Fair Market Value Versus Investment Value in Imaging: Understanding Standards

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The standard of value must be established in performing a valuation of any imaging business. The standard of value defines the hypothetical conditions under which a valuation will be performed. These hypothetical conditions affect many of the underlying assumptions that an appraiser or valuator would employ in establishing a value opinion.

In current valuation methodology, three standards of value usually apply: fair market value, investment value, and fair value. Fair market value and investment value are the two standards most often used for transactional purposes, while fair value is most often employed for accounting and financial-reporting purposes. In the distinction between fair market value and investment value (as they apply to imaging transactions), issues such as physician ownership, health-system synergies, and Stark regulations can complicate the understanding of value.

Fair Market Value

Fair market value is defined as the price at which property would be exchanged between a typical willing buyer and a typical willing seller when each party has reasonable knowledge of the relevant facts and neither party is under compulsion to buy or sell. Essentially, fair market value is the value of a business as determined using the current and expected future state of operations (in the absence of a transaction). This assumes that a typical buyer or seller could not add value by providing significant operational benefits. In the imaging marketplace, typical buyers and sellers include (but are not limited to) ordinary investors, physicians, and health systems.

If all typical buyers or sellers would provide operational benefits, a valuator or appraiser would be able to adjust the worth of current operations accordingly. Common benefits that a typical buyer or seller would provide (that a valuator might consider) include instances where the center has incompetent management, a below-average billing/collections function, abnormally high overhead, and excess staffing levels, compared with the marketplace. The assumption is that any typical buyer or seller would make rational managerial decisions and correct these operational deficiencies.

What a valuator would not be able to consider are any benefits or synergies that a specific buyer, such as a particular health system, might bring to an imaging center after the transaction. Benefits or synergies that specific buyers might contribute include superior contracted reimbursement rates, duplicate-expense reductions, and incremental volume. While large health systems would probably be able to provide these benefits, other typical buyers (such as physicians or individual investors) generally would not. As a result, many synergies and benefits of this nature cannot be considered when the standard of fair market value is employed.

Investment Value

Investment value is defined as the value of a business to a specific or expected buyer, meaning that it includes the additional value that the buyer would bring to the center if a transaction were to take place. As a result, investment value is almost always (and often quite significantly) higher than fair market value. A valuator or appraiser must carefully consider what incremental benefits and synergies a buyer would bring to the center and how they would affect center operations.

For example, in the imaging marketplace, one of the main drivers of value is the reimbursement environment. Health-system or hospital buyers often receive reimbursement rates far higher than those of freestanding imaging centers; many times, the difference is well in excess of 50%. Health systems also will usually eliminate duplicate expenses such as accounting, billing, and management functions, further improving operational performance after the transaction. All of these benefits can be considered in a valuation when investment value is the standard of value employed.

In addition, investment value should take into account any negative consequences of the proposed transaction. Many times, buyers such as health systems are high-cost operators in the market, from a patient perspective—with higher premiums, deductibles, and so forth. Higher costs can negatively affect a center’s procedural volumes and market share as patients vote with their feet, using the services of lower-cost competitors in the area.

Using Each Standard

In the health-care industry’s transaction marketplace, both standards of value can be used, depending on the situation.