Over the past month, VertitechIT has put the focus on healthcare consolidation courtesy of our sister company, akiro. As one of the healthcare industry’s more unique and innovative M&A transaction consultants, akiro specializes exclusively in healthcare transactions by bringing decades of valuation and compliance experience together under one roof.
This blog, “What Does Fair Market Value and the Tour de France Have in Common?” is the second of three pieces they’ve curated putting the spotlight on healthcare M&A best practices. If you haven’t read the first installment you can do so here.
Don’t try this at home.
How many times have we heard those words?
For those of us who had enjoyed the Tour de France this past summer, we watched on as riders adopted a new dangerous move called the Super Tuck to shave seconds off their times. The cyclist actually slides his backside forward off the saddle and onto the top tube of the bike. He moves his hands to the top of the handlebars, nowhere near the brakes, and lowers his chin over the stem. Risk of a crash is exponentially elevated and there are calls to cycling’s governing body to ban it in competition for the expressed reason that non-professionals may try it with potentially calamitous results.
The same is true for DIY hospital systems that enter into transactions without a third-party opinion validating fair market value. Attempting to confirm fair market value and commercial reasonableness in-house is only slightly less dangerous than not doing it at all (internally prepared valuations do not have “strong evidentiary value”1 due to the risk of bias). Moreover, parties completing the valuation are not independent nor at “arms-length”1. Failure to confirm with a third party creates huge potential liability risks for even minor structural problems between the parties. After the agreements are in place, the arrangement needs to be retested routinely to confirm for both commercial reasonableness and fair market value on a recurring basis.
Much like the risk of the Super Tuck, which increases with the incline and speed of the rider, the risk of entering into transactions or agreements without third party validation increases with the complexity of the transaction. Physician practices operating at a loss after acquisition is one such situation. A former federal prosecutor said: “In the government’s eyes, profit is required for commercial reasonableness…if it’s not profitable, the hospital is paying for referrals.”2
Practice losses are a red flag for investigators when validating and pursuing details in examining whether physician arrangements are at fair market value. Although, there are many instances when this, in fact, can be the case, and quite valid, such as revenue cycle management, hospital overhead allocations, and changes in payer mix to name a few; practice losses after the agreements are in place is a matter of concern and should be fully evaluated and understood.
An alternative method is to use third-party valuators to conduct the required analysis in tandem with internal resources. This can have the benefit of both saving money and educating staff on the structural issues and problems for the next transaction or agreement.
Amateur Super Tuckers and DIY Hospital System valuators be warned, don’t try this at home!
akiro can provide health care providers with ongoing fair market value services to ensure updated compliance with regulatory and legal requirements. If you have any questions about post-transaction valuations or the services provided by akiro, please contact David Audibert at email@example.com.
1-(66 F.R. 945)
2-Health Business Daily (March 25, 2015) Robert Trusiak