Valuations: Use cost approach

Q. How do I structure outside contract arrangements and determine the fair market value payments for those services?
Friday, August 23, 2013

A. Many HME companies that provide PAP products and supplies are looking for ways to expand their customer base and catchment area without having to invest directly in new facilities, locations and staffing.  For example, some HME companies contract with sleep centers to use their employees for PAP patient education and equipment set-up. Qualified specialists from the HME company train the sleep centers/contractors and consistently follow up to continue training. The HME company provides PAP equipment on a consignment basis. The sleep center stores and distributes it to eligible patients who choose to obtain the equipment from the HME provider. The HME provider bills the proper insurance for the equipment. The contractor is paid a fixed amount based on a per set-up calculation.  

In determining the fair market value fee that should be paid to a contractor for services, the cost approach is typically the most applicable. This method essentially looks at what costs the HME company would incur to fully employ someone to perform the same services. The HME company must look at the required time it would take for the contractor to complete each of the required services on a per unit basis. This time is then combined with the average salary of the employee providing the services (some clinical, some administrative) to arrive at the total direct cost per setup. The total direct cost then has an allocated overhead and a profit margin added to it based on market comparable data from groups such as the Risk Management Association, annual statement studies, with the resulting total amount being the fair market value on a per setup basis.

Craig Hittle is senior manager of the health care team at Somerset CPAs, PC. Reach him at or 317-472-2150.