Equipment Appraisals & the Healthcare Industry

In today’s healthcare environment, administrators are faced with numerous types of transactions the hospital is pursuing.   From acquiring a physician practice to shutting down an underperforming service/department within the hospital, an administrator must be able to manage multiple scenarios. Knowing what equipment is worth when acquiring or liquidating assets is crucial to any healthcare project.   Here are some examples of when equipment appraisals are needed: 

  • Insurance purposes:  equipment may need valuation for future policies or claims.
  • Mergers & acquisitions:  needed to properly value assets bought or sold
  • Liquidation & bankruptcy: necessary any time creditors are involved
  • Partnership separation: objective view assisting with buyout negotiations
  • Leasing/buy-outs: for market value at end of term
  • Management & planning: understanding equipment’s value prior to replacement
  • Finance & tax purposes: current market value against book/equipment life and depreciation values.

Once a healthcare facility decides an appraisal is necessary for a pending project they must understand why they need the appraisal. A third party appraiser offers many benefits that can be leveraged in a project. Under USPAP “Universal Standards of Professional Appraisal Practice” the appraiser needs to review with the client how the appraisal will be determined and what circumstances impact the methodology of the value that will be applied. It’s extremely important that both parties are utilizing the same guidelines when establishing an appraised value.

In future newsletters we will highlight some of the differences between using in house staff or a third party appraiser and what types of appraisals would be used for different circumstances. 

Fair market value and trade-in value are apples & oranges

Recently MRG was involved in an audit of a surgery center that specializes in gastroenterology. The practice was being acquired by another healthcare organization and the buyer requested that an inventory and fair market appraisal be conducted on the hard assets.

Upon review of the deliverables the seller approached their OEM representative and requested that they review the appraisal applied to the equipment in the practice. The OEM representative recommended that the seller not accept anything less than the current trade-in value for the equipment. It just so happens that the trade-in value was much higher than the installed in use value that was applied to the equipment in the appraisal.

Here is the problem when trying to compare trade-in value with fair market value:

Fair Market Value is the current value a willing seller and a willing buyer could anticipate if an asset needed to be sold under no duress to do so. The value applied is unbiased and based on current market conditions. It identifies a reasonable value if the buyer needed to go out to the market and acquire the equipment.

Trade-In value is not a cash value but a discounted value off a pending purchase where the OEM is selling new equipment to a buyer therefore creating a bias on the value of the equipment that will be used for trade-in. The market has no impact on determination of value this now rests in the sole discretion of the OEM.

The goal of a fair market appraisal is to provide both buyer and seller with market information that supports the current value of an asset and creates a common ground for all parties when negotiating the purchase/sale of an asset. By injecting the opinion of the OEM in this circumstance has created a biased opinion that favors the seller and the parties involved are now comparing apples and oranges.

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Importance of using a 3rd party to audit your hospital

The Sarbanes-Oxley Act has caused hospitals and other non-profit companies to show more financial transparency. Hospitals are now auditing all of their processes, departments, and even their assets: including the supplies and capital equipment. It is important facilities maintain financial integrity while examining their assets. Utilizing a third party, objective group to audit capital equipment is necessary for a successful examination.

Hospitals must use an outside source to conduct audits for capital equipment and other areas so they can maintain financial honesty, avoid conflicts of interest with internal employees, and receive quality reporting. In-house employees do not have the time to conduct a proper audit for the hospital’s financials, processes, or equipment. The employees are also biased. Part of the auditing process is to locate inefficiencies and an employee is less likely to point out his/her shortcomings. Due to the time constraints and subjective employees, in house audits lead to inaccuracies.

For more thoughts on why third parties are necessary for proper audits, check out the article below:

Disadvantages / concerns with selling an active physician practice

The last few weeks we touched on the advantages of selling a physician practice to a hospital system. We learned that there are many benefits to a successful merger, but there are also some disadvantages that a physician may face when they choose to sell their practice. First and foremost, there is a diminishment of control for the physician who may have worked independently for many years. Now they are faced to work as a team for the greater good of the hospital group, rather than individually. In addition, the physician may now have to work within the management structure that is present in larger organizations. There is now a hierarchy to follow for equipment needs, managing staff, etc.

Group practice acquisitions take effort, time and money. To avoid problems, it is imperative that legal documents are prepared to define how the group is legally organized, set forth the power that each individual has after the merger, and to define the leaders and leadership style. It is necessary for the physicians to fund the legal, consulting, and accounting fees to bring the group together to make sure the merger is successful.

Listed below are just a few of the challenges which must be addressed in the legal documents for a practice merger:

Leadership – Disputes can often arise as to how leadership of the merged practice will be divided among the merged physicians. Will the physicians be members of the system, or solely employees?

Compensation – Each physician involved in the merger will need to know upfront how the practice merger will affect their income.

Benefits – Since the practice will be managed as one unified group, all employees will be employed by one entity. It is important to compare the employee benefit and retirement plans that the practice provided before the merger so that decisions can be made as to what will be continued after the merger.

Office staff/Personnel – Sometimes a merged practice may not require all of the locations or personnel that existed prior to the merger. It is important that the office staff and all locations be addressed in the documents associated with the merger.

As you can see, there are many important issues that must be addressed before considering a group practice merger. Physicians involved must anticipate the changes that will occur. Putting the necessary time & effort into proper planning will result in a successful group practice that will meet the health care challenges of the next century.