Valuations: Weigh pros, cons before partnering

Q. What are the major considerations in determining the benefits of entering into a partnership/joint venture with a hospital-based HME provider?

A. More and more private/hospital HME partnerships are starting to surface as a result of competitive bidding and other industry pressures. Hospital HME providers are looking for private HME providers to help them continue to access new Medicare patients after having been locked out of Round 2; to help them manage operations leaner and more efficiently; and to develop better discharge processes to reduce length of stay and prevent re-admissions. Private HME providers, in turn, are looking to further imbed themselves with hospital partners in an attempt to garner additional market share by accessing new referral sources and payer networks that they may otherwise be locked out of.

Typically HME/hospital joint ventures (JVs) come in the form of 1) equity joint ventures; 2) management agreements; or 3) leases, with equity JVs and management agreements being the most common. If an HME provider wants to more closely align with a hospital, it must do so in such a way that makes economic and operational sense and meets regulatory standards. The following considerations should be looked at closely by both the parties to a JV:

* Vision and strategy of each partner, particularly that of the hospital if it is non-profit

* Level of charity care and/or indigent population being served in the community

* Competitive bid MSA penetration and commercial payer mix

* Level of risk that each party will share and who gets what percentage ownership in the JV   

* Amount of capital (in the form of cash, equipment, space, workforce in place, goodwill and other) each party will contribute and the fair market value of those contributions (should be determined by an independent third party) to help determine the overall value of the JV and the respective equity split

* Implications, if any, of Stark, anti-kickback or private inurement/excess benefit regulations and

* Revenue and operational synergies, such as skilled management, purchasing power/logistics management and sales/marketing programs.

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