Valuing healthcare AR: Can you spot the errors?

The owner of several dialysis centers in San Antonio sold to a national provider in 2006. But the parties couldn’t account for the pre-sale accounts receivables (AR) and wound up in front of a jury, which awarded the plaintiff/seller $750,000 based on expert testimony (that calculated damages as high as $2.8 million). The defendant’s challenged the expert under the state’s six-factor, Daubert-type test, claiming his method was unreliable.

In particular, the expert “just took a percentage of what’s been paid on the amount billed in the past and applied that percentage to the amounts outstanding.” For example, the expert assumed that private patients who had paid the entire amount of their bill in the past were insured by companies that did not have a contract with the dialysis center; and further, that all of these patients would continue to pay their entire accounts. He applied a similar approach to Medicare and Medicare patients, without reviewing the underlying data or verifying the accuracy of his averages. For example, one contract-patient had not paid any of his six bills, but the expert still assumed a 29% collection, because that was the company’s average rate for such patients.

By contrast, the defendants’ rebuttal expert (a healthcare specialist) pulled eight Medicare patient files: Seven posted the secondary insurance payment as a primary Medicare payment, “which basically created the zero balance on the secondary side,” he said, causing the plaintiff’s expert to inflate retained AR. The eighth file contained a handwritten note indicating no secondary insurer, but the plaintiff’s expert categorized him as private. Ultimately, this lack of review rendered his conclusions “extremely unreliable,” the defendants’ expert said—and the Texas Court of Appeals agreed, finding “not a scintilla of evidence” to support the jury award. Look for digest of U.S Renal Care v. Jaafar, 2010 WL 3405831 (Tex. App.)(Aug. 31, 2010)  in the Nov. 2010 Business Valuation Update™ and the court’s opinion at BVLaw™.

Confirm your credible healthcare valuations: Pre-order your copy of The AHLA/BVR Guide to Healthcare Valuation, 2010 Edition, available soon in book and electronic form. Edited by Mark Dietrich and co-published with the American Health Lawyers Association (AHLA), this newly updated edition includes the latest industry specific information and insight along with eight new chapters, written by top healthcare appraisal experts. Check out the Table of contents here