“Some appraisers in the healthcare industry have avoided using traditional methodologies in certain situations in favor of approaches that contradict business valuation theory due to misinterpretation of the Stark Law definition of fair market value,” writes William B. Hamilton, (Pershing Yoakley & Associates, PC) in the March 2015 issue of Business Valuation Update.

For example, some healthcare appraisers have chosen not to consider the income approach in fair market value appraisals of certain hospital-physician transactions because they believe it implicitly considers the “volume or value of referrals.” In other cases, the appraiser transforms an existing business into a hypothetical one for valuation purposes by utilizing benchmarks to calculate the value of a “typical” entity using the income approach rather than relying on the expected future operating performance of the subject. “Our view as appraisers is that each of these methodologies misinterprets the Stark Law definition of fair market value and violates traditional business valuation theory,” writes Williams.

For further details, see the March 2015 issue of Business Valuation Update (subscription required).