Healthcare valuations require industry-specific knowledge and an understanding of how valuation approaches and methods apply to health care. For instance, Fair Market Value (FMV) is defined by Revenue Ruling 59-60, as, “the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.”
In healthcare, FMV focuses on regulatory compliance and is different from the above definition. The regulatory environment includes, the Stark law and the Anti-Kickback statute (AKS). The Stark law prohibits a physician from referring Medicare patients for designated services to an entity with which the physician has a financial relationship. Violation of the Stark law can result in civil penalties, whereas violation of AKS can result in criminal penalties.
Under Stark, the Centers for Medicare and Medicaid Services (CMS) has its own definition of FMV, which reads in part: “Fair market value means the value in arm’s-length transactions, consistent with the general market value. ‘General market value’ means the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not in a position to generate business for the other party…”
The key words in the above definition are “well-informed” sellers who will not generate business (i.e. refer work). As a result, the CMS’s FMV definition results in a hypothetical value in which the value of any potential referrals is excluded.
Therefore, when valuing a healthcare entity it is important to understand that regulatory factors such as the exclusion of the value of referrals between the buyer and seller need to be considered.