ASC valuation + common misconceptions about 'fair market value': 2 key insights

VMG Health's Taryn Nasr, director, and Savanna Dinkel, senior analyst, spoke to Becker's ASC Review about the ASC valuation process and common misconceptions.

Note: Responses were lightly edited for style and clarity.

Question: What's the most important thing for ASC leaders to know about the valuation process?

Taryn Nasr and Savanna Dinkel: It's important for ASC leaders to know when and why a valuation might be needed. A valuation might be requested for various reasons, including need for expertise, saving management time, regulatory considerations, due diligence purposes, purchase price determination and transaction advisory. Most often, we at VMG are engaged by an ASC or ASC's counsel to perform a Fair Market Value valuation for the purposes of complying with relevant regulatory considerations such as Stark Law and the Anti-Kickback Statute. Whether a major transaction is occurring or a physician is buying in or out of a practice, an FMV opinion is often required.

Additionally, leaders should be aware that more than just a business valuation might be needed for a full FMV opinion. Contracts such as management services arrangements, billing and collection services, and rental agreements must also be at FMV. Therefore, if any of these arrangements are with a related or physician-owned party, an FMV opinion will also need to be rendered for these items.

Q: What is a common misconception ASC leaders have about valuation?

TN & SD: A common misconception that ASC leaders often have about valuation typically revolves around the meaning and application of FMV. FMV differs from other types of value such as strategic/synergistic value or investment value. FMV is the price at which the ASC would change hands between a hypothetical (not particular) willing buyer and a hypothetical willing and able seller.

As a result, FMV does not take into consideration any post-transaction synergies such as rate lifts or cost savings. During FMV ASC valuations, many ASC leaders are confused on why the reimbursement rates were not adjusted to the acquirer's contracted rates or why certain cost efficiencies attributable to the acquirer were not considered. Under the regulations related to FMV, buyers cannot pay for the value that they are bringing to the table post-transaction.
Another common misconception about valuation is the difference between third-party FMV valuations and the buy/sell clauses detailed in most ASC operating agreements. Buy/sell clauses in operating agreements are typically formula-based or multiple-based and rely on backward-looking financial and operational information, whereas FMV valuations consider all three approaches to value, including market comparisons, asset build-ups and forward-looking cash-flow projections. Since FMV valuations utilize forward cash-flow projections, FMV valuations are able to account for changes in physician volume, reimbursement trends and other changes in the market space.

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