INTANGIBLE ASSET VALUATION IN HEALTH CARE

INTANGIBLE ASSET VALUATION IN HEALTH CARE PowerPoint PPT Presentation


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2. Goals for Today. Recognize the types of intangible assets typically valued in the health care industryRecognize opportunities for appraisal work in health care business planning and transactionsReminder to review other presentations on health care valuation. Health Capital Advisors, Inc.. . 3.

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INTANGIBLE ASSET VALUATION IN HEALTH CARE

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1. 1 INTANGIBLE ASSET VALUATION IN HEALTH CARE

2. 2 Goals for Today Recognize the types of intangible assets typically valued in the health care industry Recognize opportunities for appraisal work in health care business planning and transactions Reminder to review other presentations on health care valuation

3. 3 Discussion Outline Brief overview of healthcare industry Typical business transactions involving intangible assets Valuation approaches and conclusions Appendix materials

4. 4 Health Care Industry >$1 trillion a year industry 44% paid by federal government 3.5% fraud in private sector 11% fraud & abuse in Medicare ($20.3 billion of improper billing out of $177.4 billion in fee-for-service) HIT HARD by BBA of 1997 May be CRUSHED by HIPAA of 1996

5. 5 Drivers of Change in Health Care Increasing consumer / purchaser expectations System / organization relationships Revenue flows - capitation v. FFS v. case rates v. other Expense control Access to and productive use of capital Capital market conditions

6. 6 Focus on core competencies and market strengths Reacting to immediate financial needs Corporate finance principles beginning to emerge as a means of operation Corporate culture issues emerging as basis for improvement Leadership has never been more important The dead horse strategy might not work anymore

7. 7 Early retirements affected by stock market All see working harder to maintain income Some jaded by worthless stock deals - integration may not be vital - returning to traditional business models Many in markets not dominated by managed care see private practice futures

8. 8 Pure Play Providers developing greater focus & emphasizing a longer term strategy National / Regional Providers are shaking out & reorganizing New Marginal Players develop with equity capital & seek to capture investor interest Biotech startups seek investors for 3-5 year ROI Pharmaceuticals evaluating middle market and genomics applications

9. 9 Healthcare is a highly-regulated industry - look into these issues! Fraud & abuse, private benefit/inurement, anti-referral prohibitions, antitrust Sanctions for non-compliance with the law are great Loss of Medicare provider status, loss of tax-exemption status, astronomical financial penalties, incarceration

10. 10 Current Trends in Transactions Strategic interests may override the fact of value Unreasonably high prices still paid in some markets Appraisal shopping, ignoring appraisal, not obtaining appraisal occurring Anecdotal information on value, deals and benchmarking remain confusing

11. 11 Industry Activity & Uses of Opinions Acquisition and divestiture Partnership / buy-sell agreements Employment/compensation agreements Medical directorships very hot Financing Joint venture and operating agreements Hospital conversions (NFP to FP)

12. 12 Intangible Asset Valuation Commentary A turbulent period Greater expectations of patients Ever-decreasing reimbursement and increasing costs Technological advances outstripping our ability to manage Gene therapy, genetic engineering, pharmaceutical development, other biotech and more! Summary - you must gain an appreciation for the drivers of change if you want to understand this industry

13. 13 Intangible Asset Valuation A review of Pratt (Valuing a Business) Distinguish between tangible and intangible assets Our focus: intangible personal property Driven by purpose of appraisal (the proposed transaction) standard of value (typically FMV) premise of value (typically a going concern) legal framework

14. 14 Intangible Asset Valuation Premise of value issues - the deal drives the issues Going concern or not What defines failure? Value in use, in place, in exchange

15. 15 Intangible Asset Valuation When the appraiser is called in, what’s tangible and what’s not - a debate? Simplified rule: if it’s not real property, FFE, cash or A/R, its probably intangible No substantial physical form (Pratt) Not attached to land or real estate (Pratt)

16. 16 Intangible Asset Valuation

17. 17 Intangible Asset Valuation Three categories of health care intangible asset valuation Vanilla valuation: contracts, restrictive agreements, clear-cut income streams Tutti-fruitti valuation: complex universe of buyers issues, qualitative/quantitative private benefit issues, transactions in highly competitive markets where strategic purchases are involved Insane valuation: trusting the client completely when litigation may be involved - do your own research!

18. 18 Intangible Asset Valuation Process and method Cost, income, market and hybrid approaches Primary method tends to be on the income approach using a residual allocation process for intangible value Total value - tangible value = intangible value US Tax Code 1.338 (b) -2(T) UFE, Inc. v. Commissioner 92 T.C. 88 (1989)

19. 19 Intangible Asset Valuation The existence of intangible value - valuation at the enterprise level, fractional interest, or something else Ignorance and ambiguity abound - clients often do not understand (and sometimes do not want to understand) economic valuation Goodwill v. other intangibles & the deal Goodwill manifests itself in earnings Perspective of net benefit to a non-operating investor

20. 20 Intangible Asset Valuation Setting the record straight on physician compensation Predominant practice: picking the survey median Correct practice: associate compensation with production, hours & weeks worked Create baseline compensation : production ratio Remember data are largely for self-employed owners! Adjust to subject practitioner’s data Adjust for management expense

21. 21 Intangible Asset Valuation Going concerns without goodwill (unprofitable entities) may have: Going concern-related elements of intangible value e.g., assembled workforce, formal operating policies & procedures, records, clinical data, etc. Other intangible assets which allow the enterprise to remain a going concern e.g., contracts, licenses, restrictive agreements, etc.

22. 22 Intangible Asset Valuation Challenge in health care is a transaction that represents FMV at the date of the transaction Business deals in the future (e.g., option to purchase) are not easily valued in the present while ensuring that the future represents FMV Traditional option valuation may not apply because puts and calls are usually based on present indicators Future conditions might create a transaction outside of FMV Certain deals at FMV might be structured in advance

23. 23 Intangible Asset Valuation Valuing intangible assets using the cost approach Often for unprofitable entities (e.g., HMOs, MSOs, ASPs), new or highly specialized assets/entities Define the asset, its nature, why value is suggested Rigorous documentation of replacement or reproduction cost within the buyer universe clear identification of assets, remaining useful life, and market proxies Obsolescence considered

24. 24 Intangible Asset Valuation

25. 25 Intangible Asset Valuation

26. 26 Intangible Asset Valuation

27. 27 Intangible Asset Valuation

28. 28 Intangible Asset Valuation

29. 29 Case Study 1 Issue: The practice generates $150,000 annually in gross retinal surgery referrals. Should this be included?

30. 30 Case Study 2 What assets or services are offered? What is the market price for comparable services? Does intangible professional goodwill exist?

31. 31 Goals for Today Recognize the types of intangible assets typically valued in the health care industry Recognize opportunities for appraisal work in health care business planning and transactions Reminder to review other presentations on health care valuation

32. 32 Summary A rapidly changing and still consolidating industry Many opportunities for experienced appraisers Pick areas suited to your expertise CYA - Cover Your Assets

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34. 34

35. 35 Appendix Materials Expanded Industry and Transaction Issues

36. 36 Medical practices - minority, non controlling interests Restrictive and network agreements Right of first refusal to purchase Option to purchase Network participation Exclusive or non-exclusive Non-solicitation provisions Typical Valuation Engagements

37. 37 Valuing invested capital of failed ventures What defines “failed” when one partner chooses to continue? Valuing contracts for service when intangibles exist Medical directorship compensation Identifying and valuing assets in strategic acquisitions Typical Valuation Engagements

38. 38 Intangible Asset Valuation

39. 39 Intangible Asset Valuation

40. 40 Intangible Asset Valuation

41. 41 Intangible Asset Valuation

42. 42 System / Organization Relationships Healthcare trends & herd behavior “Man would rather die than think” Bertrand Russell 1980’s: TQM/CQI - 20% success rate Reengineering - 20% success rate Integration - 10% - 30% success rate 2000: Disintegration: ? - less strategic/synergistic 3 envelopes

43. 43 Dead Horse Business Venture Dakota tribal wisdom: When you discover you are riding a dead horse, the best strategy is to dismount. In healthcare, we often try other strategies with dead horses

44. 44 Dead Horse Business Venture Healthcare’s Alternative Solutions Buy a stronger whip Change riders Saying things like: “This is the way we have always ridden this horse” Appointing a committee to study the horse Arranging to visit other sites to see how they ride dead horses Appoint a tiger team to revive the dead horse

45. 45 Dead Horse Business Venture Healthcare’s Alternative Solutions Create training sessions to increase our riding ability Harness several dead horses together for increased speed Providing additional funding to increase the horse's performance Purchase a product to make dead horses run faster Promote the dead horse to a supervisory position

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