Under Arrangements now Six Feet Under

August 10th, 2008 | Income Approach & Methods | Medicare | Regulatory Matters

The subject line of this post was actually the title of slide #45 in my 2007 AICPA Business Valuation Conference presentation, slide #58 in my Healthcare Conference presentation as well as the one I did at the Arizona Society the previous September.  Throughout my years as a healthcare consultant and appraiser, it has been relatively easy to foresee changes like per click leases, home health care rates (ala Caracci), the addition of PET to Stark DHS, and the DRA changes in payment for MR and CT. What has not been easy, of course, is to predict exactly when those changes will take place. More often than not, when they do, the extent of the changes are dramatic if not altogether draconian. I have argued for many years that simply focusing one's attention on what MedPAC recommends in its annual report to Congress is a good predictor of what will change in 3 to 5 years.  Another increasingly important source is GAO reports.

Given that business valuation is about future cashflow and the risk of that cashflow, high volume/high cost healthcare services and structures are more risky than perhaps first meets the eye.  More importantly, because business valuation has as a fundamental premise that the cashflows from the business will be perpetual, likely regulatory changes challenge that perpetual assumption and the inclusion of the present value of future cashflows more than 5 to 10 years out as part of the value. The impact on the perpetual assumption can be mitigated through a higher discount rate or by adjusting the terminal value cap rate or exit multiple.

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