Questions about the shelf life of a fair market value (FMV) opinion can arise when the parties seek certainty about compliance with government regulations or wish to maintain arrangements that are financially viable to all parties. When it comes to the FMV of compensation to a health care management services organization (MSO), the question of the FMV shelf life is especially common. Unfortunately, authoritative literature or rule books do not provide a definitive answer.
There are three smart ways to help determine the FMV shelf life of your MSO compensation arrangement.
Look to comparable guidance.
While not specifically intended to govern FMV opinions for MSOs, public accounting rules for fair value (Accounting Standards Codification 350) require testing for impairment the sooner of 1) annually or 2) upon occurrence of a triggering event.
In the context of testing annually for impairment, financial reporting puts forward the notion of “qualitative testing.” An annual assessment can take the form of a general review of an appropriate set of factors that, taken together, provide a reasonable indication of whether there has been a material enough change in the overall arrangement to require a fully updated FMV. These financial accounting standards provide a reasonable paradigm for FMV in MSOs.
- The duration of each arrangement is at least one year;
- The compensation to be paid over the term of each arrangement is set in advance;
- The compensation does not exceed fair market value; and,
- A holdover arrangement after 1 year is on the same terms and conditions as the preceding arrangement.
Put time on your side.
A compensation FMV opinion should cover ongoing payments over a certain time frame, which is most often defined in the management services agreement (MSA). Therefore, the effective dates of legal documents (i.e. MSA and lease agreements) and FMV reports become an important element of determining shelf life. Aligning effective dates helps keep the start of the FMV shelf life at the same starting point as the legal documents.
The risk of changes in future market conditions often prompts valuators to limit their FMV opinions to be valid for two years, sometimes three. Parties need to be aware of such limitations when designing an MSO arrangement with the expectation of a going-concern enterprise.
Tie shelf life to enterprise risk.
Arrangements that have higher risk profiles generally have shorter FMV shelf lives. Higher risk can come in many forms, including heavy reliance on a low number of providers or certain types of payers, short term agreements that can be terminated without cause on short notice, and de novo operations. As risks change, so might compensation expectations and what is supportable as fair market value.
Valuation and Compliance Takeaways
- Unexpected triggering events can occur at any time throughout the life of an MSO arrangement. The parties share responsibility for determining the need for a review of FMV at the time of a triggering event. Often a valuator will assist in the review process, and in determining whether or not compensation arrangements remain consistent with FMV.
- Many MSAs contain a clause to review compensation for FMV on an annual basis, mirroring the annual testing requirement under ASC 350.
- To maximize FMV shelf life, start by syncing the effective dates of the FMV and legal documents.
- A one to three year shelf life is possible, but manage expectations to review FMV at least annually. Update FMV after at least two-three years, depending on the nature of your arrangement.
- When users of the FMV opinion limit shelf lives for riskier arrangements, they can create more flexibility to adjust compensation and remain compliant with FMV.
For more information about Fair Market Value opinions for management services organizations, contact Weaver.
This is one in a series of related health care valuation posts:
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