In 2025, civil fraud recoveries reached record levels, primarily driven by healthcare–related qui tam lawsuits. As the Department of Justice (DOJ) continues to prioritize healthcare fraud enforcement, valuation support around fair market value (FMV), commercial reasonableness, and referral-sensitive financial relationships remains a critical risk-control function. Recent cases, including the $345M settlement involving Community Health Network, underscore a consistent theme: When valuation methodologies fail to produce independent and supportable FMV conclusions, especially with referral relationships, the financial and reputational consequences can be substantial. In many cases, compensation or transaction pricing may be viewed as influenced, directly or indirectly, by anticipated downstream revenue or ancillary service profitability, raising concerns under Stark’s strict liability framework.
From the Field: Succession Case Study
Much like an asset on a balance sheet, the valuation of any business reflects a point-in-time estimate and should encapsulate all market nuance and idiosyncratic factors present as of the valuation date. Valuation formulas included in operating agreements may appear “fair” when first drafted, but they are inherently static and lack the flexibility to adequately account for market changes, risk dynamics, or shifting operating realities and outlooks. These limitations become more pronounced as businesses evolve, particularly in physician-driven models where value is closely tied to human capital.
An orthopedic center operated by a large physician practice recently engaged VMG Health when it faced significant succession challenges. While the center appeared healthy with roughly 25% margins on $20M in revenue, generated by 18 physicians, ownership was concentrated among seven significant producers. Valuation dynamics changed quickly when several associate physicians left the center for employment contracts at a competing health system, while two physicians looked to exit upon retirement. The resulting 20% reduction in volume led to a loss of roughly half of center EBITDA, illustrating how quickly the underlying economics of a business can shift.
Against that backdrop, the limitations of valuation formulas become clear. Consider a framework where physician buy-outs are executed at four times the average three-year trailing EBITDA. At one point, historical cash flows may have reasonably reflected go-forward expectations. But with the departure of key physicians, that assumption no longer holds. In this scenario, the remaining physician base would be required to buy out partners at values materially above FMV—effectively overpaying for a business whose future earnings profile has fundamentally changed.
This example may sound extreme, but even forward-looking valuation methodologies can be problematic. There is inherent subjectivity in assessing the likelihood and magnitude of future cash flows, especially when physician alignment is uncertain. A third-party, independent appraiser must evaluate these risks and incorporate them through professional judgement.
Not only is top line revenue or expense subject to change, but EBITDA itself is an imperfect proxy for cash flow. A proper valuation considers capital expenditure requirements, potential legal or regulatory overhangs, and other obligations that may not be readily apparent from a simple review of financial statements.
Internal vs. External Valuations: Where Compliance Risk Lies
Even where valuation is not governed by a predefined formula, internally prepared analyses can present similar challenges. Internal teams may have a deep understanding of the business, but their proximity to the transaction and alignment with organizational or shareholder objectives may introduce bias, even unconsciously. This is particularly relevant in arrangements involving referring physicians, where valuation conclusions can directly influence compensation, ownership interests, or transaction pricing.
Well-intentioned internal analyses may be viewed as less defensible if they are not supported by objective, market-based evidence or fail to adequately consider contrary indicators. Valuation standards emphasize the need for objectivity and the use of appropriate, supportable assumptions, recognizing that internally developed inputs, such as growth, risk, or market positioning may require independent validation to avoid unintentional bias or outcomes that favor a desired result.
In contrast, independent third-party valuations add objectivity and rigor, ensuring conclusions are driven by market realities rather than internal incentives.
Static Valuation Formulas in a Dynamic ASC Market
Just as cash flows can change, so can market multiples. Valuations are subject to the forces of supply and demand, which are constantly evolving. According to VMG Health’s 2026 Healthcare M&A Report and related insights, standard control-level multiples for ambulatory surgery centers (ASCs) historically coalesced around 7x–8x EBITDA. Increased demand from health systems for outpatient centers, combined with continued interest from private equity–backed platforms, has caused multiple expansion of one to two turns in certain specialties and markets. Static valuation formulas cannot reflect current-day pricing. Any selected multiple should be evaluated in the context of observable market data.
Reconciling with Precedent Transactions
Just as valuation methodology should align with external market evidence, valuators should consider both control and non-control precedent transactions and ensure that any adjustments for minority ownership, lack of control, or specific risk factors are measured and well supported.
For instance, the application of a 2x multiple against an implied 8x control valuation reflects a 75% discount, an outcome that may be difficult to reconcile without significant and clearly articulated risk factors, like extreme physician concentration, deteriorating financial performance, or material regulatory concerns. Substantial deviations from market benchmarks may invite scrutiny, particularly where valuation conclusions directly impact referring physicians. As a result, it is critical to ground any departures from observed transaction multiples in objective evidence and provide a well-reasoned explanation for both economic credibility and regulatory defensibility.
The disparity in prior control level valuations with contemporary non-control transaction was key to the qui tam action of U.S. ex rel. Simmons v. Meridian Surgical Partners, LLC. The relator, a former employee of the ASC, alleges Meridian paid above FMV to physician-owners for its initial controlling ownership stake, and then sold ownership interests to physician-investors below FMV, all as inducements for referrals. Without admitting fault, Meridian’s CEO chose to settle the matter to avoid further financial costs and distractions.
Building Trust Through Independent Valuations
It is a common misconception that a valuation formula is, on its face, neutral. Depending on the ASC lifecycle, valuation formulas may include intentional or unintentional bias. For example, when an ASC is established, it may be in everyone’s best interest to make the formula as conservative as possible to incentivize syndication. Even if successful at first, physicians will inevitably retire as the center progresses through its lifecycle. In our experience, such investment premiums are often long forgotten when it’s time to monetize.
Conversely, valuation formulas may be too aggressive, hindering syndication and dampening growth. Such situations may be exacerbated by an aging physician base wanting to maximize one of the most significant professional investments of their careers. Either situation can result in costly shareholder disputes. But perhaps less obvious, both situations can result in significant opportunity costs.
In both instances, the result is often the same: misaligned incentives, potential shareholder disputes, and hampered growth.
ASC ownership environments are often complex, where health systems, physicians, private-equity sponsors, and management entities often share equity. Maintaining balance among stakeholder interests is critical. Transactions involving partner admissions, buyouts, or ownership rebalancing can quickly become sensitive when valuation inputs are perceived to favor one group over another, and reliance on internal calculations or simplified market multiples can unintentionally introduce bias or the appearance of bias, undermining trust and delaying transactions.
An independent FMV analysis provides a neutral foundation by engaging a third-party appraiser with no financial stake in the outcome, demonstrating a commitment to objectivity, regulatory compliance, and sound governance. This impartial approach mitigates dispute risk, increases trust, supports smoother negotiations, and ensures valuation conclusions are grounded in defensible methodologies rather than internal assumptions. It is this level of objectivity and rigor that reinforces confidence that ownership changes are being handled equitably.
Objectivity is the foundation of credibility. Lenders, legal advisors, investors, and strategic partners frequently require third-party valuation support before committing capital or approving transactions.
A credible, unbiased valuation signals that the organization is operating with appropriate governance and alignment with regulatory expectations.
Unlike static valuation formulas or internally developed approaches, an independent valuation provides a more comprehensive assessment of value by incorporating current market conditions, forward-looking risk, and the specific circumstances of the business. With ever-evolving market dynamics and heightened regulatory scrutiny, trusting independent valuation is not necessary for sound financial, operational, and compliance governance.
Don’t leave your valuation defensibility to an inflexible formula. Connect with VMG Health to ensure your FMV analyses are independent, defensible, and built to withstand scrutiny.
