PYA Principal Darcy Devine and Consulting Manager Emma Miller presented “The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities” during NACVA Webinar Week. They provided an overview of fixed asset appraisals including how they are performed, the definitions of value, and why they are necessary when conducting a business valuation of a healthcare entity. Their presentation also demonstrated how the resulting value from a fixed asset appraisal can vary significantly from simply using depreciated values.

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
Agenda
Current Trends in Healthcare
Purpose of Fixed Asset Appraisals
The Appraisal Process
Agenda

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
Current Trends in Healthcare
• Consolidation and integration
• Hospital/physician alignment
• Mergers and acquisitions
• Cost reduction
• Quality initiatives
• Technology improvements
• Compliance focus

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
Current Trends in Healthcare
Hospitals
Imaging Centers
Ambulatory Surgery Centers
Specialty Practices
Physical Therapy
Primary Care
Home Health
High
Low

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
Purpose of Fixed Asset Appraisals
Primary M&E engagements in Healthcare:
 Transactional: Identify, inventory, appraise assets
 Compliance: Determine Fair Market Value for Stark / Anti-Kickback compliance
 Financial Reporting: Fair Value to calculate impairments/recording of acquired assets/liab
Other Purposes of Fixed Asset Appraisals:
 Bankruptcy
 Condemnation
 Dissolution of corporations, partnerships, and marriages
 Taxation (income tax, property tax, charitable contributions)
 Financing
 Leasing
 Management Decisions

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
Purpose of Fixed Asset Appraisals
Compliance: Stark Law
• Also called the “physician self-referral law”
• Prohibits a physician from making referrals for designated health services to entities in
which the physician (or a family member) has a financial relationship
• Designated Health Services (DHS)
 Currently 12 health services
 Includes hospital inpatient and outpatient services, as well as clinical lab, physical and
occupational therapy, radiology, certain imaging, DME, home health and various other services
and supplies
• Is a “strict liability” law
• Contains various “safe harbors”
• Provisions enforced by the Centers for Medicare & Medicaid Services (CMS), although
Department of Justice adjudicates false claims arising from violations of the Stark Law

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
Purpose of Fixed Asset Appraisals
Compliance: Stark Law
Stark Law Definition of Fair Market Value:
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 a result of bona fide
bargaining between well-informed parties to the agreement who are not otherwise in a
position to generate business for the other party, on the date of acquisition of the asset or
at the time of the service agreement. Usually, the fair market price is the price at which
bona fide sales have been consummated for assets of like type, quality, and quantity in a
particular market at the time of acquisition, or the compensation that has been included in
bona fide service agreements with comparable terms at the time of the agreement, where
the price or compensation has not been determined in any manner that takes into account
the volume or value of anticipated referrals.

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
Purpose of Fixed Asset Appraisals
Compliance: Anti-Kickback Statute (AKS)
• Anti-Kickback Law prohibits the payment or receipt of remuneration to induce or
reward referrals for Medicare or Medicaid services
• Criminal statute that requires proof of “intent”, i.e., knowingly and willfully paying for
referrals
• If one purpose of the payment is to induce referrals, then the AKS is violated, even if
there are other legitimate business reasons for the payment
• Contains various “safe harbors”
• Enforced by the Office of Inspector General (OIG) and the Department of Justice
(DOJ)

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process
Step 1
Define the problem and
scope of work
Step 2
Collect relevant data
Step 3
Apply appropriate valuation
methodologies and analytical
techniques
Step 4
Formulate value
(or other conclusions)
Step 5
Prepare report

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process
1. Define the Engagement
• Property to be Appraised
• Purpose of Appraisal
• Intended Use(s) of Appraisal
• Definition of Value
• Effective Date
• Limiting Conditions

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process
STANDARDS OF VALUE
Fair Market Value or
Fair Value
PREMISE OF VALUE
Premise of value is an assumption about the
likely set of transactional circumstances that
can be applicable in the valuation process.
1. Sale for Removal - for a similar or alternate use
• Fair Market Value
• Fair Market Value – Removed
2. Continued (or As Installed) - use of the asset for the
purpose for which it was designed and acquired
• Fair Market Value In Continued Use
• Fair Market Value Installed
3. Liquidation
• Orderly Liquidation Value
• Forced Liquidation Value
• Liquidation Value in Place

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Data Collection
2. Data Collection
INVENTORY: Asset identification - item, make, model, date of
manufacture (DOM), size, condition
Know what to look for:
• Bio Med tags
• Different components of equipment
• Removable components
• DOM

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Data Collection

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Data Collection
DATA REQUEST:
• Invoices
• Maintenance agreements
• Photos (if performing a desk appraisal)
• Depreciation schedule
• Balance sheet
• Identification of leased items (and copy of lease agreements – operating
versus capital lease)
• Identification of personal or excluded items
• Identification of grant Items

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Data Collection
Depreciation Schedules:
Not typically used as the basis for the valuation asset list.
• Insufficient asset descriptions
 Condition
 Purchase date vs. DOM (or new/used)
 Grouped assets
 Upgrades, maintenance agreements
 Smaller items
• Disposals, acquisitions, and items not in use
• Cross reference

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Analysis
3. Apply Appropriate Valuation
Methodology & Analytical Techniques
The appraiser must consider all three approaches:
Cost Approach
Market Approach
Income Approach

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Analysis
COST APPROACH
Reproduction Cost New or Replacement Cost New
Less
All forms of Depreciation
Physical Deterioration
Functional Obsolescence
Economic Obsolescence
Note: Appraisal depreciation is defined as “the difference in value between an
existing old asset and a new asset taken as a standard of comparison. Appraisal
depreciation should measure value inferiority.”

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Analysis
Determining Replacement Cost New & Reproduction
Cost New
• Detail Method (includes all direct & indirect costs)
 Direct Costs include: Materials/equipment, labor, installation, etc.
 Indirect Costs include: Professional fees, administrative fees,
temporary insurance, licenses/permits, typical finance charges
(during construction), equipment rental, etc.
• Trending
• Cost-to-Capacity

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Analysis
Methods for Determining Depreciation
Depreciation Methods
Physical Depreciation Age/Life Analysis
Direct Dollar Measurement (curable vs. incurable depreciation)
Functional Obsolescence
(Operating Obsolescence)
Excess Capital
Excess Operating Expenses
Economic Obsolescence
(External Obsolescence)
Inutility (Cost-to-Capacity Concept)
Analysis of Industry Terms
Supply/Demand Relationships
Sales Transactions
Etc.

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Analysis
MARKET APPROACH
Indication of value by analyzing recent sales (or offerings) or properties
that are similar to the subject property.
Where data comes from:
• Online Used Marketplace (e.g., ebay, Dotmed, MedWow)
• Online Dealers (e.g., Block Imaging, Alarka Medical, Office Pros)
• Manufacturers
• Internal Databases

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Analysis
Element of Comparability: Direct Match or Comparable Match
Factors to consider
If the item is a comparable match, then the appraiser will make adjustments when
necessary to account for any differences. The appraiser may also make
adjustments based on the definition of value being used in the appraisal.
 Age or Effective Age  Manufacturer  Type of Sale
 Condition  Motivation  Time of Sale
 Capacity  Price
 Features  Location

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Analysis
INCOME APPROACH
• Rarely used in M&E appraisals
• Used to determine the present value of the future economic
benefits of owning an asset
• Difficult or impossible to identify an income stream of an individual
item

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process:
Formulate Values
4. Formulate Values or Other Conclusions
Use the data collected and the appropriate methodologies to determine the
conclusion of value.

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
The Appraisal Process: Report
5. Report
• Must be one of the following:
 Appraisal Report
 Restricted Appraisal Report
Note: Verbal reports are also acceptable, provided the information communicated is that which would be contained in one of the
above reports and is reflected appropriately in work papers.
• Follow USPAP Standard 8
 Include an Appraisers Certification
 Statement of Assumptions and Limiting Conditions

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
M&E Appraisals

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The Role of Fixed Asset Appraisals in the Valuation of Healthcare Entities
Contact
Darcy E. Devine, MBA, CVA
Emma Miller, CVA, AM
Monarch Tower, Suite 700
3424 Peachtree Road, NE
Atlanta GA 30326
404-266-9876
www.pyapc.com
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