The formation of any business partnership typically begins with an eager commitment by each party to pursue a particular goal, business, or venture. Often, the endeavor begins with an eagerness and readiness to overcome growing pains and challenges at the onset. However, some challenges cannot be overcome, and instead, they may exacerbate what turns into a tenuous relationship. Healthcare partnerships are not exempt from these challenges. Over its almost 30-year history of serving healthcare clients, VMG Health has been engaged to perform a variety of damage analyses and provide its expert witness services, including, but not limited to, disputes, divorces, and commercial damages. These damages are often in the form of diminution of business value or lost profits. VMG Health has served as a trusted advisor to its clients amid these challenging situations.

Disputes

Ambulatory surgery centers (ASCs) are one such example where disputes may arise. With at least 11,000 surgery centers nationwide and with multiple partners at each of these surgery centers, there are many instances where disputes arise among partners (often consisting of physicians, health systems, and management companies). Typical to any business where partners come and go, physicians will buy in and buy out of surgery centers. This opens the door to disputes in situations where one partner is offered a purchase price that may not be appropriate. Alternatively, a physician may be forcibly redeemed of her shares. Inevitably, the greater the number of partners, combined with human nature, the greater the likelihood of an eventual dispute. Of course, disputes are certainly not specific to surgery centers but remain an ever-present adversity insofar as human fallibility exists.

In these disputes, it is typical to engage attorneys who subsequently may engage healthcare expert appraisers to determine the value of the interest in question. A few examples, specific to surgery centers, whereby VMG Health has provided its expert opinion, and in some cases, expert witness testimony on, are as follows:

  1. Surgery center dispute whereby the relationship between physicians and the operator soured, resulting in the physicians abandoning the surgery center and damaging the operator owner’s interest.
  2. Surgery center dispute where the buy-out price for a non-controlling interest was in question.
  3. Surgery center where a physician owner was inappropriately terminated without cause.
  4. Surgery center where distributions were inappropriately withheld by one of the owners.

Divorce

Marital dissolution has its challenges and unique considerations. One key component is determining the allocation of community assets among both spouses. The challenges lie in determining the value of private interests that either spouse may own. This may take the form of the entirety of a privately held business (e.g., physician practice or lab company) or an interest in a smaller, yet still private, business (e.g., interest in an ASC). Regardless of the interest owned, it is imperative to determine the value of a private business for the purpose of a marital dissolution.

Unlike other disputes among business partners, a marital dissolution has its nuanced challenges that an appraiser must understand. First, an appraiser must understand state specific requirements, through discussions with legal counsel, regarding any statutory regulations on equitable distribution. Some states follow the policy of equitable distribution, which requires a fair allocation of the assets between spouses at the time of a divorce. It is necessary to understand the jurisdiction, particularly if the state does not require equitable distribution. Second, an appraiser must understand personal goodwill. Personal goodwill may be defined as the value created and attributed to an individual’s efforts. As an example, personal goodwill may be applied to a physician owner. However, understanding that the business itself may have goodwill, it is important that the appraiser separate enterprise goodwill from personal goodwill, as applicable. Quantifying personal goodwill is necessary to understand when providing an opinion for purposes of a marital dissolution. Third, the valuation date must be defined following discussions with legal counsel. In a marital dissolution, the valuation date may be based on the date of separation, the date of filing or the date of trial.

VMG Health has provided expert opinions, and in some cases, expert witness testimony, on a variety of marital dissolutions, including, but not limited to, the following:

  1. Marital dissolution of a provider owning interest in a pain management business, a surgery center, and pharmacies.
  2. Marital dissolution of a physician owning a primary care business.
  3. Marital dissolution of a physician owning interest in a surgery center.
  4. Marital dissolution of a physician with a healthcare product in development.
  5. Marital dissolution of an owner of a home care business.

Damages

Last, not too dissimilar from a marital dissolution, a partnership between business owners or other parties that are contractually aligned may also fracture. The quantification of damages may take the form of a valuation, a calculation of value, or a lost profits analysis. Due to the unique nature of each damage engagement, it is imperative to define and quantify the damage appropriately. This also requires the valuation expert to work closely with the client’s legal counsel.

Lost profits and damages calculations have been performed by VMG Health along with expert witness services in a variety of scenarios, including, but not limited to the following:

  1. Lost profits calculation for a franchisor violating its agreement with a franchisee.
  2. Lost profits calculation regarding an agreement between a payor and health system.
  3. Calculation of patient revenue lost attributable to an unauthorized letter distributed to former patients. 
  4. Calculation of damage whereby all physician owners left the practice and its original owner to form a competing practice; a non-compete was not in place.
  5. Calculation of damages to a practice whereby the sale price of the practice was inflated due to upcoding of evaluation and management codes prior to the sale.

Conclusion

In the intricate landscape of disputes, divorces, and damages, navigating the complexities can be a daunting challenge. VMG Health understands the toll these situations may take both emotionally and financially. When faced with these difficult situations, it is crucial to entrust your needs to valuation experts aligned with your needs. VMG Health provides valuation and damages guidance through these litigated and dispute resolution matters.

Sources

Wallace, C. (2023). Number of ASCs in the US outpaces CMS’ estimates. Becker’s ASC Review. https://www.beckersasc.com/asc-news/number-of-ascs-in-the-us-outpaces-cms-estimates.html

Cornell Law School. (2021). equitable distribution. In Legal Information Institute. Retrieved March 20, 2024, from https://www.law.cornell.edu/wex/equitable_distribution

Schmidt, J. (n.d.). Personal Goodwill. CFI. https://corporatefinanceinstitute.com/resources/valuation/personal-goodwill/#:~:text=Personal%20goodwill%20is%20the%20intangible,and%20not%20the%20business%20itself