April 16, 2019 Articles

Valuing Physician Practices During Divorce

The valuation of a medical practice presents a unique set of challenges.

By John Meindl and Brad Parker

The division of marital assets can be a minefield even with relatively simple fact patterns, and the presence of business equity interests only complicates matters. The valuation of a medical practice (or interest in any health care entity), however, presents a unique set of challenges that are not found in non-health-care business valuation exercises, and it requires careful consideration in deriving an accurate value.

A key step in valuing a physician practice entails determining the number and purpose of legal entities involved. For example, real estate and machinery equipment may be owned separately and leased from a related party. In addition, physicians often own minority level interests (e.g., 1 percent of shares) in outpatient facilities such as ambulatory surgery centers or imaging centers. The divorce proceedings should consider the value of each of the entities owned by the physician, with all of the nuances that accompany performing a valuation in each subindustry. Furthermore, the appraiser and counsel should discuss any provisions contained in governing documents regarding the valuation of a spouse’s ownership interests in the event of divorce.

In addition, one must consider the selection of the right valuation standards (e.g. fair market value (FMV) or fair value). Typically, transactions involving health care entities consider FMV. Applicable health care laws in determining FMV primarily include the Stark law, the anti-kickback statute, and the health care fraud statute. The Stark law prohibits physicians from referring a patient to an entity with which the physician has a financial relationship; the anti-kickback statute prohibits the payment or remuneration in exchange for, or in order to induce, the referral of patients or other businesses that are reimbursed under the Medicare program; and the health care fraud statute prohibits knowingly and willfully executing or attempting a scheme or artifice to defraud the health care benefit program.

While FMV is the most common value standard in divorce litigation, it is not the only standard applied, and the appropriate standard varies from state to state. The standard of value that is appropriate to apply in any given divorce engagement should by determined with input from counsel.

Another item that requires the attention of counsel is the effective date of the valuation. In some states, this date is the date of separation, while in others the appropriate valuation date may be the closest possible date to the date of trial. Different valuation dates, especially in the context of a divorce, may result in vastly different valuation outcomes.

Finally, it’s important to identify common assets involved in the valuation of a physician practice in a divorce setting:

  1. Real estate. Real estate can be the most valuable asset of a physician practice, if it is owned. This value can be determined by an independent appraiser. A physician’s ownership of the property where the practice is located can contribute significant additive value to the practice. The real estate does not have to be owned through the business but may be owned by the physician through a related entity. Oftentimes, the real estate is not owned but is leased from a third party.
  2. Machinery and equipment. Similar to real estate, machinery and equipment may be owned or leased from a third party. An appraiser may determine the value of the machinery and equipment considering factors such as age, obsolescence, original purchase price, and economic life.
  3. Working capital. Working capital consists primarily of cash, accounts receivable, and inventory, less the value of liabilities such as accounts payable and accrued expenses. Liabilities will include any accrued payroll to support staff and providers, as well as other business-related payables. If these items are not reported on the balance sheet, an appraiser may need to determine the value based on other available data.
  4. Intangible assets. Intangible assets may include medical records, trade name, non-compete agreements (if applicable), corporate goodwill, and personal goodwill, among others. It is important to note that many states recognize corporate goodwill as a divisible marital asset but do not recognize personal goodwill as a divisible marital asset. As with the value standard, the engaged attorney should work directly with an expert witness to determine the appropriate treatment of personal goodwill in a divorce setting.

As described above, there are many moving parts and legal requirements that are involved and required for health care valuations in divorce settings. It is important that attorneys and expert witnesses or valuation experts work together to come to a common understanding of the correct value standard, treatment of personal goodwill, and key assumptions to apply in the valuation of a physician practice. Securing an experienced health care valuation advisor can be a critical component in providing accurate information to anyone involved in marital dissolution proceedings.

John Meindl is a director and Brad Parker is a manager with VMG Health in the Dallas, Texas, office. 

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