Becker's Hospital Review

40 Executive Briefing: Automated Valuations Potential pitfalls to avoid There is certainly a risk that the advantages of this approach could be defeated by sophisticated internal operators purposely misus- ing the system created by the tools, which after all are somewhat automated by nature. But if the tools are used correctly, the risk of problems should be substantially reduced over other internal approaches. Perhaps more likely is not bad intent, but honest use of the tools within their parameters. However, the tools may be used in ways that were never intended or contemplated by the third-party valu- ator. Valuators who review or develop such tools must be aware of doing so, and they must carefully consider the possible av- enues for tools to be used incorrectly or in unintended ways that might lead to problematic results. Finally, internal valuation tools can assist with determining FMV, but one must always keep in mind that FMV is not the only el- ement of the healthcare regulatory requirements. Commercial reasonableness is a separate element required of many deals, and similarly, most transactions cannot have compensation that is based in any way on the volume or value of referrals. Those two requirements are also key aspects of the healthcare law, and unlike FMV, they are notably more difficult to safeguard with any sort of framework or automated tool. In particular, commercial reasonableness is mostly a question of demonstrating the need for the transaction in the absence of referrals, which is normally a somewhat subjective inquiry. Conclusion – The benefits are measureable The trend toward use of frameworks and automated tools is no- ticeable and significant. Clearly, the benefits of using these type of tools, far outweighs the drawbacks, as there are simply too many transactions to have them all reviewed by an external appraiser. Given that a certain percentage of deals will be subject to inter- nal review regardless, the ability to do that review with tools that provide extra protection over other types of internal approaches is worthy of strong consideration. The savings in time and effort alone is significant, but the real savings is in preventing costly and damaging problems down the road. n References: 1 Among the laws and regulations that may have FMV requirements are: (i) the Phy- sician Self-Referral Prohibition or "Stark" law (42 U.S.C. §1395nn); (ii) the federal Anti-Kickback Statute (42 U.S.C. § 1320a-7b); (iii) Internal Revenue Service Private Benefit Guidance and Intermediate Sanctions rules (see Treas. Reg. 53.4958 et seq.); (iv) the Foreign Corrupt Practices Act (15 U.S.C. § 78dd-1); and others. 2 The IRS first defined its FMV standard in Revenue Ruling 59-60, and the Stark law modified it in 42 U.S.C. § 1395nn(h)(3) and 42 CFR § 411.351. To get a sense how difficult FMV can be to determine in the context of the IRS and Stark defini- tions, consider the 947-page textbook on the subject entitled: "BVR/AHLA Guide to Healthcare Industry Compensation and Valuation," edited by Timothy Smith and Mark O. Dietrich (2012). 3 42 CFR § 411.351 contains the definition. Commentary on the Stark definition is found at: 72 Fed. Reg. 51015 (September 5, 2007); 69 Fed. Reg. 16107 (March 26, 2004); 66 Fed. Reg. 944 (January 4, 2001); and 63 Fed. Reg. 1686 (January 9, 1998). 4 See note 3. 5 66 Fed. Reg. 945 (January 4, 2001). 6 See for example, Corporate Integrity Agreement between OIG and HCA, Inc. (2000), and Deferred Prosecution Agreements between the U.S. Dept. of Justice and Stryker, Zimmer and other device manufacturers (2007). 7 66 Fed. Reg. 945 (January 4, 2001). In developing automated tools, that value of having an independent third party involved in creating the tools or at least reviewing the tools is considerable. Their independent knowledge and position helps ensure the tools are not biased and are used consistently and correctly. HealthCare Appraisers, a nationally recognized valuation and consulting firm, provides services exclusively to the healthcare industry, including: business valuation (e.g., ASCs, hospitals, physician practices, dialysis centers, home health, diagnostic/treatment facilities, and intangible assets); fixed asset appraisals for furnishings, machinery and equipment; fair market value opinions for compensation and service agreements (e.g., employment, ED call coverage, medical directorships, collection guarantees, equipment lease/use ar- rangements, and service/co-management arrangements); consulting and advisory services (including valuation for financial reporting); and litigation support. www.HealthCareAppraisers.com | info@hcfmv.com | (561) 330-3488 DELRAY BEACH | DENVER | DALLAS | CHICAGO | PHILADELPHIA We are not your average Healthcare Valuation Firm. With over 12 years in the business and thousands of fair market value opinions rendered, HealthCare Appraisers has assembled a diverse, highly experienced team to help you navigate through a myriad of valuation needs and dilemmas. HealthCare Appraisers - Redeening Healthcare Valuation Since 2000

• Cover