Whereof what’s past is prologue; what to come, in yours and my discharge.
—William Shakespeare, The Tempest, Act 2, scene
It may be the “perfect storm.” The continued rise in healthcare expenditures, the increasing segment of the U.S. population that is uninsured or underinsured, the growth in demand for care from the changing patient demographic of the aging baby-boomer population, and declining reimbursement for physician services and provider manpower shortages are just a few of the several catalysts that are driving the turbulent transactional marketplace for healthcare enterprises, assets, and services in this new era of reform.
Those valuation analysts, whose healthcare engagements have been focused on appraising historically traditional provider organizations, for example, physicians in solo and small group practices, are seeing a decline in their client base as the healthcare industry consolidates, and greater numbers of providers form new and larger emerging healthcare organizations (EHOs). These EHOs are driven by the need to develop new affiliations, capital structures, and governance configurations, in order to align the interests of patients/ consumers, as well as various U.S. healthcare industry subsectors, including inpatient and outpatient providers, suppliers and vendors, payors, and managed care entities, in such a manner as to address the emergence of valuebased reimbursement initiatives, such as Accountable Care Organizations.
This book will address the key issues that the professional appraiser should consider when undertaking a healthcare valuation assignment, set within the conceptual construct of the “Four Pillars” of the U.S. healthcare delivery system.
The Four Pillars of the Healthcare Industry
Exhibit I.1 - The Four Pillars of the Healthcare Industry
In developing an understanding of the forces and the stakeholders that have the potential to drive healthcare markets, it is useful to examine what value may be attributable to healthcare enterprises, assets, and services as they relate to the four paramount market influences of the healthcare industry, that is, the Four Pillars—reimbursement, regulatory, competition, and technology. These four elements of the healthcare industry marketplace shape the dynamic by which providers and enterprises operate within the current transactional environment, while also serving as a conceptual framework for analyzing the viability, the efficiency, the efficacy, and, ultimately, the value that may be attributed to property interests, whether enterprises, assets, or services. Each of these Four Pillars, depicted in Exhibit I.1, will be further addressed in subsequent chapters.
Structure of this Text
This text is meant to serve as both a resource and a reference and is focused on providing guidance in an era of reform related to the requisite research and analytical processes for both (1) the development of a supportable and replicable valuation conclusion and opinion in the financial appraisal of healthcare enterprises, assets, and services; and (2) the submission of a certified valuation report that is both comprehensive and credible. It is written for readers with a wide range of experience and professional focus, including healthcare industry C-suite executives; physicians and other clinical providers and their professional advisers, including attorneys, accountants, and consultants; banking, investment, and transactional advisors; and academics, researchers, and students, as well as other interested stakeholders.
This book is structured in two parts:
1. Volume 1 consists of six chapters, beginning with a chronology of the U.S. healthcare delivery system, from the origins of medicine to the transformation of modern healthcare in the twentieth and twenty-first centuries (Chapter 1). Chapters 2 through 5 explore the paramount influences of the Four Pillars, that is, reimbursement, regulatory, competition, and technology, as they apply to healthcare enterprises, assets, and services. Chapter 6 provides an overview of the current healthcare environment in this new era of healthcare reform.
2. Volume 2 consists of ten chapters, of which the first four provide a discussion of basic valuation tenets (Chapter 7), as well as a presentation of the generally accepted valuation approaches, methods, and techniques (Chapter 8), and the costs/sources of capital (Chapter 9), as these topics may be pertinent to healthcare valuation. Chapter 10 sets forth the planning and process elements related to a healthcare valuation engagement. The next five chapters examine the following: the value drivers unique to each type of healthcare enterprise, asset, or service, as well as appropriate valuation approaches, methodologies, and techniques applicable to inpatient enterprises (Chapter 11), outpatient and ambulatory enterprises (Chapter 12), other healthcare-related enterprises (Chapter 13), tangible and intangible assets (Chapter 14), and healthcare services (Chapter 15). Finally, Chapter 16 provides the background and methodology regarding the regulatory threshold of Commercial Reasonableness.
This book will likely be used intermittently as a resource and a reference, in contrast to being read “cover to cover” in one sitting. Accordingly, to enhance the utility of this text as a navigable source for readers of various backgrounds, certain tools have been developed and appear throughout the text, including the following categories: Key Concepts, Key Terms, Acronyms, Key Sources, and Factoids. Key Concepts are the important concepts mentioned in the text that are significant to the healthcare valuation analysis. As an acknowledgment, key concepts are italicized in the text for emphasis and contrast. Key Terms, also italicized, refer to those significant words appearing in the text that may need to be defined for the reader and serve as a subset of the comprehensive Glossary that appears in Volume 2. Acronyms, formed by combining the initial letters or parts of a series of words, are particularly prevalent in (and often the favorite pastime of) the healthcare industry and appear at the end of each chapter, as well as being included as part of the Glossary. Key Sources point to significant sources of data and information that are fundamental to the chapter content and serve as a subset of the comprehensive Bibliography, which is included in Volume 2. Factoids are brief, related facts of interest that are mentioned within the text. Also included are some concluding remarks and a brief epilogue.
A bedrock principle of financial valuation is that economic value is the expectation of future economic benefit to be derived from the ownership or control of property. The valuation analyst should, in keeping with the concept of the principle of induction, begin his forecast of the future with an in-depth understanding of the past, including the historical development of the U.S. healthcare delivery system within the context of the Four Pillars, the changing reimbursement, regulatory, competitive, and technological backdrop of an array of volatile, often complex market forces that make up the “perfect storm” within which the current U.S. healthcare transactional marketplace exists.1 The first chapter of this text, “The Chronology of U.S. Healthcare Delivery: From Caduceus to Corporatization,” begins the journey toward understanding the financial appraisal of healthcare enterprises, assets, and services in the era of reform.