The Value of Intangibles in Health Care
Health care organizations, such as physician practices, hospitals or other medical service providers, typically possess many types of valuable intangible assets. These include personal and professional goodwill, practice protocols and treatment plans, and noncompete covenants, among others. Whether in a merger and acquisition (M&A) or in some other acquisition context, it’s important to know the value of these intangible assets.
What Are They?
When you hear the term “intangible assets,” you might first think of intellectual property such as patents, copyrights, trademarks and trade secrets. While hospitals may indeed own such assets, they also may have many other types of valuable intangible assets, including professional, medical and facility licenses; electronic health records software; and office systems, procedures and manuals.
Other intangible assets also can have value — for example:
- Provider service agreements,
- A trained and assembled workforce-in-place,
- Franchise/licensing agreements,
- Joint ventures/alliances, and
- Computer software/network integration.
Intangible assets may require valuation in a number of different circumstances.
How Are They Used?
Intangible assets don’t have physical value — like equipment does, for example. But their value shouldn’t be overlooked for valuation purposes. In a health care setting, intangible assets may be valued for a variety of reasons.
For instance, intangible assets require valuation not just when their owner hospital is being sold collectively, but also when they’re being sold separately from the hospital as individual assets or as part of a portfolio of assets. In addition, intangibles require valuation if they’re part of a licensing agreement or being contributed to a joint venture.
Valuation of intangible assets can play an important role in several aspects of tax planning, too. For example, a valuation is essential to the proper allocation of purchase price in a taxable acquisition, where the purchase price must be allocated among the acquired tangible and intangible assets.
In addition, fair value reporting may come into play. Valuations are integral to the process of testing for the impairment of goodwill and other intangible assets.
What’s the Method?
When appraising intangible assets, valuators typically apply one or more of three common valuation methods to obtain a consistent figure. The cost approach determines an asset’s value based on the cost to replace it. Of course, some intangible assets can’t be replaced — for instance, the state may have granted only one certificate of need for a particular region — making the cost method inappropriate.
The market approach derives an asset’s value from the prices paid in the marketplace for similar, or “comparable,” assets. The comparable asset should be about the same age, with the same remaining useful life, and be used in a way similar to how the valued asset is used. Thus, this approach is most appropriate when a sufficient amount of data on comparable transactions is available.
The income approach estimates an asset’s value based on the present value of the asset’s projected income. The income could come from using or licensing the asset and is reduced to present value by applying a risk-adjusted discount rate. It works well for certain use rights.
Regardless of which of the three common approaches a valuator takes, he or she needs to consider several factors — such as the bundle of legal rights, protections and limitations involved, and the economic benefits (direct or indirect) that the asset is expected to provide to its owners during its life. The valuator also looks at any previous or existing litigation involving the asset, and the feasibility, as well as the character, of any potential commercial use.
Who Can Help?
A hospital or other health care organization’s financial status can rely heavily on the value of intangible assets. Generally, a valuator takes into account the type of intangible asset to be valued and applies any additional factors, as appropriate, on a case-by-case basis. To help ensure the most appropriate method is applied for your organization’s specific circumstances, make sure you consult an experienced valuation expert — and coordinate any resulting accounting adjustments with your financial auditors to prevent potential audit issues at year end.