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Looking beneath the surface: valuing health care intangible assets.

Using the appropriate methodology for estimating the value of intangible assets for medical practices is especially important in the current health care environment. Transactions between not-for-profit health care organizations and physicians have been the subject of considerable regulatory scrutiny over the past year. The Internal Revenue Service closely examines valuations of intangible assets of health care entities, since the Service regards these assets as a potential area for private inurement.

In addition, the Office of the Inspector General (OIG), U.S. Department of Health & Human Services, has emphasized that payment for goodwill as part of the purchase price of a physician practice could be a disguise for payment for anticipated referrals, which would violate federal anti-kickback statutes.

This article presents several acceptable methods for the identification, valuation and remaining useful life analysis of the typical intangible assets of physician practices (and other health care organizations).

Identification of Health Care Intangible Assets

The Definition of an Intangible Asset in a Health Care Environment

There are numerous legal-, accounting-, or taxation-related definitions of the term "intangible asset." The analyst should perform adequate research to ascertain if a particular definition is appropriate to the subject health care-related intangible asset analysis, given:

* the particular purpose and objective of the medical practice appraisal; and

* the particular jurisdiction or venue in which the health care intangible assets exist.

Appropriate professional advisors (e.g., lawyers, accountants, etc.) may have to be consulted in this research. For purposes of this article, we will focus on the definitional questions that are relevant to the economic analysis and to the valuation of intangible assets. Accordingly, from this economic valuation perspective, there are two definitional questions that the analyst should consider:

1. What economic phenomenon qualifies as a medical practice intangible asset?

2. What economic phenomenon manifests or is indicative of value in a medical practice intangible asset?

Economic Phenomena That Qualify as an Intangible Asset

For a health care-related intangible asset to exist from a valuation or economic perspective (and to withstand a regulatory challenge), typically it must possess certain attributes. Some of the more common attributes include the following:

* It must be subject to specific identification and recognizable description.

* It must be subject to legal existence and protection.

* It must be subject to the right of private ownership, and this private ownership must be legally transferable.

* There must be some tangible evidence or manifestation of the existence of the intangible asset (e.g., a contract, a license, a registration document, a computer diskette, a set of procedural documentation, a listing of patients, a set of financial statements, etc.).

* It must have been created or have come into existence at an identifiable time or as the result of an identifiable event.

* It must be subject to being destroyed or to a termination of existence at an identifiable time or as the result of an identifiable event.

In other words, there must be a specific bundle of legal rights (and other natural properties) associated with the existence of any health care-related intangible asset.

Economic Phenomena That Indicate Value in an Intangible Asset

For a health care-related intangible asset to have a quantifiable value from an economic analysis or appraisal perspective, it must possess certain additional attributes. Some of these additional requisite attributes include the following:

* It must generate some measurable amount of economic benefit to its owner; this economic benefit could be in the form of an income increment or of a cost decrement. This economic benefit is sometimes measured by comparison to the amount of income otherwise available to the intangible asset owner (e.g., the medical practitioner) if the subject intangible asset did not exist.

* This economic benefit may be measured in any of several ways, including net income or net operating income or net cash flow, and so on.

* It must be able to enhance the value of the other assets with which it is associated. The other assets may encompass all other assets of a medical practice, including: tangible personal property, tangible real estate or other assets.

Clearly, there may be a substantial distinction between the legal existence of an intangible asset and the economic value of that asset. An example of this situation would be the new registration of a legally binding and enforceable certificate of need (CON) that, upon creation, is immediately and permanently locked in the institutions vault. If the CON is never (and never will be) used in the production of, or in the protection of, income, then it has no economic value - even though it has legal existence.

Economic Phenomena That Do Not Qualify as Intangible Assets

Economic phenomena that do not meet the specific attribute tests described previously do not qualify as identifiable health care-related intangible assets. Some economic phenomena are descriptive or expository in nature. They may describe conditions that contribute to the existence and value of identified intangible assets. But these phenomena do not possess the requisite elements to distinguish themselves as health care-related intangible assets.

For a typical medical practice, such "descriptive" economic phenomena that do not qualify as identifiable intangible assets may include:

* high market share of the practice;

* high profitability of the practice;

* general positive reputation of the practice;

* monopoly position of the practice;

* market potential of the practice; and

* other economic phenomena.

However, while these "descriptive" conditions do not qualify as medical practice intangible assets themselves, they may indicate that the actual identifiable intangible assets do have substantial economic value. For example, while these "descriptive" conditions do not themselves qualify as intangible assets, they may indicate the existence of - and greatly contribute to the value of - loyal and profitable patient relationships (for primary care practitioners) or of an established referral network (for specialists and subspecialists).

Common Categories of Health Care-Related Intangible Assets

Generally, appraisers and economists will categorize individual health care-related intangible assets into several distinct categories. This categorization of intangible assets is used for general asset identification and classification purposes. Intangible assets in each category are generally similar in nature and in function.

Also, intangible assets are grouped in the same category when similar valuation methods apply to that group of assets. A common categorization of health care-related intangible assets follows:

* technology-related (e.g., proprietary technology, technical know-how, systems and procedures, technical manuals and documentation);

* patient-related (e.g., patient relationships, referral relationships);

* contract-related (e.g., certificates of need, licenses, affiliation agreements, noncompetition agreements with practice partners);

* data processing-related (e.g., computer software, automated databases);

* human capital-related (e.g., a trained and assembled workforce, employment agreements with associate physicians);

* marketing-related (e.g., practice trademarks and trade names);

* location-related (e.g., leasehold interests); and

* goodwill-related (e.g., going-concern value).

Motivations to Conduct an Intangible Asset Appraisal

While there are numerous individual reasons for conducting an appraisal of the intangible assets of a medical practice, typically all of these individual reasons can be grouped into a few categories of motivations:

* transaction pricing and structuring, for the sale or other transfer of all or a part of the practice;

* financing securitization and collateralization for both cash flow-based financing and asset-based financing;

* taxation planning and compliance with regard to asset amortization, abandonment, charitable contribution, gifting and other federal taxation matters and with regard to state and local ad valorem taxation matters;

* management information and planning, including practice value enhancement purposes, physician estate planning and other long-range strategic issues;

* bankruptcy and reorganization analysis, including the value of the estate in bankruptcy, debtor in possession financing, traditional refinancing, restructuring and assessment of the impact of proposed reorganization plans; and

* litigation support and dispute resolution, including practice shareholder disputes, infringements, fraud, lender liability and a wide range of deprivation-related reasons (e.g., eminent domain, property damages, etc.).

Professional Standards Related to Health Care Intangible Asset Appraisals

Intangible asset appraisers should be familiar with two principal sets of professional standards: the Uniform Standards of Professional Appraisal Practice (USPAP) and the American Society of Appraisers (ASA) Business Valuation Standards.

A brief overview of these two important sets of professional standards follows.

In 1987, The Appraisal Foundation promulgated - and its nine founding appraisal organization members adopted - USPAP.

The principal content of USPAP includes the following:

* The prefatory material contains, among other things, an ethics provision, a competency provision and a departure provision, which apply to all appraisers.

* Standards 1 through 6 deal with real estate appraisal.

* Standard 3 deals with reviewing an appraisal. While Standard 3 is oriented to real estate, it is applicable to a business valuation or intangible asset appraisal with only minor modification.

* Standards 7 and 8 deal with personal property appraisal.

* Standards 9 and 10 deal with business appraisal and intangible asset appraisal (which include the valuation of a medical practice or the intangible assets of a medical practice).

In 1992, the American Society of Appraisers, through its Business Valuation Committee, completed the process of issuing a series of standards for business valuation.

The principal content of these standards includes:

* BVS-I - General requirements for developing a business valuation.

* BVS-II - Financial statement adjustments.

* BVS-III - Asset-based approach to business valuation.

* BVS-IV - Income approach to business valuation.

* BVS-V - Market approach to business valuation.

* BVS-VI - Reaching a conclusion of value.

* BVS-VII - Comprehensive written business valuation report.

* Definitions.

These standards encompass the valuation of a medical practice and the valuation of the intangible assets of a medical practice.

Purpose and Objective of the Health Care Intangible Asset Appraisal

The objective of the appraisal describes the appraisal assignment. The objective of the appraisal should clearly articulate at least the following issues:

* what specific intangible asset is being appraised;

* what ownership interest (or what bundle of legal rights) related to that intangible asset is being appraised;

* what standard or definition of value is being estimated; and

* what is the "as of" date of the appraisal.

The purpose of the appraisal describes who the audience (i.e., the expected reader) of the appraisal is and what decision (if any) will be influenced by the appraisal. The purpose of the appraisal should clearly indicate at least the following:

* why the appraisal is being performed;

* the intended use of the appraisal; and

* who is expected to rely upon the appraisal.

It is highly recommended that both the appraiser and the health care provider client agree in writing upon the purpose and objective of the appraisal prior to commencement of the intangible asset appraisal.

Alternative Standards of Value

The term "standard of value" may be considered to be synonymous with the term "definition of value." The standard or definition of value means: what type of value is being estimated? The alternative standards of value generally answer the question: value to whom?

That question is important because the same health care-related intangible asset has different values to different parties. Some of the more common alternative standards of value include:

* Fair market value - what a typical (hypothetical) willing buyer will pay to a typical (hypothetical) willing seller with neither being under undue influence to transact.

* Fair value - the amount that will fairly compensate an owner who was involuntarily deprived of the benefit of an asset where there is neither a willing buyer nor a willing seller. This is primarily a legal concept.

* Market value - the most probable price an asset should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus.

* Acquisition value - the price that a particular identified buyer would be expected to pay for an asset with consideration given to any unique benefits of the asset to the identified buyer.

* Use value - the value of an asset in a particular specified use (which may be different from the asset's current use or from the asset's highest and best use).

* Investment value (or investor value) - the value of an asset given a particular defined set of individual investment criteria (e.g., given a definite set of internal rate of return or payback period investment criteria); this standard of value does not necessarily contemplate a sale transaction.

* Owner value - the value of an asset to its current owner, given the owner's current use of the asset and current resources and capabilities for economically exploiting the asset; this standard of value does not necessarily contemplate a sale transaction.

* Insurable value - the amount of insurance proceeds necessary to replace the subject asset with an asset of comparable utility, functionality and income-producing capacity.

* Collateral value - the amount a creditor would be willing to loan with the subject asset serving as security for the loan.

* Ad valorem value - the value of an asset for property taxation purposes, given the statutory standards of the particular taxing jurisdiction.

The selection of the appropriate standard of value will be greatly influenced by the purpose (or intended use) of the appraisal. Obviously, the selection of the appropriate standard of value will directly impact the value estimated. It is important to emphasize that an appraiser "estimates" the value of health care intangible assets; the market "determines" the Value of health care intangible assets.

Highest and Best Use Analysis

The "valuation premise" is the set of asset transaction assumptions under which the subject health care intangible assets will be analyzed. The selection of the appropriate valuation premise is typically dictated by the highest and best use of the subject health care intangible assets.

The highest and best use of an intangible asset is the reasonably probable and legal use of the asset that is physically possible, appropriately supported, financially feasible and that results in the highest value. The highest and best use must meet the following four criteria:

1. legal permissibility; 2. physical possibility; 3. financial feasibility; and 4. maximum profitability.

Among all reasonable alternative uses, the use of the health care intangible asset that yields the highest present value - after payments are made for labor, capital and coordination - typically represents the highest and best use of the subject intangible asset.

The assessment of the highest and best use of the subject health care intangible asset will determine which of the four alternative fundamental premises of value should be applied in the appraisal.

Alternative Premises of Value

Virtually any type of health care intangible asset may be appraised under each of these following four alternative premises of value.

* Value in continued use, as part of a mass assemblage of assets, and as part of a going-concern practice. This premise contemplates the contributing value of the subject intangible asset to and from the other assets of the practice.

* Value in place, as part of a mass assemblage of assets but not in current use in the production of income, as part of a going-concern practice.

* Value in exchange, on a piecemeal basis (not part of a mass assemblage of assets), as part of an orderly disposition. This premise contemplates that the intangible asset will enjoy normal exposure to its appropriate secondary market.

* Value in exchange, on a piece-meal basis (not part of a mass assemblage of assets), as part of a forced liquidation. This premise contemplates that the intangible asset will experience less than normal exposure to its appropriate secondary market.

While virtually any health care-related intangible asset may be appraised under each of these four alternative fundamental premises, the value conclusions reached under each premise for the same asset may be dramatically different. The appraiser will select the appropriate premise of value based upon:

* the purpose and objective of the intangible asset appraisal; and

* the actual functionality and economic status of the subject medical practice intangible asset.

Describing the Intangible Asset Subject to Appraisal

The description of the subject health care intangible asset should be complete enough to clearly identify the intangible asset to the reader of the appraisal. The description may include reference to the common categories of intangible assets discussed previously. The description may identify the physical, functional, technical [TABULAR DATA FOR EXHIBIT 2 OMITTED] or economic parameters of the subject intangible asset. The description of an intangible asset in an intangible asset appraisal serves the same informational purposes as the legal description does in a real estate appraisal.

Exhibit 1 presents an illustrative listing of many health care-related intangible assets that are commonly subject to economic analysis and appraisal.

Appraisal Methodology for Intangible Assets

There are several examples of intangible assets commonly found in the appraisal of medical practices. These assets may include patient relationships, trained and assembled workforce, and trademarks and trade names.

Several methods may be appropriate for the appraisal of health care intangible assets. These methods are grouped into three general categories: the market approach, the cost approach and the income approach.

In the market approach, the value of the intangible asset is estimated by identifying and analyzing the price at which similar properties have been exchanged between willing buyers and sellers.

The cost approach is based upon the economic principle of substitution. In the cost approach, the value of the intangible asset is the estimated cost to either purchase or construct an asset of equal utility.

In the income approach, the value of the health care intangible asset is equal to the present value of the expected income to be earned from the ownership of the asset.

Market Approach

Arm's-length transactions regarding the sale, license or lease of comparable or guideline properties provide solid evidence regarding the value of a health care intangible asset.

The application of the market approach to health care intangible asset appraisal requires the following steps:

1. research the appropriate exchange market to obtain information on transactions, listings and offers to purchase and/or license similar intangible assets;

2. verify the information by confirming that the data obtained are factually accurate and that the sales and/or license exchange transactions reflect arm's-length market considerations;

3. compare the selected intangible asset sales or license transactions with the subject health care intangible asset using relevant units of comparison; and

4. reconcile the various value indications produced from the transactions into a single value or range of values.

It is important that the transactions be analyzed thoroughly in order to determine the degree of comparability to the subject intangible assets. Some of the key elements of comparison include:

* the legal rights of intangible asset ownership that were conveyed in the transaction; and

* the functional, economic and technological characteristics of the guideline intangible assets compared to the subject health care intangible asset.

In addition, the appraiser should adjust for the existence of any special financing terms or other special arrangements and also determine whether the elements of an arm's-length sale and/or license existed.

Market approach methods are generally implemented by relying on purchases or sales of similar health care intangible assets or licensing arrangements for similar health care intangibles.

A simplified example of a market approach method to estimate the value of a medical technology (e.g., a surgical implant device), based on comparable arm's-length licensing arrangements, is presented in Exhibit 2.

In this example, the value of the proprietary technology owned by a physician group is estimated by reference to the amount of income that it could generate if it was licensed in an arm's-length transaction, based on an analysis of comparable trademark licensing transactions.

As presented, the fair market value of the proprietary technology is estimated by multiplying projected technology-related revenues by a market-derived arm's-length royalty rate of 1.5%. This royalty rate was based on an analysis of arm's-length licensing transactions involving similar licensed medical/surgical technologies.

This results in the projected long-term annual returns from the hypothetical license of the subject technology. Capitalizing the projected royalty income by a 20% capitalization rate, which is the appropriate present value discount rate less the expected long-term growth rate in royalty income, results in the indicated fair market value of the subject proprietary technology of $6.8 million.
Exhibit 3:


Illustrative Example of the Application of the Cost Approach to
Value a Practice Workforce


 Total Cost to
 Annual Recruit,
Employee Grade Compensation Hire & Train


1-2 $1,000,000 10.0%
3-4 $5,500,000 20.0%
5-6 $7,500,000 30.0%
7-8 $5,250,000 35.0%
9-10 $1,000,000 40.0%


Total cost to recruit, hire & train a workforce of
comparable experience and expertise $5,587,500


Indicated fair market value of trained and assembled
workforce of the subject medical practice (rounded) $5,600,000


Cost Approach

Estimating the fair market value of a health care intangible asset using the cost approach typically involves estimating either the reproduction cost or the replacement cost of the asset.

The reproduction cost equals the cost to construct an exact replica of the subject intangible asset, while the replacement cost is defined as the cost to recreate a property with an equivalent utility of the subject health care intangible asset.

However, while the replacement intangible asset performs the same task as the subject intangible asset, to the extent that an intangible asset is less useful than an ideal replacement asset, the value of the subject intangible asset must be adjusted for any differences in value due to physical deterioration, functional obsolescence, technological obsolescence and economic obsolescence.

One method that is sometimes used to estimate the reproduction cost of a health care intangible asset is to restate actual historical development costs in current dollars. This provides an estimate of the costs that would need to be incurred to reproduce the subject intangible asset.

A method that is used to estimate the replacement cost is a direct estimate of the current costs necessary to create a similar asset. For example, in applying the replacement cost method to estimate the value of a trained and assembled workforce of a physician practice, examples of costs to consider include:

* salaries and benefits of individuals who would recruit, hire and train replacement employees;

* overhead costs (e.g., office space, utilities and clerical support) related to recruiting, hiring and training the workforce;

* any direct expenditures (relocation costs, costs to bring in individuals for interviews, etc.); and

* any outside consulting services used for the development of the replacement workforce.

A simplified example of the replacement cost method to estimate the value of a trained and assembled workforce of a physician group is presented in Exhibit 3.

In this example, the estimate to replace the physician group's assembled workforce is based on estimating the cost to recruit, hire and train new employees of comparable experience and expertise to the subject work-force. This cost was estimated as a percent of total compensation for various grades of employees (where higher grades represent employees with longer tenure, greater compensation and/or higher levels of responsibility within the company).

Based on these estimated costs, the total cost to recruit, hire and train the medical group's assembled work-force, or the indicated fair market value of the workforce based on the replacement cost method of the cost approach, is $5.6 million.

Income Approach

Since the value of any asset equals the present value of the prospective economic income expected to be generated by the asset, estimating the value of a health care intangible asset using the income approach requires estimating an income stream and an appropriate discount rate or capitalization rate.

There are several measures of economic income that may be used in the income approach. It is important that the measure of economic income included in the valuation analysis relates only to the subject health care intangible asset.

In addition, an essential element in the application of this approach is to ensure that the discount rate or capitalization rate is derived on a consistent basis with the measure of economic income used in the analysis.

The methods for valuing health care intangible assets using the income approach are most commonly grouped into the following categories:

* methods that quantify incremental levels of economic income (i.e., the health care intangible asset owner will enjoy a greater level of economic income by owning the property as compared to not owning the property);

* methods that quantify the decremental levels of economic costs (i.e., the health care intangible asset owner will suffer a lower level of economic costs - such as otherwise required investments or operating expenses - by owning the [TABULAR DATA FOR EXHIBIT 4 OMITTED] intangible as compared to not owning the asset); and

* methods that estimate a relief from a hypothetical rental payment (i.e., the amount of rental payment that the health care intangible asset owner would be willing to pay a third party in order to obtain the use of and the rights to the subject intangible asset).

All of these income approach methods rely on either capitalization of economic income or discounted economic income.

In the direct capitalization of economic income method, the analyst estimates the appropriate measure of economic income for one period and divides that by an appropriate capitalization rate.

In a discounted economic income analysis, the analyst projects the appropriate measure of economic income for several discrete time periods into the future, and this projection is converted into a present value by use of a discount rate.

In both cases, an estimate must be made of the duration of the economic income stream and incorporated into the analysis.

A simplified example of an income approach method to estimate the value of a patient relationship of a primary care physician group is presented in Exhibit 4.

As presented, the primary care physician group's projected revenue is $115.1 million for the next fiscal year. In addition, the subject group's pretax profit margin is 8% after deducting expected compensation to physicians, based on expected compensation levels for the next fiscal year.

Therefore, the pretax "excess" profit per year is $9.2 million.

As presented above, the after-tax "excess" profit per year for the subject primary care physician group, based on an assumed 40% tax rate, is $5.5 million.

Based on an appraisal of all of the other assets owned by the practice, the fair return on the other assets is $1.2 million.

Subtracting the fair return on other assets owned by the practice from the estimated after-tax "excess" profit results in the expected practice return attributable to recurring patient relationships.

Based on a statistical analysis of the active and inactive patient records, the average remaining life of the patient relationships is six years.

Therefore, the indicated fair market value of the recurring patient relationships of this primary care group is $12.7 million.

Remaining Useful Life Analysis

Purpose of Remaining Life Estimation

The following abbreviated list presents several common reasons to estimate the remaining useful life of a health care intangible asset.

* Valuation of the property-for-sale transaction pricing and/or license structuring purposes: an estimate of the health care-related intangible asset's remaining life is important regardless of which valuation approach is used.

* Amortization and cost recovery for income tax accounting and/or financial accounting purposes and/or regulatory accounting purposes.

* Cost accounting for capital recovery purposes in normal business operations, whether as a product expense or as a period expense.

* "Percent good" studies for financing purposes and for ad valorem property tax assessment purposes.

* Other - for miscellaneous management information, financing and controversy resolution purposes.

Priority of Estimating Remaining Life for Each Valuation Approach

As explained below, the estimation of the remaining useful life of a health care-related intangible asset is an integral part of each of the standard approaches to intangible asset valuation.

Under the income approach to valuation, a "lifting" analysis may be performed in order to estimate the prospective period for the economic income projection subject to capitalization (whether the direct capitalization or the yield capitalization method is used).

Under the cost approach to valuation, a "lifting" analysis may be performed in order to estimate the amounts of obsolescence, if any, that should be deducted from the measures of reproduction, replacement, creation or recreation cost of the subject intangible asset.

Under the market, or sales comparison, approach to valuation, a "lifting" analysis may be performed in order to select or to reject and/or to adjust either the "comparable" or the "guideline" health care intangible asset sale and/or license transaction data - so that the adjusted transactional data are more comparative to the subject intangible asset.

Effect of Remaining Life Estimation on Each Valuation Approach

The analysis of the remaining useful life of a health care intangible asset will typically have a direct and predictable effect on the value of that intangible asset. The expected valuation effects of the results of the remaining useful life estimation are summarized below.

In the income approach to valuation, normally a longer remaining useful life results in a higher indicated value. Typically, the value estimation is particularly sensitive to 'remaining useful life analysis when the remaining life is less than 10 years. And, typically, the value estimation is not very sensitive to remaining useful life analysis when the remaining useful life is greater than 20 years.

In the cost approach to valuation, normally a longer remaining useful life results in a higher indicated value. And, normally, a shorter remaining useful life results in a lower indicated intangible asset value.

In the market, or sales comparison, approach to valuation, the market should indicate a normal level of transactional acceptance for the remaining useful life of the subject intangible asset. If the subject health care intangible asset remaining useful life is much different from the remaining useful life of the intangible assets in the guideline transactions, then adjustments may be required in the market-derived valuation multiples. If the subject's remaining useful life is substantially different from the remaining useful life of the intangible assets in the guideline transactions, then this may indicate a lack of marketability (i.e., a lack of normal market acceptance of the remaining useful life) of the subject health care intangible asset.

Various Means or Determinants to Estimate Remaining Life

The following list presents the most common "determinants" or factors that directly influence the expected remaining useful life of most health care-related intangible assets. This list also presents several illustrative examples of typical health care intangible assets that are most commonly influenced by the indicated life "determinant."

* Legal determinants:

- Certificates of need

* Contractual determinants:

- Affiliation agreements - Contracts - Employment agreements - Noncompete agreements

* Functional determinants:

- Computer software - Procedural manuals - Technical manuals and documentation

* Technological determinants:

- Proprietary technology - Technical documentation

* Economic determinants:

- Trademarks and trade names

* Analytical determinants:

- Patient relationships - Referral networks - Trained and assembled workforce

Each of these categories of remaining life "determinants" or factors should be considered in the estimation of the remaining life of the subject intangible asset. Typically, for valuation purposes, the "determinant" that indicates the shortest remaining life is the "determinant" that deserves primary consideration in the estimation of the remaining life of the subject health care intangible asset.

Intangible Asset Valuation Synthesis and Conclusion

Typically, an appraisal is performed to answer a specific question about a health care-related intangible asset. In order to answer this question, the analyst follows the valuation process summarized above. When more than one valuation approach is used, each approach usually results in a different value indication for the subject intangible asset.

Even within the same valuation approach, there are often different indications of value. For example, there may be several values indicated for the same intangible asset by the different income approach methods.

The intangible asset valuation synthesis is the analysis of alternative indicated valuation conclusions in order to arrive at a final value estimate for the subject health care intangible asset.

The intangible asset final value estimate should generally be a number from within the final range of values indicated by the application of the three valuation approaches. The final value estimate may be one of the numbers indicated by one of the three valuation approaches, or it may be based on the valuation approach relied on most heavily, or it may be based on another number within the indicated range of values.

Generally, it is not appropriate simply to average the indicated values of the various valuation approaches in order to arrive at a final value estimate. A simple arithmetic mean implies that all of the valuation approaches have equal validity and equal weight; this is usually not the case in the typical intangible asset valuation.

The final value opinion with regard to the subject health care intangible asset should be derived from the analyst's reasoning and judgment of all of the relevant factors and from the impartial weighing of all of the available market evidence.

Summary and Conclusion

This article has presented several acceptable methods for appraising and estimating the remaining use life of the intangible assets of physician practices.

Obtaining an independent appraisal of the fair market value of the intangible assets of a physician practice is especially important for transactions involving not-for-profit health care organizations and physicians, given the current level of scrutiny of the transactions by the Service and the OIG.

RELATED ARTICLE: Exhibit 1: Illustrative Listing of Health Care-Related Intangible Assets Commonly Subject to Appraisal

Affiliation agreements Agreements (general) Book libraries Buy-sell agreement Certificates of need Computer software Computerized databases Contracts Cooperative agreements Employment contracts Favorable financing Favorable leases Goodwill HMO enrollment lists Know-how Laboratory notebooks Leasehold estates Location value Management contracts Manual databases Marketing and promotional materials Medical charts and records Noncompete covenants Procedural manuals Referral networks and relationships Regulatory approvals Reputation Technical and specialty libraries Technical documentation Trained and assembled workforce Trademarks and trade names Training manuals

Robert F. Reilly, ASA, CPA, CFA, CRA, is managing director of Management Associates in Chicago.

James G. Rabe, CFA, ASA, is co-director of the Portland, Oregon, practice office of Management Associates.
COPYRIGHT 1996 National Society of Public Accountants
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1996 Gale, Cengage Learning. All rights reserved.

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Author:Rabe, James G.; Reilly, Robert F.
Publication:The National Public Accountant
Article Type:Cover Story
Date:Mar 1, 1996
Words:5574
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