Certificates of Need (CONs) are state regulatory documents approving major expansions, developments, or other projects for certain types of healthcare facilities, such as the construction of a new hospital or ambulatory surgery center (ASC).
To secure CON approval, organizations must demonstrate a shortage of available service capacity within the community for the services to be provided by their facility, hence the “need,” and also meet stringent state-specific requirements. While not applicable in all geographies, CONs are still required in the majority of states – approximately 35 as of this writing – although their exact criteria and specifications vary. As a result of these inconsistencies, among other complexities, navigating CONs can prove challenging for physicians and other healthcare business owners without proper guidance from attorneys and financial advisors.
Requirements
Before beginning the process, individuals should always perform due diligence regarding their state’s laws (or lack thereof). Conferring with experienced counsel is highly recommended.
Some states may require CONs for certain types of businesses (such as hospitals) but not others, and obtaining approval can range from an administrative formality to a virtually impossible process when the application is likely to be heavily contested or where approval moratoriums are in place.
When the approval process is uncertain or highly costly, buyers may seek to acquire capacity from businesses that have existing (and unused or underutilized) CON approval. For example, a surgery center may have approval for three operating rooms and only have two in use. When transfer in whole or in part is legally permissible, that CON capacity will have value to prospective buyers and facility operators.
Valuation
Preparing a valuation of a CON is a complex process which involves isolating cash flows and returns to all assets (i.e., tangible and intangible) that are required to operate the business. It requires an experienced professional with an in-depth understanding of not only the valuation of intangible assets (i.e., as is the case with a CON), but also, the fundamentals and value drivers of the underlying healthcare business and its projected operations, the local approval process and existing market for approved (i.e., competitive) CONs, and the probability and outlook for continuation of CON enforcement, to name a few. As with any other valuation, the more relevant experience your valuation consultant has, the more meaningful and defensible the results will be.
For those seeking to form a better understanding of CONs and how they contribute to a company’s overall value in a transaction, Root Valuation is here to help. Our experts have significant experience appraising CONs and can help your organization navigate the intricacies specific to your market.
Contact us at 720.458.3777 or info@rootvaluation.com to learn more.