Healthcare Valuation for Entities Undergoing Change

by Gabriel Andrada, MHA, CSAF, CHBC, CVA

During the last two years, the healthcare industry has faced numerous challenges including the response to COVID-19, staffing shortages, migratory patient populations, and new or changing regulatory guidelines.  While some of these challenges may be transitory, the economy continues to be subject to significant uncertainty.  For healthcare entities considering a sale, joint venture, or other business transaction, these challenges and uncertainties can make the determination of fair market value difficult. Here is a recent example of a challenge we faced when valuing a business undergoing change:

• A surgery center had expectations of a significant increase in case volumes due to a migration of surgeons leaving a competing health system. The ASC had already begun conversations with some of these physicians indicating that some capture of these cases was likely, but specifics regarding the volume, type, and timing of any new cases was highly uncertain.

Problem:  Valuing the center as status quo could lead to an undervaluing of the center, but including these volumes requires speculative assumptions and could over value the center.

• Uncertainty such as this needs to be taken into consideration and can be typically addressed in two ways.
  • One is to include an estimate of most likely volumes and then account for this uncertainty is through an increase in the company-specific risk component of the discount rate (using the discounted cash flow method). A potential drawback to this is the lack of a precise way to measure the appropriate level of riskiness to account for the uncertainty of additional case volumes.
  • Consideration of conducting a probability-weighted scenario analyses to derive a range of values. This involves deriving a baseline conclusion of value using the status quo, and then performing one or more analyses that assume Some level of attainment of additional volumes. These indications of value are then weighted based on the relative likelihood that each scenario may come to pass

This approach could serve as a starting point for discussions with management regarding a contemplated transaction and how to further home in on ascribing a greater degree of empiricism to capturing uncertainty in deriving the conclusion of value.

Understanding the proper way to analyze and account for atypical changes or uncertainty in an appraisal will depend on the specific set of facts and circumstances being faced by the business.  If you are contemplating a business transaction and your business is experiencing change, give us a call.  We are happy to help you understand the value implications of these changes and help you establish a fair market value.