Healthcare Valuation Series Part II: The Valuation of Intangible Assets

The four-part HC Topics Series: Healthcare Valuation will examine various aspects of valuation related to the healthcare industry.  The first installment discussed the fair market value and commercial reasonableness standards utilized by various regulatory bodies and the application of these standards in valuing healthcare enterprises, assets, and services.  Part II will address the valuation of intangible assets, and Part III will address the valuation of physicians’ services.  Part IV will conclude with a discussion of several of the more complex aspects of valuation related to the acquisition of physician practice enterprises and service lines; assets (both intangible and tangible); and, services, by exempt organizations. This HC Topics Series is excerpted from the book authored by HCC Chief Executive Officer, Bob Cimasi, entitled, “Healthcare Valuation: The Financial Appraisal of Enterprises, Assets, and Services,” to be published by John Wiley & Sons early next year.

Last month’s installment provided an in-depth discussion of the fair market value and commercial reasonableness standards as they are applied in the valuation of healthcare enterprises, assets, and services.  Because of the heightened regulatory environment in which healthcare providers operate, it is essential that valuation approaches are congruent with general valuation principles, as well as industry-specific regulatory concerns, such as those imposed by the Stark Law, the Anti-Kickback Statute, and relevant provisions of the Internal Revenue Code.  This month’s installment of the HC Topics Series: Healthcare Valuation will discuss the valuation of intangible assets in the healthcare industry.

A significant majority of healthcare transactions do not encompass the simple acquisition of the entirety of a business enterprise as a going concern. Most often, these transactions are more complex in nature, encompassing a series of distinct, yet related, transactions and contractual relationships for the acquisition, lease, or co-venture of specified assets (both tangible and intangible), as well as, specified services (both clinical and non-clinical), on other than a going concern basis - with, perhaps, only some portion of the target enterprise (e.g., an ancillary service line) being considered as a going concern enterprise. Consequently, these transactions often present multiple, inter-related elements and a higher degree of complexity, and it is within these complex transactions that the specific identification and valuation of intangible assets is most often required.

The appropriate classification of assets and the goodwill related to a healthcare enterprise is critical to the valuation process.  Each healthcare enterprise will have a unique and distinct profile as to the likelihood of existence of the various specific assets, and these assets may be classified in two general categories: tangible and intangibleTangible assets are, “…physical assets (such as cash, accounts receivable, inventory, property, plant and equipment, and so on).1  An intangible asset is a “…nonphysical business asset that grants certain rights and privileges ([e.g.,] copyright, trade names, services marks, brand names, etc.) that have business enterprise economic value for owners. It is an asset without physical form, such as a patent, trademark, physician goodwill, or copyright.”2

Although the major distinction between these definitions of tangible and intangible assets is the aspect of their physicality, this is not an exclusive definitional barrier. In fact, physical tangible assets also possess an intangible aspect as regards to the legal rights of property ownership attached to them. Further, there is often some physical evidence or element of an intangible asset that provides some form of assurance as to its economic existence. For example, relationships between an employer and its employees that form the basis of “trained-and assembled-workforce-in-place,” are intangible, however, they may be evidenced by employment agreements. Intellectual property rights, such as trade names, trademarks, service marks, patents and copyrights are intangible assets; however, they may be evidenced by certificates, licenses and other related documents.

Intangible assets fall into two broad categories: Intangible Real Property; and, Intangible Personal Property. Intangible Real Property consists of one or more legal rights, but not all legal rights, related to the use of real estate, such as easements, permits, and use rights.3 Intangible Personal Property consists of all intangible assets that are not related to Real Property.

In the context of the valuation of healthcare enterprises, the typical focus of the classification of assets begins with determining the existence and ability to quantify intangible assets.  There are several types of intangible assets that may be considered in the valuation of a healthcare enterprise. They include:  Payor/Client-related Intangible Assets, such as managed care and provider service agreements;4 Goodwill and Patient-Related Intangible Assets, such as custodial rights to medical charts and records;5 Human Capital-Related Intangible Assets, such as staff/employee and provider employment agreements and trained and assembled workforce in place;6 and, Intellectual Property-Related Intangible Assets, such as practice protocols; treatment plans; procedure manuals; trade names; and, trade secrets.7  Other types of intangible assets include:  Locations and Operations-Related Intangible Assets, such as leasehold interests or computerized management information systems;8 Governance/Legal Structure Related Intangible Assets, such as organizational documents; income distribution plans; and, covenants not-to-compete;9 Marketing and Business Development-Related Intangible Assets, such as advertising; franchise/licensing agreements; and joint ventures/alliances; Regulatory/Legal-related Intangible Assets, such as facility licenses; medical licenses; permits; and, certificates of need; Financial/Revenue Stream-related Intangible Assets, such as office share arrangements; management services agreements; and financing agreements; and, Technology-related Intangible Assets, such as computer software/network integration; technical/software documentation; and, maintenance/support agreements.10 Intangible assets also consist of Professional/Personal Goodwill, which is generated by the reputation and personal attributes which accrue to an individual physician which may not be transaction,11 and Practice/Commercial Goodwill, which is the unidentified, unspecified, residual attributes of the subject enterprise as an operating entity that contribute to the propensity of patients (and the revenue stream thereof) to return to the subject enterprise in the future and may be transacted.12

In recent years, there has been an increase in hospital-physician integration/transactional activity, which has led to enhanced regulatory scrutiny from the Office of Inspector General (OIG), the Internal Revenue Service (IRS), and the Department of Justice (DOJ), through such initiatives as the Fraud Enforcement and Recovery Act (FERA), the Healthcare Enforcement Action Team (HEAT), and in certain provisions of the Patient Protection and Affordable Care Act (ACA)13 related to the legal permissibility of acquiring healthcare enterprises, services and assets.  Significant valuation issues arise from these regulatory concerns, including: (1) establishing the very existence of certain tangible and intangible assets; (2) whether (and under which circumstances) it is legally permissible for hospitals to acquire those assets, (3) the selection of and appropriateness of certain valuation approaches and methods, within the selected premise of value, in appraising the Fair Market Value of these property interests.

There are three general valuation approaches that may be used: the market approach, the asset/cost-based approach, and the income-based approach; however, there is no single approach, method, or combination thereof, that is universally correct or that applies to every valuation.  Market approach methods are premised on the foundation that actual transactions of similar entities provide guidance to value.  Asset/cost-based approach methods, which may include cost based methods, establish a determinant of value by aggregating the value of each discrete asset of the enterprise. Income-based methods measure the present value of anticipated future economic benefits that will accrue to the owner of the subject entity.  The choice of approach(es) or method(s) depends primarily upon the purpose of the valuation and the specific characteristics of both the subject entity and the subject interest.  Although all valuation approaches and methods should be considered for the valuation of all Intangible Assets, this does not mean that all valuation approaches and methods are applicable to the valuation of all Intangible Assets.

Market approach methodologies may be used to estimate of the value of the subject asset based on transactions of properties similar to the subject asset.  Asset/cost-based methods are often the most appropriate valuation methodology for certain types of intangible assets, such as trained and assembled workforce.14 However, as the asset/cost approach has limited application in the valuation of land (i.e., land is not created, it exists and the cost to acquire would be representative of the market approach), this approach has a limited application, if any, to the valuation of Intangible Real Property.  For certain intangible real assets, such as leasehold estates or certain use rights, the income approach may be the most pertinent method of valuation. 

Assets, both tangible and intangible, are the economic resources of a company that contribute to the company’s future economic benefit.15  As all value is forward-looking, without assets to produce a future economic benefit, a company would have no value.  Correspondingly, the value of any enterprise is bound up in the value of each of its discrete, separately identifiable assets.  However, each and every asset, tangible and intangible, must be identified and appropriately valued, utilizing the most appropriate valuation methodologies, to estimate the value of the subject enterprise.  As discussed in last month’s installment, in the healthcare industry, the valuation standard of Fair Market Value allows the valuation of assets under the Anti-Kickback Statute and the Internal Revenue Code, which outline the legal permissibility of the payment of consideration for assets in exempt healthcare organization transactions.16  Under this standard of value, intangible assets can be valued utilizing market-based, asset/cost-based, and income-based valuation methods.  Next month’s installment will explore these approaches in the valuation of physician services.

“Valuing a Business: The Analysis and Appraisal of Closely Held Companies” By Shannon Pratt, Fifth Edition, New York, NY: McGraw-Hill, 2008, p. 1074.

“Dictionary of Health Economics and Finance” By David Edward Marcinko, New York, NY: Springer Publishing Company, LLC, 2007, p. 197.

“Valuing Intangible Assets” By Robert Reilly and Robert Schweihs, p. 411-412.

“Valuing Professional Practices – Thorny Challenges.” William H Black, CPA/ABV, CVA, CFE. Analytical Value, LLC. 2006. p 25.

“Valuation of a Medical Practice”, by Reed Tinsley, Rhoda Sides, Gregory D. Anderson, John Wiley & Sons, Inc., 1999. P 148.

“Intangible Assets: Valuation and Economic Benefit,” Cohen, Jeffrey A., John Wiley & Sons, Inc., 2005, 24-26.

“Valuation of Intellectual Property and Intangible Assets.” Third Edition. Gordon V. Smith, Russell L. Parr. John Wiley & Sons, Inc. 2000. P 27.

“Valuing Professional Practices – Thorny Challenges.” William H Black, CPA/ABV, CVA, CFE, p. 27.

“Valuing Intangible Assets” Reilly, Robert, and Robert Schweihs, p. 403-404.

Ibid.,p.  435.

“BVR’s Guide to Personal v. Enterprise Goodwill.” Chapter 1: Personal Goodwill vs. Enterprise Goodwill. Jay Fishman, FASA, CBA. Business Valuation Resources, LLC. 2011. P 19.


Office of the Inspector General (OIG), Internal Revenue Service (IRS), Fraud Enforcement and Recovery Act (FERA), Healthcare Fraud Prevention and Enforcement Action Team (HEAT), Patient Protection and Affordable Care Act (ACA).

“Consider the Cost Approach when Valuing Intangible Assets.” Reilly, Robert F. Valuation Strategies. September/October 2012. p4-19.

“Business Analysis & Valuation Using Financial Statements”. Palepu, Ph.D, Krishna, Victor Bernard, Ph.D, and Paul Healy, Ph.D. South-Western College Publishing. 1996. p 3-2.

Criminal Penalties for Acts Involving Federal Healthcare Programs”, Title 42: The Public Health and Welfare, Chapter 7 Social Security Act, 42 USC §1320a-7b; Internal Revenue Code (IRS) 26 USC 4958.

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