panel yesterday received a number of good questions, observations and critiques from participants during and after the call-in. One comment directed my way was on the use of replication cost outside the physician to physician transaction area. I believe this is thoroughly addressed in my article in the current edition of Financial Valuation and Litigation Expert. The law always trumps what would otherwise be considered good appraisal practice - as USPAP specifies, for example, for jurisdictional exceptions.
On Delaware Open, I should at least clarify that I think the Judge and prevailing expert got it wrong on the discount rate, growth and per unit reimbursement. A forthcoming article will make this more than clear!
