Becker's Hospital Review

39 Executive Briefing: Automated Valuations Sponsored by A staggering volume of transactions implicate the federal healthcare laws, with requirements that remuneration be consistent with fair market value (FMV). 1 The monumen- tal logistical challenge is to accurately determine FMV, which is hardly straightforward 2 to begin with, and to do so consistently across a myriad of different deals. At larger healthcare entities, such as multi-hospital systems, or pharmaceutical and device companies, there is an emerging new trend to handle this problem by utilizing one or more valuation tools (such as valuation frameworks or calculators) to help sup- port a certain bolus of lower risk transactions. The beauty of this approach is in its ideal balance between the need to carefully manage budget and timeline considerations, coupled with the ex- tra assurance offered by having the valuation tools independently developed or reviewed. Regulatory considerations The key passages of the Stark regulations and associated com- mentary that define FMV 3 provide fairly vague and disjointed guidance on how to determine FMV over numerous separate pronouncements. 4 CMS made it clear that internal valuations are allowed, stating: "We agree that there is no requirement that parties use an in- dependent valuation consultant for any given arrangement when other appropriate valuation methods are available. However, while internally generated surveys can be appropriate as a meth- od of establishing fair market value in some circumstances, due to their susceptibility to manipulation and absent independent verification, such surveys do not have strong evidentiary value and, therefore, may be subject more intensive scrutiny than an independent survey." 5 However, while internal valuation is allowed, the government guidance clearly indicates a preference for independent third-par- ty appraisals, whenever possible. Simply put, CMS undoubtedly recognized that there are too many transactions that are subject to the FMV requirement to insist that all valuations be conduct- ed by an independent third party. That said, a frequent remedy in settlements and corporate integrity agreements has been to require the settling party to obtain outside valuations for a sub- set of its riskier transactions for an agreed-upon period of time. 6 The key passage from the commentary above suggests that the government's concerns with internal appraisals are mainly bias, manipulation, rigor and consistency of internal valuations versus independent ones. 7 Addressing the concerns effectively In this context, the advantage of using valuation tools becomes clear, particularly when the tools have been developed or re- viewed by a third-party independent appraiser. This approach significantly reduces the risks noted above by having a third party help develop tools that are largely free from bias and manipula- tion, and that contain the rigor and consistency sufficient to satisfy the substantial concern expressed by the regulators. Tools of this kind take several forms. Some are frameworks that require some internal calculations based on deal terms and other inputs gathered by the user. Some frameworks will use rate tables based on varying parameters, while others will use a worksheet to determine applicable rates. Finally, a popular tool is an automated calculator tool, where the user enters various inputs and the au- tomated tool generates the FMV guideline rates (or alternatively, it generates a finding as to whether the proposed rates are con- sistent with FMV). Use of internal tools does not remove the ability to utilize outside analysis when needed. Because tools are automated, and cannot consider certain subjective factors, and because the valuator who developed the tool is not examining the facts directly, the tools have more limited applicability, and a direct analysis may be able to support arrangements that automated tools cannot. In effect, the automated tools provide baseline guidance, which may be sufficient to support a transaction, but if not, more detailed human analysis may be all that is needed. In developing automated tools, that value of having an indepen- dent third party involved in creating the tools or at least review- ing the tools is considerable. Their independent knowledge and position helps ensure the tools are not biased and are used con- sistently and correctly. The third party provides the user with the additional assurance of knowing the tools are well-tested without having to independently review every deal. The third-party valu- ator should extensively test tools for many different scenarios to ensure they can provide an opinion which states that they believe the tool, if used correctly, yields values that are consistent with FMV. Do Automated Valuation Tools Realize Their Value Proposition? Using automation for systematized initial fair market value guidance when possible By Albert "Chip" Hutzler, JD, MBA, CVA, Partner, HealthCare Appraisers www.HealthCareAppraisers.com | info@hcfmv.com | (561) 330-3488 DELRAY BEACH | DENVER | DALLAS | CHICAGO | PHILADELPHIA

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